jump to navigation

How to Interpret the Current Crisis. From the London Review of Books October 17, 2008

Posted by Garibaldy in Economy, Media and Journalism, The Left.

In January, I read quite simply the best piece of analysis I have seen during the whole of the credit crunch, by John Lanchester, the son of an old-school City banker. in the London Review of Books. Entitled Cityphilia, and published not long after the Northern Rock fiasco, it cut right to the heart of the matter:

“There is no mystery about how we got to this point: successive governments have, in policy terms, given the City more or less everything it wants. One of the last big things any government did to piss the City off – truly piss it off – was the windfall tax on profits imposed in 1981 by Mrs Thatcher’s chancellor Geoffrey Howe. (Blair or Brown would never dream of doing anything like that to the City.) But the abolition of exchange controls in 1979 and the increasingly international flow of capital, combined with the abolition of restrictions on trading practices which culminated in the ‘Big Bang’ in 1986, have all led to the City’s increasing dominance of British economic life. This, in turn, makes it all the more striking how little knowledge most people have of what goes on in the City: what it is for, what it does, and how it affects everyday life for everybody else.”

What he was talking about was the sacrificing not only of industry, but of the social fabric of much of the UK to the interests of the financial capital concentrated in the City (on a side note, the historians A. Hopkins and P.J. Cain argue that this “gentlemanly capitalism” was the driving force behind British Imperialism).

The conclusion spoke volumes, and seems not entirely unprophetic (if that’s a word):

One of the few victories of the collective polity over the financial industries – though it’s not one much celebrated in the financial press – came in 1991. The House of Lords ruled that Hammersmith and Fulham didn’t have to pay the huge sums it had lost investing in swaps (a kind of derivative) because its participation in the activity had been illegal to start with. That ruling affected 130 councils which had done similar deals, almost always to get around Tory rate-capping, and cost the 75 banks involved an estimated £750 million. The City hated that but the principle established was an important one: these deals are not beyond the law. If our laws are not extended to control the new kinds of super-powerful, super-complex and potentially super-risky investment vehicles, they will one day cause a financial disaster of global-systemic proportions.
Still, let’s look on the bright side: at least City bonuses will be smaller this year.

In short, the lack of regulation would destroy the system, and risk economic devestation for us all.

And Lanchester is back. This time, in an article entitled Cityphobia Lanchester explains how the sale of debt lies at the bottom of all this, added to the fact that the bonus culture encouraged bankers to take risks without the prospect of personal responsibility

“If you are wondering how a total of $8,200,000,000 could be paid in bonuses over two years to the great minds whose company went bankrupt, well, what can I tell you? The bonus question is often seen as a tragicomic footnote to the business of banking, but it may be that it goes close to the heart of the problem of how we got to be in this place. Through history, the great fortunes have been made by people directly taking risks on their own account. Today, great fortunes are made by employees, doing nothing other than their jobs: jobs which, in the case of bankers, involve taking on risks, usually with other people’s borrowed money. To make more money, and earn more bonuses (which are usually 60 per cent of an investment banker’s pay), it’s simple: you just take on more risk. The upside is the upside, and the downside – well, it increasingly seems that for the bankers themselves, certainly in the case of Lehman New York, there isn’t one. This undermines the whole principle of ‘moral hazard’, which was the idea behind letting Lehman go under in the first place – the need for companies to face the consequences of their decisions. This principle obviously collapses if the individuals involved don’t face any consequences.”

So once again, he is repeating his message that regulation is the key. Having praised the British government’s actions (though interestingly, Cowen’s move doesn’t feature in his brief round-up of events) , he moves on to hint at what type of regulation he would like to see to avoid this happening again. “For a start, there must be a tight limit on the relationship between banks’ debt and their equity, and much greater transparency about the nature of banks’ ‘assets’.”

He then moves to what must be the key question for progressive people across the world:

So: a huge unregulated boom in which almost all the upside went directly into private hands, followed by a gigantic bust in which the losses were socialised. That is literally nobody’s idea of how the financial system is supposed to work. It is just as much an abomination to the free marketeer as it is to the social democrat or outright leftist. But the models and alternatives don’t seem to be forthcoming: there is an ideological and theoretical vacuum where the challenge from the left used to be. Capitalism no longer has a global antagonist, just at the moment when it has never needed one more – if only to clarify thinking and values, and to provide the chorus of jeering and Schadenfreude which at this moment is deeply appropriate. I would be providing it myself if I weren’t so frightened.

Shame that he is frightened, but I’m sure there is no lack of schadenfreude on this site. The point though about the virtual absence of an alternative is one that we find ourselves drawn back to again and again and again. Not just in Ireland, but internationally, although an interesting statement from the President of the GUE/NGL in the European Parliament was flagged up here.

Lanchester also draws attention to something that has not been discussed enough:

One thing which has been lacking in public discourse about the crisis is someone to point out that we did this to ourselves, because we allowed our governments to do it, and because we were greedy and stupid. It’s not just bankers who have been indulging in greed, short-termism and fantasy economics. In addition to our stretched mortgage borrowing, Britain has half of the total European credit-card debt. That is a horrible fact, and although it’s nice to reserve the blame for banks who made lending too easy, the great British public is just as much to blame. We grew obsessed with the price of our houses, felt richer than we should, borrowed money we didn’t have, spent it on tat, and now that the downturn has happened – as it was bound to do – we want someone else to blame. Well boo fucking hoo. Bankers are to blame, but we’re to blame too. That’s just as well, because we’re the ones who are going to have to pay.

He also ends on a somewhat discouraged note.

“What will, what must, die is the mystical belief in the power of the markets that has dominated political and economic discourse in most of the Western world for the last several decades. The markets have so manifestly, so flagrantly malfunctioned that we can’t go back to the idea of unfettered liberal capitalism as a talisman, template or magic wand. The unquestioned Cityphilia I wrote about earlier this year is gone, I hope for ever. Unfortunately, we have no current model of where to go from here, apart from a more heavily regulated form of growth-based liberal capitalism.”

And it is here where I think I shall most strongly part company with Lanchester. The fundamental fault is not with failed regulation. We – or our ancestors to be more precise – have heard all the stuff about never again and new regulations to ensure it can’t happen before, in the aftermath of the great crash of 1929, when the US financial sector was overhauled. The fundamental fault lies of course with the nature of capitalism, the boom and bust cycle, undoubtedly exacerbated by the leeway given to speculators in the banks. Even if we chain then up so tight that they cannot do this again, the cyclical nature of the real economy will lead to depression. And as history tells us, ways around regulation will be found, and the power of the banks will ensure that regulations are ignored by government, or relaxed by it. Until we face up to these facts, the regulations will remain sticking plasters. We all here agree that we can build an alternative. As to its precise details, suggestions on a postcard please….


1. ejh - October 17, 2008

Ah, Lanchester, I’m afraid.


2. Repetition « Garibaldy Blog - October 17, 2008

[…] (although the same can assuredly not be said in reverse), but I’ve just put a piece up there discussing two excellent articles from the London Review of Books by John Lanchester dealing with […]


3. Garibaldy - October 17, 2008

Oops, thanks for that EJH. A quick bit of editing shall result.


4. Garibaldy - October 17, 2008

Er, I mean, I don’t know what you’re talking about.


5. WorldbyStorm - October 17, 2008

Great stuff G…


6. CL - October 17, 2008

Somewhat along the same lines John Bellamy Foster drawing on Magdoff and Sweezy, last April wrote-
” The fact that such financialization of capital appears to be taking the form of bigger and bigger bubbles that burst more frequently and with more devastating effect, threatening each time a deepening of stagnation—i.e., the condition, endemic to mature capitalism, of slow growth, and rising excess capacity and unemployment/underemployment—is thus a development of major significance.”


7. Graham - October 18, 2008

Clearly there is a struggle going on to figure out what went wrong… There has been a massive cluster of errors committed more or less simultaneously by major players in global financial markets and it demands a coherent explanation. And while the analysis provided here does constitute an effort to figure it out, the proposed cause-and-effect relationships are not being laid out as clearly as I think they could be. What is an unacceptable moral hazard, and what causes it? What role do bonuses play in high finance? What causes the business cycle? What are the functions of speculation? I understand that there are tempting political points which can be scored in this environment, but I think we’d be vastly better off if more people went back to basics and figured some of this stuff out. Without understanding economic cause-and-effect, interpreting this crisis correctly is impossible.


8. WorldbyStorm - October 18, 2008

Fair point Graham, but it’s clear that there are few self-evident economic causes and effect. Markets are driven by sentiment to a much greater degree than their proponents have recognised, something that I suspect makes them very difficult to predict… and reductionism or simplification simply isn’t going to cut it…


9. Graham - October 18, 2008

To be honest, I have some difficulty understanding what you mean with that comment, WbS, and how it relates to what I said. That’s probably my fault, just thought I’d let you know! Maybe you can explain it in a different way.


10. Garibaldy - October 18, 2008

I think I agree with both Graham and WBS. I think that Lanchester’s analysis is a cogent and powerful one (albeit more in the first than the second article) but also incomplete. I do think though that Graham’s characterisation of the events as a massive cluster of errots committed more or less simultaneously is to downplay the extent to which the current crisis is a result of the nature of any system of financial speculation (as I guess his series of questions recognises to some extent). A friend of mine likes to compare the situation to the South Sea Bubble in the early C18th, we could add the John Laws disaster in France in the same period, I’ve seen it compared to specultation on Tulips in C17th Holland, and I’ve referred above to the Crash of 1929. It’s not like this is a new phenomenon. There is something fundamental going on here, when capitalism is left unchecked. One thing I haven’t heard much is talk of whether this is similar or different to the collapse of the Asian Tigers in the late 1990s. I suspect that there are some similarities, especially with the situation in Japan, so the fact that more wasn’t done to prevent this tells us something about the short-term thinking inherent in the system.

Equally, as WBS says, the financial markets are to a large extent dependent on perception, on feeling, on emotion, on confidence. The human factor must also be taken into account too.

Clearly this comment is incoherent and not at all a sophisticated analysis, but it seems to me that to understand what has happened we need to understand both. And to prevent it happening again (as far as is possible within capitalism), political point scoring is essential.


11. Tomaltach - October 18, 2008

On a bit of a tangent. I and a couple of Irish journalists had the opportunity to speak to Charlie McCreevy a couple of days ago on the issue of regulation. McCreevy is slightly embattled because he holds the internal market portfolio, and clearly aspects of the internal market have gone a little awry! The socialist grouping in the EP, making a bit of political hay out of the crisis, has called for his head. Anyway – McCreevy was in typical fighting form. He wasn’t having any of the argument that lack of regulation was a root cause. He kept on saying it is far to easy to dismiss the immense decision facing Hank Paulson and that hindsight is 20/20. But I put it to him that it isn’t simply the case that we have suddenly discovered that regulation was inadequate, alarm bells were already ringing, indeed as far back as the late 90s some in the SEC were asking congress for example to regulate derivatives, but Alan Greenspan, god that he was, prevailed, arguing that regulation would spark a financial crisis. McCreevy wouldn’t accept and kept saying that in general, banks in very heavily regulated. Another issue I raised directly was that the regulator he set up via the FSA simply didn’t do its job – even within the framework it was given. The regulator gave the all clear to Irish banks last year while at the same time acknowledging that the big banks had loaned close to 90% of the previous year’s lending against commercial property in Ireland and the UK – at a time when it was clear the thing was already tanking. Yet the Regulator didn’t flag a huge risk let alone reprimand the banks. Again, McCreevy wasn’t accepting and just said it is fine now to look back etc.

McCreevy follows the pattern: None of those responsible for this mess are going to admit they were at fault. Not the politicians who didn’t regulate, or drew up weak regulation, not regulators who sat back and watched the system slide towards the precipice, and of course not the bankers who were prepared to risk the entire economy to pull in more mega bucks for themselves and their peers. I happen to believe that far far more rugged investigation needs to take place and people like John Neary, the Irish regulator ought to be fired if it can be found he didn’t flag significant risk under conditions which might reasonably lead a regulator to do so. Do I expect and of this to happen? You must be joking.


12. CL - October 19, 2008

-Without understanding economic cause-and-effect, interpreting this crisis correctly is impossible.-Graham (above).
The assumption here is that there is some agreed upon ‘economics’ to which we can turn to help us interpret the crisis correctly. Such a body of knowledge does not exist: there are instead competing schools of thought. The current crisis is a major defeat for the Chicago School.
Other approaches, mostly ignored for the past 20 or so years due to the ideological hegemony of market fundamentalism, are now receiving some attention. I reference one of the Marxian approaches above (6). Keynes too is again receiving attention.
And the Keynes who wrote “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic,” would agree with WBS comments.
It could very well be that economic circumstance is forcing a Kuhnian shift in how we interpret economic life.


13. Graham - October 19, 2008

Garibaldy, I’m glad you are recognising the scale of the problem before us in trying to figure this out. There is something fundamental going on here. Unfortunately we can’t presume that the problem is capitalism, since the socialist components of our economies (central banks in particular) may also have played a role. The goal I would suggest to you is to use a coherent theory to disentangle cause from effect and so make comprehensible the events in the real world. If speculation (properly defined) caused this crash, then it should be possible to explain the precise mechanisms by which this happened. Same for any other proposed cause. My criticism is that some people are using current events to score points without making any serious attempt to understand these events. These people, to the extent that they are succeeding, are going to make things much worse. I am confident that that criticism will not apply to you! 🙂


14. Graham - October 19, 2008

CL, you are completely correct that there are multiple schools of economic though. I don’t assume the contrary; the fact of disagreement just makes our task much harder (or perhaps more interesting!), since we are going to have to evaluate radically different ways of studying this field.

I must say that I don’t understand why you would say that there has been an “ideological hegemony of market fundamentalism”. The economics profession has a reputation for being centre-right, but I see little evidence of any sort of widespread libertarianism amongst them.

Anyway, Keynes and Marx are indeed worth exploring at this time. I have some major gripes myself with the way that mainstream economics is conducted, such that it is now in many ways indistinguishable from a branch of applied statistics. There is a sense in which the “human” elements have been lost; I am most attracted to theories which can incorporate these aspects of economic life.


15. WorldbyStorm - October 19, 2008

Graham, sorry will clarify later…


16. Garibaldy - October 19, 2008


I don’t think that was a tangent at all, I think it was exactly relevant.


I’m fairly sure that while I won’t be able to understand how all this happened exactly, my point scoring won’t have any influence, for good or bad! Are central banks socialist? Was not the Bank of England created to fund King Billy’s wars against Louis XIV, and the others set up in an attempt to copy the financial stability it and the national debt brought to Britain?

I do agree though that an agreed narrative is emerging which blames greed and deregulation – for an example, see Jim Gibney’s column in the Irish News. But that, as you say, is far too simple (unsurprising that Gibney trots it out given his boss Adams’ simplistic and pathetic grasp of economics at the last election). How can theory help us understand what has gone on? Well obviously, I reckon Marxian theory has a lot to tell us, but at the same time, unfortunately people do not always behave according to Marxist theory. So we do need to look carefully at the behaviour of the people involved, and what regulatory and political arrangements let them flourish, and let the situation develop. And again, does panic that grips the financial markets ever really act according to a theory? I’m not sure it ever does.


17. Garibaldy - October 19, 2008

I meant to say Paddy Murphy has a very effective and interesting piece on the rise, death and social legacy of the Celtic Tiger in the Irish News, here


and which I’ve talked about a bit at my blog. His piece is well worth a read.


18. CL - October 19, 2008

Graham, there are a number of different economic schools of thought.
There are a number of different marxian approaches among them the ‘Monthly Review’ school, of which Paul Sweezy is the best known name.

A formalist, very abstract marxian economics flourishes in Japan.

There are also varieties of Keynesianism. The post-Keynesianism of Paul Davidson is one of the most important.

The ‘American Institutional’ school is alive and well (no longer just confined to the U.S) They publish the Journal of Economic Issues, and draw their inspiration from the great Thorstein Veblen-especially his essay: Why Economics is not an Evolutionary Science (1898) in which he effectively demolished the epistemology of orthodox economics.
The Behavioral Economics school, a much more recent development, attempts to deal with the psychological deficiencies of orthodoxy. A book entitled ‘Nudge’ by Richard Thaler and Cass Sunstein is a recent example.

I just don’t see how anyone can deny the dominance, politically and intellectually, of ‘free market’ ideology over the last several decades,-the ‘outmoded market mentality’ which Polanyi effectively debunked 60 years ago, and which was effectively ‘re-bunked’ by Reaganism/Thatcherism.
‘Re-bunk’ is a coinage of Joan Robinson in her essential book ‘Economic Philosophy’.

As the failure of market fundamentalism creates cognitive dissonance among the true believers, there is an opportunity and a need to develop a more human alternative: in this project the various strands of heterodox economics are assets of real value.


19. CL - October 19, 2008

Central banks as ‘socialist components of our economies’-Graham (comment 13) This notion is just not sustainable.
The U.S. central bank, the ‘Fed’ is a private profit-making institution (albeit govt. regulated). For the two decades of ‘free market’ triumphalism it was led by Alan Greenspan, a disciple of Ayn Rand. It may be somewhat anomalous to have the most important price in the economy,-the price of money-set by a ‘free market’ ideologue, but the Fed is an institution of, by, and for the capitalist class-like central banks everywhere whether govt owned or not.


20. WorldbyStorm - October 19, 2008

There’s a very interesting, if not entirely fair piece on libertarianism in the wake of the crisis here at Slate. http://www.slate.com/id/2202489/

I don’t agree with the emotionally immature bit, but I would say that I recognise – from the left – the sense that logic alone can account for economic organisation (be it statist or anti-statist).

I don’t believe it can. I don’t believe markets are infallible. I don’t believe that unhindered they accord to some sort of ‘laws’. Nor do I believe that command control economies do either from the opposite direction. And I think the thing here is that it’s dangerous to look at processes rather than seek outcomes.


21. ejh - October 19, 2008

As the failure of market fundamentalism creates cognitive dissonance among the true believer

Ah, no it doesn’t. The true believers just believe that intervention caused more trouble than it prevented – or caused it in the first place.


22. WorldbyStorm - October 19, 2008

Yeah, that’s what I’d suspect too…


23. CL - October 19, 2008

“The best thing you can say about libertarians is that because their views derive from abstract theory, they tend to be highly principled and rigorous in their logic.”-Weisberg
Whats interesting is that most of these libertarians have no notion where the abstract theory came from in the first place.
So not only do they mistake the abstract for the concrete, but their utopian project, as Polanyi showed, is to use the power of government to impose the abstract ideal on society,- a recipe for political and economic disaster.
Current empirical reality, the financial/economic debacle, has subverted the basic tenets of the ‘free market’ ideologues. They have various defense mechanisms to deal with this cognitive dissonance, including denial, reaction formation etc. Its kinda fun to watch.
For these reasons, empirical reality alone will not defeat the true believers: they need to be defeated intellectually and ousted from political power.
In Ireland the growing opposition to Harney/Lenihan/Cowen shows the failure of their ideology and creates an opportunity for the left. An important part of the political task is to expose the ideological and philosophical underpinnings of the ‘outmoded market mentality’. And in this project the work of Polanyi, Marx, Veblen and Keynes are essential.


24. crocodile - October 19, 2008

An article by Andrew Rawnsley in this Sunday’s ‘Observer’ reprints speeches made by Gordon Brown and David Cameron, in which they lauded the gods of the City of London and poured scorn on those who advocated regulation – both speeches made in the last year. The British politician who most accurately predicted the current meltdown, and identified its causes, is – rawnsley points out – Vince Cable of the Liberals. Not that the Liberals have benefited from his prescience.
So is the current state of affairs ‘an opportunity for the left’ in Ireland? Many columnists have suggested so, but I’ve yet to read a coherent alternative budget strategy. FG thinks public servants are the problem – all those postmen in helicopters – and individual leftist politicians speak up for the weak in society, but offer no analysis as to where money to finance services should come from in the absence of property taxes.


25. ejh - October 19, 2008

Postmen in helicopters?

I used to know a social security officer in Shetland who used a aeroplane on visits, but he didn’t have any option.

(Used to land in fields, he said. They’d have to make two runs though, the first to scare off the sheep…)


26. WorldbyStorm - October 19, 2008

crocodile, that’s it exactly. I’m not insanely tax and spend. But it has to come from taxation. There is no other alternative income stream.

Wouldn’t like to be that man ejh, I’ve ducked certain jobs in the past due to being once very phobic about flying.


27. crocodile - October 19, 2008

Sorry, ejh, all I mean is that – to read Stephen Collins or Alan Ruddock or listen to Richard Bruton or Leo Varadkar – it’s the public service pay bill and the lives of luxury lived by postmen, teachers, nurses etc following those bounteous benchmarking awards that are the real causes of this mess. And you thought it was developers, property lawyers etc in those choppers to the races? How naive.


28. Justin - October 20, 2008

CL – October 17, 2008
Somewhat along the same lines John Bellamy Foster drawing on Magdoff and Sweezy, last April wrote-
” The fact that such financialization of capital appears to be taking the form of bigger and bigger bubbles that burst more frequently and with more devastating effect, threatening each time a deepening of stagnation—i.e., the condition, endemic to mature capitalism, of slow growth, and rising excess capacity and unemployment/underemployment—is thus a development of major significance.”

Yes, and he also wrote last April:

“So crucial has the housing bubble been as a counter to stagnation and a basis for financialization, and so closely related is it to the basic well-being of U.S. households, that the current weakness in the housing market could precipitate both a sharp economic downturn and widespread financial disarray. Further rises in interest rates have the potential to generate a vicious circle of stagnant or even falling home values and burgeoning consumer debt service ratios leading to a flood of defaults. The fact that U.S. consumption is the core source of demand for the world economy raises the possibility that this could contribute to a more globalized crisis.”

The mainstream economists may not have seen it coming but at least some within the Marxist tradition did.


29. Justin - October 20, 2008

Sorry not last April. He wrote that in April 2007, i.e. before the crisis.


30. Graham - October 20, 2008

Garibaldy (#18): Thanks for the reply. I would put it to you that central banks represent state control (almost always a monopoly) over the production of money, and as such they must be socialist institutions, i.e. they represent collective ownership of the factors of production – that is, production of money. It’s clear that they would not exist in a free market. (You are probably also aware that the centralisation of credit by a national bank is the 5th plank of the Communist Manifesto. That the historical role of central banks has been to fund war is not a contradiction.)

Also, you note that people do not always act in accordance with theory. I think that’s an extremely fair point. On the other hand, it might not apply to certain types of theory. If I construct a theory regarding human action whose propositions abstract from the real world without introducing any assumptions which must be false, then maybe I can have a theory which is universally applicable. The term for this is “non-precisive” abstraction. I can suggest papers which discuss this if you like. e.g:

Click to access long.pdf


31. Graham - October 21, 2008

CL (#18,19): Thank you for the comments. I understand that the mainstream probably looks to you like it is dominated by what you call “free market ideology”. I think we need to be a little bit discerning and understand that there are a variety of views at opposite ends to each other. If you ask the average libertarian about the mainstream they will tell you just how statist it really is! But thank you for discussing those different schools of economics. I myself greatly value the heterodox.

Regarding the Fed, this institution is a creation of the US Congress. Like I’ve been saying, it would not exist in the free market. And it does engage in highly profitable activities for private interests. There is no contradiction there, just as there is no reason to believe that “the capitalist class” has any particular interest in the free market. They are just doing their jobs, and often this involves exploiting government power. Again, nothing terribly interesting here as far as I can tell. Regarding Alan Greenspan, he only became the Chairman of the Fed to the great shock and disappointment of the wider libertarian community. Greenspan had previously been a supporter of the gold standard.



32. Graham - October 21, 2008

WbS (#20): Hi again. Could you please tell me what you mean when you describe the claim that “logic alone can account for economic organisation”? It doesn’t sound like something that I would agree with, I just don’t know what it means! I would never claim that markets are infallible. I agree with the description of the market as a “discovery process”, through which actors of limited means and unique, subjective values attempt to achieve their most highly valued goals. Mistakes are inevitable and everywhere, but through competition, trial and error, we can gradually improve.

Economic law is another controversial topic. The nature and contents of economic law varies according to the school of thought to which one subscribes. However, nearly all schools would have to agree with at least some forms of the most basic laws, e.g. the laws of supply and demand. Anyone who disagrees with basic laws such as these probably cannot agree with anything in economics.

Regarding whether we should be looking at processes or seeking outcomes, this is an absolutely key point. I think I will quote Mises (apologies for length). He is saying exactly that economics is about understanding the process, not about seeking outcomes. There is an implication that when people understand the process, they will have a different perspective on the correctness or otherwise of seeking outcomes. Anyway, here is the passage (the opening paragraphs of Human Action). I look forward to hearing back from you.

Economics is the youngest of all sciences. In the last two hundred years, it is true, many new sciences have emerged from the disciplines familiar to the ancient Greeks. However, what happened here was merely that parts of knowledge which had already found their place in the complex of the old system of learning now became autonomous. The field of study was more nicely subdivided and treated with new methods; hitherto unnoticed provinces were discovered in it, and people began to see things from aspects different from those of their precursors. The field itself was not expanded. But economics opened to human science a domain previously inaccessible and never thought of. The discovery of a regularity in the sequence and interdependence of market phenomena went beyond the limits of the traditional system of learning. It conveyed knowledge which could be regarded neither as logic, mathematics, psychology, physics, nor biology.

Philosophers had long since been eager to ascertain the ends which God or Nature was trying to realize in the course of human history. They searched for the law of mankind’s destiny and evolution. But even those thinkers whose inquiry was free from any theological tendency failed utterly in these endeavors because they were committed to a faulty method. They dealt with humanity as a whole or with other holistic concepts like nation, race, or church. They set up quite arbitrarily the ends to which the behavior of such wholes is bound to lead. But they could not satisfactorily answer the question regarding what factors compelled the various acting individuals to behave in such a way that the goal aimed at by the whole’s inexorable evolution was attained. They had recourse to desperate shifts: miraculous interference of the Deity either by revelation or by the delegation of God-sent prophets and consecrated leaders, preestablished harmony, predestination, or the operation of a mystic and fabulous “world soul” or “national soul.” Others spoke of a “cunning of nature” which implanted in man impulses driving him unwittingly along precisely the path Nature wanted him to take. [p. 2]
Other philosophers were more realistic. They did not try to guess the designs of Nature or God. They looked at human things from the viewpoint of government. They were intent upon establishing rules of political action, a technique, as it were, of government and statesmanship. Speculative minds drew ambitious plans for a thorough reform and reconstruction of society. The more modest were satisfied with a collection and systematization of the data of historical experience. But all were fully convinced that there was in the course of social events no such regularity and invariance of phenomena as had already been found in the operation of human reasoning and in the sequence of natural phenomena. They did not search for the laws of social cooperation because they thought that man could organize society as he pleased. If social conditions did not fulfill the wishes of the reformers, if their utopias proved unrealizable, the fault was seen in the moral failure of man. Social problems were considered ethical problems. What was needed in order to construct the ideal society, they thought, were good princes and virtuous citizens. With righteous men any utopia might be realized.

The discovery of the inescapable interdependence of market phenomena overthrew this opinion. Bewildered, people had to face a new view of society. They learned with stupefaction that there is another aspect from which human action might be viewed than that of good and bad, of fair and unfair, of just and unjust. In the course of social events there prevails a regularity of phenomena to which man must adjust his actions if he wishes to succeed. It is futile to approach social facts with the attitude of a censor who approves or disapproves from the point of view of quite arbitrary standards and subjective judgments of value. One must study the laws of human action and social cooperation as the physicist studies the laws of nature. Human action and social cooperation seen as the object of a science of given relations, no longer as a normative discipline of things that ought to be–this was a revolution of tremendous consequences for knowledge and philosophy as well as for social action.


33. Garibaldy - October 21, 2008

Thanks for the link Graham. On closer inspection, a bit late to be reading that now, but I’ll try again tomorrow. I think that if you look at how central banks evolved historically they were absolutely crucial to the development of the market, just as government is. Regulating the quality of coin, then printing money, enforcing contracts, ensuring access to credit across the country, uniform weights and measures, a single internal market, etc – the market cannot function independent of the state. Never has and never can. There is no such thing as a free market. Merely conditions for trade regulated by the state (or some other coercive group or institiution) on behalf of society as a whole.


34. Graham - October 21, 2008

CL (#23): interesting comment. The thing about it is that libertarians don’t want to use government power to achieve anything – the whole point, after all, is to get rid of government power! There are quite a few claims wrapped tightly together in comment #23, but I think that that is the most important one to comment on. Perhaps also worth saying that the unpopularity of centre-right politicians is probably not something of concern to many Irish libertarians, either intellectually or personally. We don’t really exist on the mainstream political spectrum, what happens there is irrelevant us!


35. Graham - October 21, 2008

Garibaldy (#33): No problem. Of course I’m in complete and fundamental disagreement with the latest set of statements you’ve made, but no surprise there! Maybe I’ll continue this tomorrow or write a post about it, perhaps something called “The State or The Market” 🙂


36. Garibaldy - October 21, 2008

Please do so and let us know when you do write that post.


37. CL - October 21, 2008

Graham. Without government power the ‘free market’ would never have been imposed on society. This is one of the major themes of Polanyi’s The Great Transformation. The State and Market go together. The State is necessary for the market system.
Libertarians are delusional if they really believe that government can be abolished. You say that libertarians don’t want to use govt. power to achieve anything. How about the rule of law?


38. CL - October 21, 2008

Graham. Without government power the ‘free market’ would never have been imposed on society. This is one of the major themes of Polanyi’s The Great Transformation. The State and Market go together. The State is necessary for the market system.
Libertarians are delusional if they really believe that government can be abolished. You say that libertarians don’t want to use govt. power to achieve anything. How about the rule of law?


39. Graham - October 23, 2008

CL, maybe you’re right, maybe libertarians are delusional! But personally I am not hoping, expecting, or trying to abolish any government. I’m trying to understand economics and politics to the best of my abilities, discover useful truths, and share in discussions with other people who have similar interests. In the course of this process I have gradually become convinced by a set of positions which some other people apparently find to be repulsive, frightening or evil. There is nothing I can do about that! If you think that I am crazy then that’s ok, we don’t have to talk to each other.

You question my claim that libertarians don’t want to use govt. power to achieve anything. “How about the rule of law?”. Fair enough. There are some distinctions which need to be made here. I stand by my comment as a very broad summary of libertarianism, but of course there are different camps with different nuances. The typical minarchist supports the existence of the State to defend property rights, e.g. through courts, police, and the military. In accepting the existence of the government, these people clearly do believe that its power should be used. On the other hand, the executive powers of an idealised minarchist government would be miniscule – no major public works, social engineering, non-defensive warfare, business regulations, public schooling, corporate welfare, etc. The manifesto of a minarchist political party would be bare; at most it would consist of a list of government agencies which the party was going to abolish! So while I accept that minarchists do want to achieve something (the protection of property rights) though government power, I think it’s clear that they believe in a radically smaller level of government power than anyone in the mainstream. So I’ll admit that “Not wanting to achieve anything with government power” is not totally correct, but it’s still in my view a reasonable comparison with mainstream positions.

On the other hand, there is an increasingly large division of libertarians who don’t believe that we need a state even to enforce contracts. Anarcho-capitalists are immune to the charge of wanting to use government power to achieve anything at all, since they believe that the government itself should dissolve into the marketplace. There is historical precedent for anarchic provision of legal services – the State as we know it is really only an invention of the last couple of hundred years. And if you follow the strongest arguments for the free market to completion, and apply them widely enough, anarchy is often the most attractive conclusion.

Anyway, I believe that I’ve demonstrated that my description of libertarians was ok.


40. What will you be reading this summer? « The Cedar Lounge Revolution - July 12, 2010

[…] second is also a book by someone we’ve discussed on CLR before, John Lanchester, who wrote some really interesting articles in the LRB on what was then the credit crunch or the banking crisis. This is his Whoops! Why Everyone Owes […]


41. John Lanchester on Marx « The Cedar Lounge Revolution - April 10, 2012

[…] Review of Books some extremely interesting stuff on the economic crisis (we’ve discussed him here, here, and here). I’ve just come across a podcast and article by him from the LRB. The […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: