«Hubris – Why Economists Alpar Lošonc Failed to Predict the Crisis and Department of Social Sciences, Faculty of Technical Sciences, University of ...»
PANOECONOMICUS, 2015, Vol. 62, Issue 5, pp. 679-687 Book review
Received: 06 September 2015.
Hubris – Why Economists
Failed to Predict the Crisis and
Department of Social Sciences,
Faculty of Technical Sciences,
University of Novi Sad
How Avoid the Next One
The review is written under the ausby Meghnad Desai
pices of the project 179052 supported
by the Ministry of Education, Science
and Technological Development, Yale University Press, 2015.
Government of the Republic of Serbia.
Meghnad Desai, a scholar-lecturer at LSE, is now chairman of an independent research network. He also has an impressive list of various published works; in addition to books on Keynesian and Marxian Economics and numerous articles in academic spheres, he has also written books on Islam, the political economy of Ezra Pound, and has been involved in discussions about global security. The reviewed book is about possibilities of economic reflection. Naturally, the title indicates a certain type of cul-de-sac about the results of economists regarding the current crisis;
the Greek word hubris, which is in the title, indicates an increased and hyperbolical self-confidence in the theory of economics. A new kind of humbleness is sought, a kind that renounces the ambition to have economic discourse that treats the world omnipotently. The question is how to achieve this, or is it just a wishful-thinking.
Therefore, it is not difficult to conclude that Desai talks about current economic theory and he is critical about the results in the science of economics, and today’s economic crisis. The title emphasizes assessment with respect to the ability of forecasting, but it is clear that although the author of the book believes that the science of economics is (increasingly) self-confident in forecasting, the aforementioned problem affects the basis of economic reflection today. It is not a coincidence that Desai expresses sympathy towards those economists who represent, as Keynes put once, the “underworld of economic science”. Desai creates a binary image: on the one side, there is an economic theory focused on static equilibrium and on the other side, there is a dynamic disequilibrium; his anticipation is that the current crisis has finally proved that economics cannot be understood without dynamic disequilibrium. Therefore, the current crisis is not just a financial speculation or asset bubble, but also an epoch that forces economic reflection on self-transformation. In this case, the crisis is not represented as a macroeconomic failure or structural crisis, but it is represented in the context of paths of economic theory. Desai’s ambition in the book is exemplified by the following passage: “why economists failed to predict the crisis, what happened, why it happened when it did, and why economists won’t admit that they were wrong. I also want to address the criticisms of the overuse of mathematics in economics and to see whether there is a new economics which can cope with future economic catastrophes better” (p. 9).
680 Alpar Lošonc Desai’s book is concise but it offers a long and extensive tour of economic ideas. Under the influence of Keynes (we have to say “partially” as there is criticism about the British economist further in the book), Desai believes that economists’ ideas have significant influence on the flow of events: therefore, he believes it is important to devote careful attention to certain economic theoreticians. Historical formations of socio-economic structures are mentioned, but the discourse on politicaleconomic conflict is minimized. We reveal assessments and qualifications only implicitly. Desai, who has a clear political affiliation and distinctive public appearance (a Labour politician): he was the only one with political affiliation among those economists who in 2010 wrote a public letter to the Sunday Times in which it was stated that “cutting the budget deficit within one Parliament” must be done; (among the signatories were Tim Besley, Christopher Pissarides, Ken Rogoff, etc.) and sometimes expresses “sympathy” towards Karl Marx, in fact does not speak about the political-economic configuration of power.
Desai simultaneously distances himself from every Keynesian fundamentalism; he cannot be classified as a representative of orthodox Keynesianism; he is not a “Structural Keynesianist” like other economists who follow Keynes’s path; and he cannot be classified in “Post-Keynesianism” either. Desai has already had ventures in which he has explicitly expressed the idea that Keynes’ theory does not have farreaching consequences today, that is, the theoretical and political repertory of the British economist does affect the essence of today’s crisis, one that has different characteristics in comparison to the Great Depression in the 1930s. Therefore, we will
not gain orientation through the Keynesian-remedy in the manner of fiscal stimulus:
the Keynes proposed his theory in a historical epoch which was defined by problems of effective demand, but in a situation of excess of saving. The situation today reminds us that we are faced with reverse phenomenon, that is, with undersaving; constant encouragement towards consumption contradicts any type of therapy in light of Keynes. The states also find it appropriate to take loans during the peak of cycle.
Economic theorists, following Keynesian tradition, underestimate the level of debt and give prominence to borrowing as a stimulus to encourage growth.
Therefore, returning to the past is not recommended, and even Keynesians who call upon the writer of The General Theory of Employment, Interest and Money are not praised: they are not able to perceive the irreversibility of change. (It is notable that in some instances Desai makes critical remarks simultaneously about “Orthodox mainstream economists” and “Keynesian economists”; therefore, he critically addresses both orthodoxy, but also heterodox economists, following Keynes’ path).
In addition, if this is the case, then we can say that despite the view of the influences of economic ideas, there is a limitation regarding the power of the same ideas. It seems that this is connected with the indication that economic theory tends to be a science, but according to the “fluidity” of its subject, the respective scientific status must be re-confirmed. The subject of economics is separated from politics, but the problem is that politics shapes the “economic context” and in this case, globalization is not just a media buzzword but also an expression of formative changes with farreaching consequences. In any case, Desai believes that globalization has “fundamentally” changed the profound context of economics; globalization is not just a PANOECONOMICUS, 2015, Vol. 62, Issue 5, pp. 679-687 Book Review mere appendage within economic theorization, it transforms the framework of economic theory. It is not a coincidence that Desai writes systematically about globalization, “governmental problems” at new levels and new power structures - not only in this book.
Desai engages in lengthy narratives; he obviously loves narrative sequences (which is also demonstrated in the description of the current crisis). The story of the book actually begins with the emergence of economy as an independent reflection by means of autonomization of economizing, and in that way, we are led straight to the fifteenth century when America was discovered and when conditions for promoting globalization were determined. However, very quickly we discovered numerous different philosophers who cleared paths for economic reflection: it began with John Locke and we discovered the classicists Adam Smith and David Ricardo who were given more attention. It has to be mentioned that in Desai’s narration Ricardo played a specific role: here, his success and breakthrough in the science of economics is interpreted as “curiosity and mystery”.
Let us not forget: Desai searches for the answer to the question as to how is it possible that despite their faltering during the crisis, economists do not change their orientation, that is, I would say (independently from Desai) for the purpose of paraphrasing, the processes of refutation à la Popper do not work. Ricardo’s triumph and modification of economic reflection pave the way towards a certain understanding of economy, which is still dominant in the present. We do not want to underestimate Ricardo’s merits, but he developed the comprehensive approach of economic reflection that can be applied to every situation. Regarding Adam Smith, we can think that the invisible hand is not always benevolent and this opens up many possibilities, but economic imperialism that originates in Ricardo’s theories sets very firm starting points. Hubris (despite some pessimistic elements of Ricardo’s theory about the fate of capitalism) was born, and we will follow its development in the future.
Ricardo is the archetype of today’s economic reflection. In this way, possibilities are raised for mathematics of markets, as well as for the arithmetic of market operations. Later, Desai also finds it appropriate to make comments about the development of the mathematization of economics; so he prepared the draft of universal mathematization in the twentieth century, reflecting upon the different stages and “overuse of mathematics” which, for example, in the current crisis “hides a shortsighted outlook”. (It is of great importance for Desai to appreciate the significance of differentiating between short and long temporal sequences; this is the only way to understand his attachment to the long-cycles). However, we have to bear in mind that Desai in fact devotes his attention to the theoreticians of dynamic disequilibrium and shows interest in cycles and crises through which capitalism is developed. Ricardo here, certainly, cannot help, but we have Marx, as a theoretician of crisis and general dynamics of capitalism, who does not appear as a theorist of value, but as a philosopher of the unstoppable dynamics of capitalism. Marx was praised because he knew how to draw conclusions about the inherently existing crises based on the immanent analyses of Smith and Ricardo. In this way, he is one of those thinkers who enable considering capitalism as a socio-economic formation which is in constant movement. Of course, this is a fact that deserves attention: Desai studies Marx, and this is
PANOECONOMICUS, 2015, Vol. 62, Issue 5, pp. 679-687682 Alpar Lošonc
certain heterodoxy. However, we still remember earlier Desai’s book (Marx's Revenge: The Resurgence of Capitalism and the Death of Statist Socialism, London and New York: Verso, 2002) in which he used to draw inspiration from Marx’s work, transforming and reducing it, ante litteram, into the apology about globalization. After all, it was also a book that bore characteristics that were similar to the book which I presented here; a journey into economic history but with an aim of discussing the present. The focus here is not on Marx as the forerunner of the advocates of globalization in accordance with the recognized fact that Desai was interested in the “philosophers” who were able to articulate the dynamic sequence of capitalism. Therefore, it is not at all difficult here to notice trends that strongly develop the relationship between Marx and Schumpeter: naturally, the Austrian expresses the view of cycles and innovation according to which the reflection, which is sensitive to the dynamics, may be stabilized. Finally, that is how we come to Kondratieff and his long wave which, in Desai’s opinion, play a crucial role. (I will make comments later when I present Desai’s program for economic theory and when I mention Kondratieff again).
Therefore, we come to the economist who enjoyed considerable support from Desai, that is, Knut Wicksell. Indeed, at first Wicksell appeared as a correction of Marx because the German thinker did not integrate the theory of cycles and theory of money (I am not at all convinced of Desai’s assessment; the fact that Marx succeeded in harmonizing cycles and the metamorphosis of money can be argued, but there are strong outlines of such intentions). Moreover, Wicksell also refreshed the equilibrium between the theory of market and the theory of cycles; it will later be very important for the presentation, because unlike some others, Wicksell’s star will continue to shine.
The only thing Wicksell does not offer are the breaking points when the economic boom stops and the economy goes into recession, because the theory of cycles and crises can be articulated only if there is a theoretical reflection of the mentioned breaking-node points that show the moments of transformation. Desai does not think in the same way as Hyman Minsky who projects permanent disequilibrium, and that is why he emphasizes the undeniable importance of turning points that dynamize the economy. The cycles and crises are proved to be systematic, but are not permanent.
Moreover, if the mentioned phenomena are systematic, which Desai says repeatedly, then it is obvious that it is a programmatic principal.
Let us now look at the Great Depression and Keynes. Desai does not hesitate for a single moment to talk about the “Keynesian Revolution”, that is, to talk about the phrase that was previously launched by Lawrence Klein. Aggregate effective demand, government spending, theory of investment and the role of interest rates have all been reformulated in a “revolutionary way”. Keynes, who became aware of his theoretical position, assumed the significance of his categories based on disengagement with tradition and by searching for, as we have already stated, the “underground world of economy”. Therefore, despite the fact that we indicated that we would have to deal with Keynes’ criticism, Desai can in no case be put in the same category as, for example, Axel Leijonhufvud who in fact denies the revolutionary of The General Theory. Desai correctly interprets Keynes in terms of public debt and deficit; his sentences, which prove how wrong it is to think of Keynes as a philosoPANOECONOMICUS, 2015, Vol. 62, Issue 5, pp. 679-687 Book Review pher who wants endless deficit, are concise, but useful as a necessary correction of different erroneous interpretations.