On my way to a conference in Turkey, I bought a book at the airport. It was Paul Krugman’s The Return of Depression Economics and the Crisis of 2008. As the back cover put it, “What better guide could we have to the 2008 financial crisis and its resolution than the newest Nobel Laureate…?” This is something to which, like General MacArthur, I shall return.
The plane was full of holidaymakers. Since for many contemporary Britons a moment sober is a moment wasted, the champagne began to flow at once. Take-off was at five past eight in the morning.
Depression? Slump? What depression or slump? Were all these people merely blotting from their minds their dismal future, indulging in the kind of forced jollity that people indulged in during the Black Death? Eat, drink, and be merry, for tomorrow we are unemployed, bankrupt, and impoverished?
Perhaps I am doing my fellow-countrymen an injustice, but they did not look to me like the kind of people much preoccupied with the future, or indeed with the past. The present moment was for them quite enough to be getting on with.
Perhaps they were right to be unconcerned. The decline in the GDP takes us back to the level of economic activity of about eighteen months ago, or perhaps two years at most. Were we utterly downcast then because we considered ourselves so poor by comparison to how wealthy we assumed we should be in eighteen months or two years hence? No.
True, the principal asset of most people – their house – has declined in value by up to a third. But you don’t live any less comfortably in a house because its value has declined, and after all you have to live somewhere (though perhaps Louis XIV wouldn’t have seen the necessity).
Of course, some people have been disproportionately affected. They have lost their jobs. People about to retire on a pension not guaranteed by the state have seen the value of their funds decline precipitously and fear that they will have to live the rest of their lives as church mice. But the kind of people on the aircraft with me – and, to judge from the airport, there were still many thousands of them, indeed all too many of them for my taste – did not fall into these categories. If they had been polled, no doubt they would have claimed to be very worried, but their behavior belied it.
By drinking champagne, they were taking to heart the Sermon on the Mount. Sufficient unto the day is the economic downturn thereof. While the lady on my right (not my wife) read a glossy magazine informing her about how she might spend her clothes that would neither become her nor shelter her from the elements, I read my Paul Krugman.
After a brief introduction, Krugman writes: “In 2003 Robert Lucas…winner of the 1995 Nobel Prize in economics…declared that it was time for the field to move on: the ‘central problem of depression-prevention has been solved, for all practical purposes.’”
So much, one might suppose, for the authority of ‘the newest Nobel Laureate in Economics.” Laureates might be clever, but not necessarily in the discovery of the truth.
What would we think of a Nobel Laureate in medicine, for example, who claimed to have discovered the viral cause of an illness, only for it to be discovered shortly afterwards that the real cause was actually a chemical in the water supply?
It is true that the Nobel Prize in medicine has very occasionally gone to someone of doubtful worthiness of it. Moniz, the Portuguese neurosurgeon (the only person of his nation ever to win the prize), was awarded it for his development of the frontal leucotomy. Not everyone was pleased. He was later shot in the back, and paralyzed for the rest of his life, by one of his grateful patients.
Sometimes, also, the prize has been given to people, like Banting and Macleod, or Waksman, who were subsequently accused of appropriating other people’s work.
Still, there is a solidity to the medical prizes that there is not to the economic ones; and this, no doubt, reflects the difference in the epistemological security of the two fields of investigation.
Fools rush in where very clever men have not feared to tread, but needs must where the devil drives. It seems to me that Krugman makes a very elementary error of logic in his book. He is very anxious to “de-moralize” the crisis, that is to say empty it of all causes that lie in the sphere of human morality. I dare say he thinks that moralizing is the worst of sins.
Indeed, he treats most human behavior almost as the behaviorists treat consciousness – as a black box, the contents of which cannot be known and are in any case irrelevant to the matter in hand. He wants to make the present crisis – and the way out of it – a purely technical matter, a question of getting certain indices correct, for example just the right amount of extra government expenditure to get demand to the right level.
To this end, he gives an example of a recession (in a baby-sitting co-operative in Washington that operated by issuing redeemable certificates for baby-sitting hours undertaken) that is not caused by the improvident or bad behavior of anyone. He then uses this example many times.
But it does not follow from the fact that recession A was caused in such and such a fashion that recession B was caused by it, only that it could conceivably have been caused by it. It does not follow that if A then B, if B then=20A. You wouldn’t want a doctor to withhold antibiotics from a case of pneumonia just because the last case he saw happened to be viral.
On Krugman’s account, then, there is no need to think of individual behavior or even such matters as trade imbalances and the reasons for them. If the American government gets demand right (and also properly regulates all entities that serve the function of banks, whether they call themselves banks or not), then all will be well.
I confess that I cannot quite make up my mind as to whether he is correct or not to disregard the greed that led to the bubbles that led to the current recession, depression or slump (we are not sure yet which). Such widespread speculative greed is, after all, a constant since the seventeenth century, and its historical constancy suggests that it is not easily to be eliminated. If this is the case, then, some other means other than religious revival or its equivalent must be found of not letting bubbles develop, and of avoiding the effects of their inevitable collapse. Speaking for myself – and I am sure for many others – I would quite like to find a speculative bubble to invest in, provided only that I got out before its collapse. The dream of something for nothing is a compelling one.
On the other hand, the idea of a resumption of normal service, with China producing and America consuming ad infinitum, once the American government has got a few economic indicators right, does not seem to be altogether plausible, and fails to capture the seismic historico-economic shift that the crisis indicates.
Here in Turkey, the sun is shining, the Aegean is blue and the food is delicious. As Doctor Johnson said, public affairs vex no man.