What next for UK banking? Not learning from the past apparently

I was at this event yesterday jointly organised by the New Statesman and Barclays Bank and addressed by representatives by the three main political parties. John Varley, the Chief Executive of Barclays Bank, began by arguing that banks should adopt more social responsibility, by which I think he means not to get into the same mess as last year again.

Two things struck me from the discussion. The first is that there is hardly a cigarette paper’s difference between the three parties on the issue of banks or by implication in their understanding of the recession. They all supported the populist tax on bonuses (described privately to me by one senior banker there as ‘puerile’). They all agree that there should be more competition in banking, better management of risk  and better regulation. One wonders yet again why there are three parties when there are virtually no policy differences between them. The cosy atmosphere was upset only marginally by John Snow asking why no bankers were in jail yet.

The second problem is that in this discussion, supposedly about the future of banking, there was disappointingly no discussion about the role that banks could be playing in the regeneration of the UK economy.  The whole discussion was about  not repeating the mistakes of the past rather than tackling the problems of the future. Lord Myners, Labour’s  Financial Services Secretary to the Treasury, mentioned in passing that there no longer appeared to be a blockage in banks financing business, although the cost of credit was perhaps too high. The banks say that there is less demand for credit from business. If there is little demand for credit this should warn us that the economy is unlikely to see a fast recovery from the recession.

The main lessons from the recession appear to be passing the parties by. The financial bubble, as I have argued before, was not the product of too much risk taking but too much risk aversion. Investors were seeking ways of making money through apparently safe new financial ’products’ rather than through investment in apparently riskier new industries and new technologies.

The government now effectively controls two of the major banks in the UK. It would be a good idea if it could enter into some major planning exercise to encourage investment from these banks in the kind of infrastructural projects that the UK desperately needs. It would also be a good idea to encourage these banks to set more investment aside for innovation and those areas of the UK economy which have the most promise.

None of the parties is facing up to the real problem facing the UK economy, what is going to be the engine of growth if financial services does not recover its dynamism, a prospect which appears to be receding all the time. Banks have a role in solving this problem, but the leadership has to come from politicians and there is precious little sign of that at the moment.

Why climate change is a convenient excuse to justify economic stagnation

Dictatorial African leaders such as Meles Zenawi from Ethiopia have been quick to take advantage of the Copenhagen talks to argue that climate change is the cause of their countries’ problems. This has rightly provoked an acid response from oppositionists in  Africa who say the problem is more lack of regime change than climate change.

The climate change debate has been honey in the mouths of forked tongue African dictators. It has provided them the perfect foil to avoid detection and accountability for their corruption and mismanagement of their societies, and a convenient opportunity to divert attention from their criminal state enterprises. Global warming has proven to be the perfect substitute for the old Bogeymen of Africa– colonialism, imperialism, neo-colonialism and poverty. Why is Africa reduced to becoming the “beggar continent of the planet”? Global warming! Why are millions starving (euphemistically referred to as “severe food shortages” by officials) to death in Ethiopia? Climate change. African dictators are using global warming as their new preferred ideology behind which they can hide and ply their trade of corruption while expanding their thriving kleptocracies.

The same leaders are looking for more aid from the west in order to ‘introduce anti climate change policies’, the latest euphemism for bigger cars and fatter Swiss bank accounts. Climate change is the latest convenient tag to avoid their own share of responsibility for the poverty and desperation of many of their countries.

So much for the rather transparent attempts of failing third world leaders to exploit climate change. But let us also consider how convenient it is for western politicians that climate change is at the top of the agenda. Western economies have suffered for years from stagnating growth. After the current recession there is a palpable fear that the future offers even slower growth, permanent high unemployment and a shift in the economic balance of the world from west to east.

The consensus response to the threat of climate change is that we need moderation in economic growth  and redistributionist rather than developmental economic policies.  These calls for sustainable growth fit very nicely with the lack of dynamism that infects western economies. How convenient that there is now a compelling reason why seemingly intractable economic stagnation can be turned into a virtue. Even a mainstream pro market economist like Martin Wolf puts reducing demand at the top of his list of ways to tackle climate change.

It is also very convenient  that the same climate change agenda points the finger at the fastest developing countries, such as China,  and leads to calls for them to slow down. Not because they represent a major threat to the strategic and economic power of the west, perish the thought, but because they are threatening the planet of course.

I am not proposing a conspiracy theory here by the way. It is more that the western elites  have lost belief in their ability to be dynamic and to lead economic growth and development. This lack of belief is built into reality, it is evident all around us in the decaying infrastructure and failing public services that we all experience. How comforting it must be in that situation to be told that this kind of stagnation is a virtuous thing rather than a sign of political and economic bankruptcy.

The climate change issue does represent a crisis, but not the one that is commonly understood. The real crisis lies in the loss of a belief in human progress and our collective ability to continue down the path of economic development. It represents collective exhaustion in the political and intellectual classes and needs to be thoroughly confronted by any of us who retain belief in the unlimited potential of humanity.

We need real growth not sustainable growth

It is not clear how the UK will earn its living in the years to come        Financial Times  3/12/2009

A new survey of the state of the UK’s economy has drawn a bleak, if not surprising , picture of the weaknesses of the UK economy as we begin to come out of the recession. The survey, carried by the FT today and over the next few days, reveals that despite all the claims of New Labour to have turned the UK economy into something more dynamic the truth is that the long-term trends of sluggish growth and the disappearance of manufacturing have if anything gone faster under New Labour than before:

  

• Growth since 1997 has averaged just over 2%, slightly less than in the previous 20 years
• Manufacturing has shrunk from 20% of the economy in 1997 to 12% now
• The growth areas of the UK economy have been business and financial services, real estate and public services-all financed directly or indirectly from the proceeds of the financial bubble.
• Around 2/3 of jobs created under New Labour have been in the public sector-which bodes badly for employment prospects if public spending is cut

To add to the ominous character of this survey a timely piece of new research by two academics at Kent University has looked at the experience of recessions around the world over the period 1960-2000 and concludes that deep recessions such as the one we are currently experiencing have profoundly negative impacts on productivity for years after the recessions are over. 

Our main findings show that, cumulatively, from the last year of the recession up to fours years after, recessions have significant negative productivity effects. These effects, however, arise as a combination of different mechanisms. Recessions tend to increase the level of frontier TFP (technology growth and efficiency) but decrease the rate of technical progress. The combination of these two effects is a fall in frontier productivity relative to the one that would have prevailed without a recession. Recessions also increase significantly technical inefficiency in the economy. Finally, deep and long-lasting recessions tend to have larger impacts on productivity, although the mechanisms differ from standard recessions.
  

 There are key debates to be had still about to what extent the UK needs to restore manufacturing as opposed to services, and also whether cuts in public spending are necessary and in what areas. However, one thing is crystal clear, that whatever route the UK has to take to recover a growth dynamic it is going to be very hard work. The dawning recognition that this is the case, and the absence of any coherent plan to achieve it,  must be one reason at least why those arguing for a more sustainable (ie environmentally focused ) economy are influential today. For a clear explanation of what the sustainable economists have in mind for us this new report spells it out. 

   The traditional function of investment, framed around increasing labour productivity, is likely to diminish in importance. Innovation will still be vital, but it will need to be targeted more carefully towards sustainability goals. Specifically, investments will need to focus on resource productivity, renewable energy, clean technology, green business, climate adaptation and ecosystem enhancement. These are precisely the kind of targets that emerge from the consensus around a global Green New Deal. Foregoing consumption growth seems inevitable if we are to sustain this enhanced need for ecological investment. 

 The necessity of ‘foregoing consumption growth’ in favour of saving the planet is, in this context, a convenient way of also avoiding the issue of tackling the stagnation of advanced economies such as the UK’s. The question of how to create a turn around in the UK economy should not get sidetracked by the sustainable growth lobby. The solution to all our problems, including environmental ones, involves greater control over our environment, through scientific and technological breakthroughs and through greater productivity of labour, which creates more human time to focus on new challenges rather than slogging away at the old ones. 

Data sharing-the guiding principle should be informed consent

There are many good reasons why both governments and businesses may want to capture, analyse and share data. Good in the sense that the intention is to create mutual benefit for all concerned. In some ways we would like digital marketing, for example,  to be more targeted than it is, if only to avoid the torrent of spam email inflicted on us. The gathering of statistical information by governments can also be used to plan service provision and state investments in a more rational way. So I do not take  the view that governments and big business are out to get us and that any data gathering is inevitably an unwarrantable intrusion into privacy.

However, while the interests of data  gatherers and those whose data is gathered (datees perhaps?) may be congruent, they also may not. This is a particularly crucial point now that we leave such a long electronic data trial behind us through phones, email and internet browsing. We should understand as well that governments have a secular tendency to gather information for its own sake. This tendency is particularly exacerbated today when politicians and others in the state apparatus are more isolated from their constituents than before. In wishing to reconnect they are very keen on gathering as much information about us in as many ways as they can. Their insecurity also inclines them to want to police society more closely , hence current attempts to have access to all the electronic  data held by phone companies.

The discussion around data sharing and privacy is very complex. However I think there is one principle that, if it were adopted, would enable a way to benchmark what should and should not be allowable. That is the principle of informed consent. In other words, those whose data is being collected should have agreed in advance that this should be so. The principle of informed consent is implicit in any democratic society. If we need a legal definition of informed consent which we could apply to data gathering we can go to the Nuremberg trials of 1947.

The voluntary consent of the human subject is absolutely essential. This means that the person involved should have legal capacity to give consent; should be so situated as to be able to exercise free power of choice, without the intervention of any element of force, fraud, deceit, duress, overreaching, or other ulterior form of constraint or coercion; and should have sufficient knowledge and comprehension of the elements of the subject matter involved as to enable him to make an understanding and enlightened decision.

It should be informed because effective democracy requires people to understand what is being done to them and in their name. It should involve active consent because that is the essence of democratic government. In practice this should mean that any information in data form should only be stored or shared with the prior active consent of the individual concerned. There should always be an opt-in rather than an opt-out button. The onus is on the data gatherers and sharers to persuade and convince that this is the right thing to do.

This approach to data sharing is consistent with the view that we are autonomous citizens whose cooperation and consent with the state or with business is an active conscious decision taken with all the facts discuss and debated out in the open. In that sense it is an approach which would contribute towards a broader democratic renewal.

 

How much is enough?

Robert Skidelsky, with whom I debated on this issue a few weeks ago, has returned to the fray in the Guardian. In his new article he looks at Keynes’s prediction that by 2030 the world (or at least the developed part of it) will have raised living standards sufficiently to call a halt to growth and to reduce the working week to 15 hours. Skidelsky points out that we have already reached Keynes’s income target in the west, but instead of this leading to a shorter working week it has led to the tendency for people to work longer for higher pay. He explains this as due to  insatiable desires induced by the consumer society.

 Keynes …recognised that there are two kinds of needs, absolute and relative, and that the latter may be insatiable. But he underestimated the weight of relative needs, especially as societies got richer, and, of course, the power of advertising to create new wants, and thus induce people to work in order to earn the money to satisfy them. As long as consumption is conspicuous and competitive, there will continue to be fresh reasons to work.

As I pointed out in my debate with Skidelsky, the developing world is far from reaching even the basic levels of income required to combat poverty. This alone would demand that we continue to grow the world’s economy for many years to come. I also argued that even in the west there are many areas of life and many sections of society which are underfunded and  suffering deprivations of different types.

However let us accept for the time being that we stay in the developed countries and we equalise incomes to produce a tolerable subsistence level for all of society. Would this then justify an end to growth? It is a good question to ask. After all, it is true that often consumption for consumption’s sake can induce a feeling akin to nausea. It is something I experience every Xmas when confronted with the huge pile of presents which arrive for my children, most of which are consigned to the rubbish tip within days (sorry grandparents!). It is also true that we ‘need’ many of the things we buy only in the sense of satisfying a desire, rather than in order to keep alive and healthy.

So should we cut back on growth and train ourselves to not want things which we do not absolutely need? I think this is a dangerous path to pursue. Human beings have developed modern sophisticated societies on the back of scientific, medical, technological and engineering progress. Taking the long view, in the space of a few thousand years we have transformed ourselves from primitive beings at the mercy of the elements to masters of our own destiny. We have turned our planet from a hostile environment to one of relative safety for most. Accepting an end to growth in all of these areas would mean that we have effectively called a halt to our upward progress.

This would have profound effects on who we are. Humans have become something special through our conflict with the natural forces which threaten us. We have transformed ourselves into civilised people through this process. If we gave up on this struggle, stopped being inquisitive and experimental, we would be in danger of becoming the human equivalent of cows, well fed, safe and chewing the cud to pass the time.

Where Skidelsky has a point is in his recognition that we have paid a price for the way in which we organise production,

The accumulation of wealth, which should be a means to the “good life,” becomes an end in itself because it destroys many of the things that make life worth living. Beyond a certain point – which most of the world is still far from having reached – the accumulation of wealth offers only substitute pleasures for the real losses to human relations that it exacts.

Here Skidelsky touches on the alienating and destructive effect of modern capitalism on human relations,something Marx described brilliantly in his description of commodity fetishism. It is true that the capitalist mode of production isolates and alienates us from each other through the endless process of competition. But to use this as a reason to abandon economic growth is to confuse the current way we organise production (capitalism) with the purpose of production (raising living standards). We can find an alternative to the first eventually perhaps, but we should never give up on the struggle to develop ourselves through further control over the world around us.

Austerity or growth-Cameron flips and flops

David Cameron appears to have realised, as I predicted, that his party’s call for austerity is not terribly appealing. He is now talking af the need to promote economic growth. At this stage there is no substance behind the talk and it seems to be as rhetorical as his earlier call for austerity.

There are really only two main ways in which government can influence what happens in a market economy. The first is at the level of political leadership. This means that government sets an agenda for the nation, and creates a legislative framework to enable the agenda to operate. In that sense focussing on the need for growth is a step in the right direction. However, even at this level it is important to identify what the barriers to growth are that need to be overcome.

In the UK, some of these are historical and structural and to do with the shape of the UK economy, particularly its over-reliance on financial services. Some are to do with social and cultural factors, particularly the culture of risk aversion which has enveloped our society in the recent past. One of the main dangers as we creep out of the recession is that the lessons we learn may make us even more risk averse at a time when boldness is at a premium.

A new report from the Confederation of British Industry (CBI) for example predicts that businesses will adopt ‘a more balanced, less risky pathway to growth’. This may seem sensible in the aftermath of a recession, except that it contains the wrong assumption that it was risky behaviour which created the recession in the first place. This has now become the default position of those who have tried to explain the recession, that it was the product of risky behaviour in the financial sector.

It is vital that we do not allow this interpretation to remain unchallenged. The bubbles in the financial and housing sector which preceded the recession were the product of a stagnant economy, not caused by risky behaviour. Real productive investment in the UK and other western economies was seen as too long term and risky and has declined in favour of speculation. The bankers were responding to a demand for risk free investment with high returns hence the boosting of both the housing sector, seen as a one way bet, and the slicing and dicing of investments to spread the risk.

The second area in which governments can affect what happens in the economy is in the areas they have direct control over such as education, civil administration, health and infrastructural projects. The main danger here is that without an overall plan of how to revive the economy, decisions will be short term  and based on trying to placate public opinion. Here we can see the dangers of the weakness of the political class at its most exposed. Without the confidence to make long term decisions, which may be unpopular, the decline of the UK threatens to become a self fulfilling event.

What all these factors mean when put together is that collectively there is little belief that we can become a dynamic economic nation once again. One can sense that behind the flip-flopping of Cameron on the economy lies a genuine lack of belief that major change can be effected. In the absence of  clarity on this issue it is very unlikely that real political leadership in the form of agenda setting will emerge.

Can the UK economy become dynamic again and does it matter if it doesn’t?

The Government has finally announced a nuclear power station building programme. Typical of Labour’s record on infrastructural projects it is far too late, too little, underfunded and came in the form of a statement in the House of Commons with no opportunity for a debate or a vote to give it democratic legitimacy, no doubt opening the way for endless legal challenges from the anti-nuclear and nimby lobbies.

It appears to be the very least that the government could do in the face of the expected power supply shortages in the future and the commitments it has made to cut carbon emissions. What it is not is part of any concerted plan to reinject dynamism into the UK economy. We are still lacking any overall vision for how the UK is going to become economically vibrant again. Of course there are  people, some of whom I debated at the Battle of Ideas Conference recently(see here for audio record), who argue that economic growth is a dangerous or futile objective.

In my previous blog I argued that economic growth is a good thing for social, cultural and philosophical reasons as well as the more obvious economic ones. I was struck at the Conference last weekend by two reactions against this point of view from people who did not fall easily into the categories of anti-growth viewpoints I was attacking.

First there were people who agreed in general that global economic growth was necessary, but that this should be mainly in the developing countries. Their argument is that we in the west have pretty much got what we need and we do not require faster growth rates. Secondly there were those, including Martin Wolf, who argued that even if we wanted to it is not possible to reverse the relative or perhaps even absolute economic decline of the UK and countries like it.

The two viewpoints are complimentary in arguing that faster growth, more economic dynamism, is either unnecessary or even if it is then it is not possible. If these views are not challenged and an alternative economic route mapped out, then the UK is condemned to stagnate with no prospect of changing itself in any fundamental way.

The recession has shocked many people in the west and shaken their confidence in the market system and added to a sense that economic growth is problematic. There is an increasing sense that we have reached a ‘new normal’, a position where slow or flat economic growth is likely and perhaps even desirable. There is a danger that this lack of confidence becomes a self-fulfilling prophecy. 

With a General Election in the next six months it is time to put on the table what we think should be on the economic agenda. If you have any views about what the economic policies of the next government should be then please feel free to respond. In future blogs I will examine why a fatalistic approach to growth and dynamism in the west is wrong and how we can begin to tackle it.

Economic growth and its discontents

Speech given by me at Battle of Ideas Conference 31 October 2009 in debate with Lord Skidelsky and others

Continued economic growth is important because it means that the productivity of labour increases, we get more for less, we get more control over our lives and we become less vulnerable to the vagaries of nature and of fortune.

The whole idea of economic growth is under attack from many quarters. Sociologists such as Richard Layard represent an anti-consumerist trend. Layard argues that economic growth and its consequent material benefits do not make us happy. I would like Layard to do a survey of the millions made unemployed through this recession to see how much happier they are now that they have lost the benefits of a wage. Do we really think that poverty will make us happier?

Environmentalists argue that economic growth is inducing climate change and irrevocably damaging the world around us. These people are in reality scientific progress deniers. They do not believe that we can grow our way out of problems. Yet it is China, the fastest growing economy in the world, which is adopting and developing alternative forms of energy at a faster rate than anywhere else. It is economic growth that is driving this and making it possible.

There are also those who argue that scientific and material progress are too prone to risks and dangers to pursue safely. They question whether such things as GM foods, nuclear power or the pharmaceutical industry are not doing more harm than good. Their campaigns against scientific progress slow down and discourage investment and development delaying the benefits that progress can bring.

All of these trends have one thing in common. They represent a loss of belief in humanity and its  ability to change, adapt and grow economically and materially. Why is continued economic growth so essential? I would argue that there is a necessity argument but also  philosophical and social reasons why we need to push for further and faster economic growth.

When is enough enough? Not yet! The average global wage according to the World Bank was around £5000 before the recession began. This means that were growth to stop now and everybody to receive the average wage we would all have the standard of living of a UK pensioner without any savings. Just to get to the reasonable but not luxurious average wage in the UK of £25,000 would mean a fivefold increase globally. This means that we need of necessity further economic growth to raise the average standard of living.

Of course, many millions of people in the developing countries are way below even the average wage and require a bigger leg up. But even in the developed western economies there is still a need for the creation of extra resources. Poverty, deprivation and lack of sufficient services exist in many areas of life. My father-in -law for example was recently refused a life saving operation from the NHS essentially because it was too expensive.

From a philosophical point of view it is important that we understand how inimical anti-growth sentiments are to the whole tradition of western civilisation. The Book of Genesis says that man shall have dominion over nature and urges us to ‘go forth and multiply’. We are turning our back on what has enabled us to crawl from the swamps and into the relative comfort of the modern world, our ability to tame the hostile environment we found ourselves in. David Attenborough made this about turn explicit when he blamed the Bible for climate change earlier this year.

Many of the discontents that people have with economic growth are connected to failures of the market economy rather than growth itself. The market is often an inefficent producer and distributor. It is a system based on production for profit rather than to meet the needs of society. The market can create environmental problems and pollution. It is unstable and contains within it continued recessionary tendencies as we are experiencing now. It is often wasteful and irrational and it produces and reproduces inequality because of the division between those who own wealth and those who do not.

But the problems of how the market economy works should not blind us to the benefits of continued economic growth. We could end up throwing away the growth baby with the market bathwater.

Anti-growth sentiments turn reality on its head. Far from creating problems all human civilisation, culture and progress have been built on economic development. The most economically dynamic and successful countries have always been the most innovative, the most culturally dynamic and the most progressive in every way. The alternative is also true, that economically stagnant or backward countries have less going for them across the board. Turning our back on growth means turning our back on what makes us most human, our ability to exercise dominion over the world we live in.

The market is not capable of being rational,but people are

The news that George Soros is creating and financing a new economic thinktank  called the Institute of New Economic Thinking (INET) should not be a surprise given both the destitution of modern economics and Soros’ own conviction that traditional economics is ‘a dogma whose time has passed’. As I have argued before there is little doubt that rational or free market theories have been discredited by the reality of the financial crisis, although this does not mean that we have really been living through a period of free market economics.

However, while a reassessment of the way forward for economics is way overdue, it seems unlikely, given its brief ,that this new Institute will help very much. For a start, as Anatole Kaletsky makes clear in the Times today, it will be heavily influenced by the Behavioural Economics school of thought. This rightly rejects the spurious rationality of mainstream economics but replaces it with a view based on the belief that people are basically irrational and the future unpredictable.

To gain a genuine understanding of unpredictable reality, some unorthodox economists may employ new mathematical techniques of non-linear dynamics and chaos theory. Others may revive the literary and anecdotal traditions of the great economists of the past, building on the work of sociologists, psychiatrists, historians and political scientists disdained by the present orthodoxy. INET will try to support these new schools of thought.

As I said in my review of a book by influential behavioural economists, 

We can agree with the BEs that the market, or capitalism, is not rational in the way that rational market theorists claim. The most singularly irrational aspect of capitalism is that decisions to invest are made by individual or groups of capitalists rather than by or in the interests of the majority of people. If the prospects for profitable investment look poor, because the expected rate of profit is too low or too risky, then money flows elsewhere. In the past ten years money flowed instead into apparently safe areas such as financial derivatives based on assets like housing etc . This created an unsustainable asset bubble which inevitably crashed and burned. Phil Mullan calls this the over financialisation of the western economies, the tendency for money to try to beget more money without going through the process of productive investment in new businesses.

Crises in the financial sector are an inevitable outcome of the over financialisation of western economies. The exact day when they will happen cannot be predicted, but the continuous instability and the tendency towards crisis contained within it will always remain. But it is not inevitable that we have to have economies of this sort. The danger of Behavioural Economics is that it condemns us to a future where the vagaries of the market are a given and the only question is how to manipulate and control the activities of the irrational people engaged within it.

Once we accept that human behaviour is irrational and the future unplannable and unpredictable then we have taken out what is unique about humanity, its ability to consciously and collectively organise and influence the future. One bright spot about the current recession is that it has revealed the bankruptcy of the prevailing economic orthodoxy. It would be a great shame if the vacuum thus created were to be filled by those who have the most disdain for human rationality. This weekend I and many others will be debating the future of the economy with experts such as Lord Skidelsky, Martin Wolf and Paul Mason at this event. Come and join us.

After the recession-the return of Keynes or the end of economics?

Robert Lucas, the University of Chicago economist, joked last year that “everyone is a Keynesian in a foxhole’. At first glance it certainly seems that the idea of government intervention to maintain economies in trouble has made a comeback. In the past year various governments have nationalised banks, introduced major stimulus programmes, prevented industries from collapsing, subsidised employment and printed money in order to combat the financial crisis.

Yet as Sean Collins has argued in his excellent review of Keynes: The Return Of The Master by Robert Skidelsky, whom I shall be debating next week at  this event  , the ragbag of anti-crisis measures put together around the world was not the product of any widespread conversion to Keynesianism. It was instead an ad hoc programme of state measures aimed at one thing-staving off financial collapse and its perceived consequences.

The Keynes they like is not the proponent of permanent state intervention to guarantee full employment. He is instead the man who said ‘in the long run we are all dead’. In so far as Keynesianism means anything today it represents the short term managerial approach to running economies which characterises the UK and other developed countries. Why has there been so much state intervention from governments which have been arguing for ‘light touch’ regulation for the past ten years? Because there is no alternative on the horizon.

The recession has effectively destroyed, at least for the time being, the belief in free markets that has governed most of the developed world since the discrediting of Keynes in the 1970s. As Sean Collins argues however, we should not go along with the thesis that the past thirty years have been about actual free markets. During this period the state has continued to intervene in the economy, although in different ways.

Nevertheless we have reached a point where economics itself has been discredited. As Daniel Yergin argues there are so many explanations for the recession that no coherent narrative has emerged. This vacuum is being filled by another legacy from Keynes. His belief in both the power of psychology and the essential uncertainty of the capitalism economy have become more influential in response to the recession. Both of these points are highlighted by Skidelsky in his book.

The falling back on psychological explanations for the crisis amongst behavioural economists is a rejection of real economics. The crisis has in roots in economic stagnation in the west, the consequent financialisation of western economies and global imbalances created by the relative dynamism of the BRICs. To ignore these causes and point to crowd psychology reduces the problem to one susceptible by state manipulation of people’s activity. In this sense it fits with the short termism we spoke of above. It represents an inability to face reality and think through what it would mean to create more dynamic western economies.

The elevation of uncertainty as a major problem is also wrong. Keynes, writing in the 1930s was obsessed with the threat of capitalist collapse. Faced with the Depression and looming global conflict this was not an unreasonable fear. It is to Keynes’ credit, in contrast with many who followed after him, that he understood that economics is about politics. His argument for full employment was that it was necessary to stave off revolution.

In fact one thing the recession has shown us is that capitalism is in general very stable and quite predictable. We are in the midst of a major recession but as I have noted before there has been very little social response. This is because capitalism is at root a system of social relations. No matter how bad the economy may get, as long as there is no organised alternative it will bounce back.

Emphasising the uncertainty and risks involved in capitalism today can only have one effect, one which Skidelsky himself recognises,’uncertainty imposes a kind of permanent fearfulness about the future which puts a damper on economic progress’. Skidelsky also criticises some of the behaviouralist economists, like Shiller, for ‘panic’ in the face of apparently irrational human behaviour in the run up to the recession.

There may be opportunities, due to the crisis within economics, to debate what kind of economy we need. This would entail rejecting the panic and uncertainty brigade and arguing for a longer term more strategic approach to the economy, more planning, more debate about where we want to go and above all more leadership.