BOOK REVIEW
Title: HUBRIS
Why economists failed to
predict the crisis and how to avoid the next one
Author: MEGHNAD
DESAI
Publisher:
Harper Collins Publishers, 2015
Price: Rs. 399/-
Meghnad’s Magisterial Mystery Tour
The author Meghnad Desai, is a Professor Emeritus of The
London School of Economics (LSE), Lord of the realm, Bollywood movie/music
buff, a distinguished British/Gujarati economist named interestingly, after a
towering Bengali mathematician.
Desai is also a popular talking head on Indian TV,
adviser to the British government on its monetary policy and financial
institutions, columnist, author, well regarded by his peers in academics both
for his erudition and intellectual honesty. With his distinctive mane of hair
and affable mien, Meghnad Desai is indeed a man of many parts.
HUBRIS may be a short book, but it is magisterial in
terms of Desai’s deft grasp of European and American economic theory from the
dawn of the modern era, meaning, Meghnad style, around the 1500s.
He points out the postulates of the early economic
theorists, elements of whose ideas, most notably the search for economic
‘equilibrium’, are quite often carried over to the present day, but these
notions are from an era when the commercial world was a very different place.
Desai writes fascinatingly of ‘cycles’ that seem to occur
as an inevitability in all economic endeavour, much before the 1870s, when
economics ‘had become a professional subject’. The meditation of this book is
how to influence if not control these seemingly involuntary cycles, that can
create both great prosperity and havoc in the lives of people around the world.
Many rather cosy theories fuelled by the realities of
imperialism and colonialism persisted for a century under the ‘Pax Brittanica’,
although every other major European power was working the same logic, with
varying degrees of success. Everything changed however with the cataclysmic
paroxysm of WWI in 1914.
The famous John Maynard Keynes makes an appearance soon
after. Desai clearly likes him: ‘He did not stay in his ivory tower and pen
articles and books. He was a man of affairs-speculator in the stock market,
chairman of an insurance company, journalist, author of a bestseller, civil
servant, controversialist, patron of the arts, husband of a ballerina, Fellow
of King’s College, Cambridge’. ‘Controversialist’ is a word Desai seems to have
coined just for Keynes.
Keynes found the nostrum for the Great Depression of the
1930s. But something similar or worse seems to be lurking about, threatening
the world once more in 2015, wages of
sin for decades of debt fuelled growth. Desai seems to suggest a combination of
manoeuvres may save the world, in case disaster strikes, rather than any one
all-encompassing formula.
Keynes was the first to advocate government spending on
projects that employed many people, because they would collectively foster a
consumption boom as they spent their wages. ‘The money would circulate’ as
Desai paraphrases the Keynesian outcome, and the goal was ‘full employment’, as
near as possible.
It was also Keynes who coined phrases such as ‘propensity
to consume’ inspired by psychologist Sigmund Freud, and ‘the exotic notion of
animal spirits’, the unleashing of which is the ambition of everyman’s economic
policy to this day.
Still, Keynesian economics, from the 1920s and 1930s,
that persisted through WWII and the post war boom, particularly in America, is
no longer thought of as the Holy Grail.
The ‘Achilles heel of Keynesian policy was inflation’
greatly aggravated by the ‘oil shock’ because the price had not risen for fifty
years till 1973. And then, in one year, the price of oil quadrupled in 1973!
The boom and bust cycles were back with a vengeance. And this was accelerated
by the ‘influence of speculation’.
In 2008, ‘on the eve of its bankruptcy, three different
potential purchasers were trying to read the accounts of Lehman Brothers and
were none the wiser as to the assets/liabilities situation.’ And so, as Desai
puts it: ‘If the model admits no possibility of failure of prediction, and the
regulator accepts the model’s assumptions, the results are that both the
poacher and the gamekeeper will lose’. The ‘malaise’ is embedded ‘in the theory’.
The ongoing
eurozone crisis began in 2010 and is the ‘second leg of the crisis that had
started with the collapse of Lehman Brothers’. What is the solution? Some, like
post-Keynesian economist Hayek, say ‘deleveraging’ is the answer. But of
course, this is another name for austerity, and imposing it is easier said than
done for the pain it causes. Besides,
this time around, all the liquidity at near zero rates of interest cannot seem
to raise the inflation rate off the floor in the West!
Meghnad Desai says
the government in Europe are trying to stoke inflation but admits that the
outcomes per earlier economic theorists have changed.Desai’s HUBRIS is in his
own words ‘a journey through the history of economic ideas,’ an exploration and
recounting, without claiming to have all the answers.
The economic cycles afoot, according to Desai, are
actually more like three concentric rings working simultaneously, and together.
There is a long cycle, perhaps 70 years or more, postulated by economists such
as Kondratieff and Schumpeter, a shorter cycle ‘in the income shares of wages
and profits’, of some ten years duration, put forward by economists
Marx-Goodwin, yes the Marx; and a shorter one still, ‘caused by the gap
between the market rate of interest and the natural rate’, theorised upon by
economists Wicksell and Hayek.
Meghnad gives an interesting account of how these cycles
may have worked in the past, via the clarity of hindsight. He thinks Europe and
America are currently in a Kondratieff style downswing, to last for the next
twenty five years to come, with growth rates that will be much lower, at 1 to
3%, than the boom rates of 1992-2007 that were as high as 6 to 7%.
The emerging markets, including India and China, will
grow much faster, in comparison, though China has now slowed from double digits
to around 7% .
The last word from Desai is: ‘Capitalism is a dynamic
system but it works through creating cycles and crises. It is a disequilibrium
system’.
And to sign off, he quotes the old discredited bug-bear
Karl Marx: ‘Mankind sets itself only such tasks as it is able to solve,’ before
saying, on his own bat: ‘We shall solve the problems yet. No one can say just
how’.
For: The Pioneer, BOOKS
(1,032 words)
July 31st 2015
Gautam Mukherjee
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