Samuel Brittan and Edward Hadas, both distinguished economic commentators, discuss where to place the blame for the current global crisis with Standpoint editor Daniel Johnson
Daniel Johnson: Here we are in the institute of Economic Affairs, this shrine of the free market, which is now under fire in a way that it perhaps hasn’t been for a generation or more. Once again people are questioning the morality of capitalism, and they are even invoking the name of Marx, and those who are doing the invoking even include people like the Archbishop of Canterbury. Is this a good thing, or is this a bad reversion to old habits?
Samuel Brittan: I think that Marx is, to make a bad pun, a red herring. It’s just become a shock-horror name to invoke, and I’m not shocked, but not that interested either. I’ve often wondered what Keynes would be saying now, I’ve never wondered what Marx would be saying. “Marxian socialism must always remain a portent to the historians of opinion – how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men, and through them, the events of history.” That’s Keynes on Marx.
Edward Hadas: I think, as Sir Samuel says, quoting Marx is more of a cultural statement – like wearing a Che Guevara T-shirt – than an intellectual statement. There’s a certain kind of perverse contradiction of reality. This very successful economy is identified as a failure again and again. Rowan Williams is just one of many people who look at what has to be considered, by pretty much any objective standard, a hugely successful economic experiment in modern times, and says, “No, no, it’s a failure.” When Marx made the claim, or, say, when Malthus made the claim that we were all about to be starving to death, at least a reader could reasonably say, “We haven’t tried it out yet but look at the terrible squalor of industrial cities and the rapidly-growing population – yes, the system is working terribly and it’s doomed to failure.” There was a prediction, and there was a case – it may not have been a very logical one – but it has been firmly, thoroughly, completely disproved. And as for Marx’s own version of the modern industrial economy that he planned out, we’ve given it a fair shot, I think. It’s also been a failure.
DJ: Despite the unquestionable success of the market economy, doubts do still remain about its morality, and the present crisis has brought these doubts to a head. I’m not just thinking of this as an epiphenomenon of the crisis – it’s having a direct impact on the course of events. So, for example, American members of Congress worry that their constituents are so angry with bankers that they will vote them out of office if they bail out the bankers. So they won’t bail out the bankers, and this has an immediate impact on the stock markets. A moral view about the system or the individuals that work the system is directly relevant. It’s having an impact every day.
EH: Yes. But if you look at it slightly differently, a few years ago the anti-globalisation brigade – and this was when the system was working very well – said, “It’s not really working very well, there are still poor people,” and before that are the environmentalists who say, “We’re ruining the world.” And then you have this so-called crisis of the system which may get worse but as yet has affected only a very small part of the economy, the finance sector. It hasn’t even bankrupted the bankers – there’s some pain but it’s of a pretty modest sort. And yet people say, “Obviously this discredits everything.” It seems like it’s a cause looking for an opportunity.
DJ: Throwing the baby out with the bath water.
SB: I’ll tell you what I think is the root of it. It goes back to what Adam Smith said about the baker and the candlestick-maker and so on following only their own self-interest and yet benefiting their fellow men and women. And I think people have a great deal of difficulty understanding how the pursuit of self-interest – let’s say self-interest rather than selfishness – can in the end achieve some moral purpose with the spreading of prosperity. And here we may encounter a slight difference between us.
EH: I think we will.
SB: Because I have always regarded the self-interest doctrine in a utilitarian sense. And one of the more surprising utilitarian teachings is that under certain circumstances – you don’t have to be laissez-faire fanatics – the promotion of self-interest will also promote the interests of other people. Now this has to be done within certain ground-rules, about which we can argue, but if people knew something about utilitarian philosophy – if they read David Hume for instance, who I think was the wisest of those philosophers – they might feel a bit easier about this. But they can’t bear the idea that people can be doing good without always feeling extremely unselfish. And this grates on them, and they think, like Old Testament prophets, that here judgment has come for worshipping Baal for so long.
EH: Well, I agree with part of that. I think that there is a general current of discontent, in some ways shaped by Marxism, which directs itself at the economy rather than other aspects of the modern world. But the fundamental issue – and I think Rowan Williams is, in his nebulous way, trying to get at this – is that people feel there is something wrong with the modern experiment: the great changes in the way that we look at God, the world, the family, society, our neighbours. They identify the problem as being connected to what I would consider probably the most successful aspect of the modern experiment, the economy. So instead of saying that there’s something wrong with our attitude towards the family or religion, or the state, or the transcendental, they say there is something wrong with the economy, which has produced so much wealth and so much education and knowledge, so many other good things. It seems like a very odd target.
But to get back to what Sir Samuel said about utilitarianism: I always have a great problem, even sitting here in this shrine to free markets, with the description of the motivation and rationale of the industrial economy we live in as actually being some random pursuit of self-interest. That seems to me not a very accurate description of what seems to me a system built on virtues rather than on calculation or on self-interest. So I put the economy into the wider group of social constructions, like families, organisations, political systems. I see all of them as built on virtues and undermined by vices. The economy is no different from that.
SB: Well, I agree with some of that as well. There have been quite a few books explaining the success of American business as a result of the Puritan tradition. Now I don’t know if you’d agree with that, coming from a different tradition. But there was the idea, in all these books like R.H. Tawney’s Religion and the Rise of Capitalism, that the successful businessman was working for his family and for God, and Max Weber had a lot to say about that sort of thing, but somehow the financial side has taken off, a sort of ostentation, which people like Andrew Carnegie would have hated.
I think we should also bring in, as well as the economists, the evolutionary biologists. Now this will probably shock a lot of people much more than Adam Smith, but why do people who have already got £10 billion try to get another £10 billion – and that’s irrespective of what they do with it in their will? It’s a kind of macho thing where one Wall Street person has got to have a bigger yacht than another, and they’ve amassed so much but they’ve still got no time to enjoy it. It arises originally from competition of the male to get the best female, it’s why peacocks have such long tails, which only hold them back in the end. I’m not an expert on this but I accept the argument that there’s a lot in human nature that can be explained by the primitive drive to get a mate.
DJ: Can I take us back to the present crisis? What do we think about the morality of bailing out bankers and other capitalists, who may or may not have done anything wrong, with taxpayers’ money? This seems to be the issue that is particularly acute at the moment in both Europe and America, although there appear be different views on both sides of the Atlantic.
EH: One has to take competing goods here. There is the good of justice, and if you were to look at it that way, these foolish and reckless people should be punished for their acts. In many cases they were just following orders, or in some cases just taking advantage of a system that presented them with a certain set of opportunities.
SB: Gullibility and greed.
EH: They suffered from gullibility and greed, and they happened to be in a place where suffering from gullibility and greed allowed them to make a fortune. And so I’m happy to judge them for the good of justice that we are trying to pursue. We would spend a lot of time trying to disentangle the responsibilities, taking into account circumstances, motivations and acts, as one always does with that kind of question. But there’s another good we are trying to balance that with, and that is the continuing operation of the economy. One can make a set of practical judgments about what kind of “bailout” we need, or adjustment, recapitalisation or reorganisation, but something probably has to be done because the way the financial dynamics are working is rather destructive. But the actions that promote these two goods are quite likely to contradict each other because, when you’re actively trying to recalibrate the financial system, a lot of financiers who helped create the disequilibrium will end up either completely rewarded or at least not punished. But so it is in the world, it’s very unlikely that you can get everything right, and I would argue that the more important issue, the more important good to pursue, is the equilibrium of the financial system.
DJ: Is there a danger of moral hazard?
SB: I would just put it in a slightly different way. One of these dispossessed sub-prime borrowers, in Staten Island, which is probably the only lower-middle class part of New York, was interviewed on television, and he said that he would rather stand in the breadline if a banker was standing next to him, than have his own position rescued and the banker not get into trouble. Now that summed up everything I dislike, not about morality, but about moralism. If I had my way – I think this may be true of Ben Bernanke, the chairman of the Fed – I would drop dollar notes from the sky if there was a danger of the market seizing up. It would serve several purposes – it would also help with obesity and physical fitness.
EH: Keynes said you should bury them in the ground. That would be even better for physical fitness.
SB: Either way, it would be better than bailing out these bankers. On the other hand, people are not sophisticated enough to see a simple solution like that, and the only way they can think of getting the monetary mechanism working is bailing out the bankers. I sympathised for the first time in my life with someone like Hank Paulson, when he got down on one knee before a hard-bitten left-wing Democrat, and asked her – interestingly, a her – to help get his proposals through Congress. Because surely it is much more important to keep the monetary side of the system going – the monetary side has always been a mystery, the person who got nearest to understanding it was Keynes, but nobody ever completely has – than it is to punish the bankers. What I would do, is do everything they say, get down on both knees before the most populist member of Congress, to get the bloody thing moving again. Afterwards, we can have an investigation and see if we can prevent the worst culprits from getting off scot-free. I doubt if we can, because I think that some of the cleverest of the evil-doers have already taken their profits and are already enjoying their villas, and that’s what they can do. But it is more important to promote prosperity and welfare than it is punish a few evil-doers.
EH: So we’ve come to the same conclusion, but I like to put the moral vocabulary in, you tend to avoid it.
DJ: Perhaps he should have gone down on his knee before the voters rather than Nancy Pelosi, because it is the voters who are most angry, rather than the legislators. It turned out Nancy Pelosi couldn’t deliver it even if she wanted to. But the other great moral question here is: does what’s happened, whoever’s to blame for it, call into question the entire system? Is this a problem that the state can cure? Whether we like it or not, the state will take a much bigger role for a long time to come because of what happened, but is this a good thing, or a regrettable evil?
SB: I’ve got a very definite view here, and I’ve been helped here by George Cooper, who has written a very good book, The Origins of Financial Crises. Now there are two aspects of the market system – I’d rather talk about the market system than capitalism – and a very good French journalist called Frédéric Bastiat wrote about the miracle by which food was delivered to Paris, its citizens clothed and housed, without any great plan. I think that remains, and it’ll tend to happen anywhere where foolish mullahs don’t get in the way.
But it’s the other aspect of it, for which I’m here going to use a Marxist term (although most of these Marxist terms aren’t original to Marx when you look at them): use value. When people are acquiring objects, or not only objects, but if you sing a song and I play a harp, and the songs get better and the harp gets more tuneful, it’s an increase in wealth, even of GDP. It’s when people buy things for their resale value that the system gets rather wonky, and this is described in financial circles as “asset bubbles”. The central banks haven’t done much about them because they don’t know when there is an asset bubble, but in fact, the asset side, when people buy things for their future value rather than present value, is not working very well.
Now we have to be careful here, because the sort of investments in steel mills which Carnegie would have approved of were in a sense entered into because of their resale value, but where that takes over completely is when people buy a home not because they think it would be a good place to live but because they think it would be a good investment. The system goes mad, and I am pretty sure we are going to move away from this rather naïve preoccupation with one set of prices known as the consumer price index [CPI]. We will move towards trying to deal with asset bubbles – not very perfectly or successfully, but the current doctrine, that if we try by small adjustments in interest rates to prevent the CPI going up too fast or down too fast everything will else will take care of itself, has, I think, been exploded.
DJ: Isn’t it slightly arbitrary though, when the state suddenly, for example, bans short selling, which until now was considered perfectly legitimate for speculators?
EH: No, short selling has never been considered perfectly legitimate! It’s always had a bit of an odour about it. The idea of selling something you don’t own always gets people a little nervous, and rightly so. I would make a broader statement on the state and the market. You make a radical distinction between the two, but as Sir Samuel’s answer suggests, the state and the market in the finance world have had a long and sometimes quite painful relationship. The market goes to extremes, and the monetary system, which is pretty much always a state matter – it certainly is in modern economies – is very difficult to calibrate. We’ve had a great deal of trouble in the last 100 years – 200 even – getting it so that prices and goods are well balanced. Without a lot of wise state supervision and action, this monetary market often falls into imbalance. That is what happened in the credit bubble. I would argue that the aberration, if any, has been the ability of a certain set of financiers to dodge the normal limits imposed by state management. As Martin Wolf puts it, the finance industry looks peculiarly like a utility with a casino attached. The utility has been quite carefully regulated by the government, but some rather clever operators have found a way of building a casino on the side.
SB: Keynes got into that even before Martin Wolf. Keynes said that if the investment activities of a community are carried out as a by-product of a casino, they are not likely to be carried out very well.
There are some people saying that everything that is going wrong now with the credit crisis is not due to the excesses of laissez-faire but to earlier state intervention. Now you can make a perfectly good case that the populist measures of Bill Clinton and others, who were trying to get people to own houses who were in no position to pay for them, may have sown the seeds of the present problem, but to pretend that this is the only thing wrong is a kind of a priori-ism. You can always show, if you have a sufficient a priori belief, that what seems to be wrong with working capitalism is too much regulation. On the other side, the dirigistes can always show that the problem is not enough regulation, and you have to be a bit empirical. If Clinton had never lived and Reagan had been there another eight years we would still have the present problem.
The present British government is inching towards supporting house values, which is quite absurd when one of the roots of the crisis is that house prices have been inflated to a ridiculous degree, and I think more in Britain and Spain than the United States. I can’t make up my mind whether it is better that house prices fall suddenly by 20 or 30 per cent, or whether the process had better be long and drawn out. It’s just a pity that people who have had nothing to do with this suffer because of the monetary mechanism seizing up. We have to get enough money going into the system.
David Cameron has been applauded for hinting that taxes might have to go up and that there will be great limits to what government can do, not because he believes in people doing things for themselves but because we are supposed to tighten our belts. Now Keynes said that saving and scrimping is sometimes good, but in the middle of the Great Depression in 1931 he said people should go out and buy things, and he was right. Adam Smith wrote that what is virtue in a household can hardly be folly in nations, but it can be. In fact it seems to me common sense that when people are nervous and reining in their spending, that it is just the time for governments to finance schools, tax cuts, cathedrals or anything else. It’s about the best time to do it when the opportunity cost is low. I think moralism is an extremely bad guide.
EH: Well sure, depending on what is meant by moralism. If you want to find someone to blame for the current crisis in terms of morality, I’d go for Adam and Eve. If they hadn’t eaten that apple…
SB: I can’t contradict you there!
EH: I think you have a perpetual moral problem in any kind of economic arrangement or any kind of human arrangement. People are good but they are also weak, sinful if you will, so they will be too greedy when they should be generous, too generous when they should be prudent – generally too greedy more than anything else. And that’s a perpetual problem, which no amount of social engineering will resolve. In fact, one of the many fallacies of Marxism is to claim that at the end of history is this idea of communism, where we will finally eliminate all of the weaknesses that make society bad, or difficult.
But then there are also a set of technical questions which any economy has to deal with. In many cases these are problems that people, when they were first thinking about them, thought would be insoluble. When pollution became an issue in the 1960s, people thought this wouldn’t be a soluble problem, and yet pollution levels have been reduced dramatically in industrial societies through a combination of private, public and semi-public measures. But one of the problems we haven’t been terribly successful at addressing is the monetary problem.
SB: You’re right.
EH: And we had that terrible depression in the 1930s, we had great inflation in the ’60s and ’70s, and stagnation in the 1990s in Japan, and a series of currency crises – the IMF just did a study of 124 currency crises since 1980 – and we are now in the middle of another crisis where we haven’t got the monetary system right. The only consistency is that the central bankers have repeatedly said, “Now we’ve finally licked this problem,” and they have been proven wrong. I roughly count four paradigms of monetary policy that have been discredited in the last century. Perhaps we will get there, but it certainly is one of the sore spots of the modern economy that the monetary system seems to go haywire.
SB: I don’t want to argue with you. An oldfashioned chairman of the Fed, who was, if you like, a moralist, William McChesney Martin, said that the object of the central banker was to take away the punch bowl just as the party gets going. Now I’m afraid when I was younger I sneered at this too, but he was replaced by Keynes and monetarists and all sorts of people who thought they knew the answer. He was sneered at partly because of the Old Testament vocabulary, but partly also because people didn’t know how you measured when the party was going too far or what the technical equivalent of the punch bowl was. Now, however, McChesney Martin does not look such an old fogey after all.
DJ: Isn’t there a danger that the cure sometimes perpetuates the problem, or sometimes makes it worse in some way or creates a new problem? I’m thinking of the Great Depression.
EH: Danger? It’s an inevitability that the cure will produce a new problem.
DJ: The cure is often the product of a moral view. It is to satisfy a sense of moral indignation that punitive measures are adopted which then have unforeseen consequences.
SB: The punitive measures are restrictions on certain kinds of city dealings, or the separation of investment banking from deposit banking.
Now these are questions for technicians. I think there is, if not a moral sense, another sense in which the cures produce the next crisis. Supposing Keynes could persuade us that government deficits are not such a bad thing after all, and that we should build cathedrals to employ otherwise unemployed workers, the danger is that this view carries on when we’re back to the more normal problem, which is scarcity. And if we say government deficits don’t matter or they don’t matter very much up to a certain point, then there is a danger that once the crises like the present one are overcome and we’re back with more normal problems, government will spend too much and tax too little and we’ll have the next crisis, which will be one of inflation. So there is a sense in which the fashions or fads or genuine remedies for one set of problems carry on into the next one, and this I think is far more important than whether financial regulation goes too far or not far enough.
EH: I agree. If you address one kind of moral weakness, people will find some other kind of way to be weak morally. So it is inevitable that if you solve one kind of problem in a practical sense people will find some other kind of trouble to get into. If you think of a rambunctious teenager, you can keep him at home for a while, but after a while he will climb out of the window, or he will do something at home which will make you wish he’d gone to that party – trash the room or hang himself or something horrible. It’s difficult, but that’s the nature of this kind of lively human activity, that we don’t solve problems completely, or if we do another problem comes.
What is really remarkable about the Western economy is how many problems we seem to have solved quite successfully and quite durably. The main one would be what Keynes refers to as the economics problem: that people were hungry. And when one talks about scarcity in economics, one used to mean scarcity in the sense that it was difficult to live to adulthood or to be fully nourished. We now live in a world – or at least a country – where the poor are the obese, and where almost everyone is reasonably well housed and educated. So this is one set of problems we have done a remarkably good job at addressing. That doesn’t mean that we’ve now perfected society.
SB: Can I ask you a question, Edward? You said in your book Human Goods, Economic Evils that the problem was not so much the economy as economists. I am not here to bat for economics, which is an industry that can look after itself. But it would still be interesting to hear from you what harm the economics industry has done.
EH: Well, fortunately they have not done that much harm, because their advice has rarely been followed. If you actually trusted self-interest you would never let corporations be constructed; you would never let them have multiple purposes because that is too complicated for the economics models. For many years those economists who followed the dominant ideology didn’t pay attention to what we now call economic growth – except for Marx, who was very sharp on this. The English-speaking economists took a long time to focus on this great wonder that industrial prosperity was creating, of making people amazingly well-off. I do believe that if we didn’t spend so much time believing in free markets, we would get better results in the monetary system.
Alan Greenspan was in his youth a radical libertarian – Ayn Rand was his teacher – and his belief that if you just let people alone they wouldn’t get into trouble did in fact get people into a lot of trouble. So I think that some of the basic ideas of economists have caused trouble. I also think that some of the complaints, like those that we are getting from the Archbishop of Canterbury – “these economists, this model of the world, these selfish people acting for themselves in some sort of evolutionary struggle” – are really justified attacks on the dominant world view of economists, but they are cast as attacks on the industrial economy itself, attacks which are totally unjustified.
I would also say that the effort to separate economics from the moral, the human sciences, is to me an erroneous, a false separation. There is no reason to look at economic virtues, economic goods or economic goals any differently from the way that we look at what we wish from our families, from our governments, from our cathedrals, from our friendships. They are moral questions, there is a good we are aiming at, or a set of goods, there are evils that we wish to avoid. The first and most important question is, what are we trying to do with the economy at all, and economists rarely address that question in any substantial way.
SB: But I want to step back a bit. If you stop somebody in this street, which is supposedly dedicated to free markets, and ask them what economists do, they will say, “They forecast, and they forecast badly.” Most of the great economists never made a macro-economic forecast in their lives, and Hayek said that all economists can teach us are principles. Now most people are too impatient for that. They sneer at economic forecasts and yet they want a magic crystal ball, and they can’t have it. But the great majority of economists are not pronouncing or failing to pronounce on the good life. A useful economist would be one who could do a better job of the [London] congestion charge than the former mayor Ken Livingstone did. Keynes said that one day economists should be humble, useful people like dentists. Now no one fitted this description less than Keynes himself, but, if you look at what useful economists do, they are things like that. Economists can’t tell us about the good life but they ought to be able to tell us about means and ends. Where we might differ is that I would take a utilitarian view of the good life, and by that I don’t mean that you can calculate bits of happiness. In the end, I think it is human welfare that matters. The early utilitarians thought that you might eventually be able to measure human welfare in terms of a cat. If a cat is purring then it is happy, and I think that Jeremy Bentham approached social policy in that way.
DJ: What do we think is the most important moral question, or moral insight, that has emerged from our present crisis? Many people, like the Archbishop of Canterbury, have jumped to the conclusion that the whole system is rotten and should be replaced, or at the very least requires radical surgery, because there’s something terribly wrong with it. But is that the right sort of moral conclusion to draw? Or if not, what is?
SB: I don’t think the Archbishop, who is a great scholar in some ways, has the faintest idea of what should replace the market system.
EH: Hear, hear!
SB: But what is more, if he became the economic adviser to the next government, we really would have a depression. And all the authoritarian conservative instincts will say, “behave”, “discipline”, “spend less”, “tighten your belt”, and if they’re reinforced by some awful Archbishop, we really would get a depression, and no amount of sermonising would get us out of it.
DJ: So the moral conclusion, as it were, is: don’t let’s moralise about this?
SB: Well, there are plenty of things to moralise about, but to my mind the most difficult question is that people can behave well in small groups, but all the nastiness is then directed towards outside groups. Take any international crisis that happens to be going at the time of publication – you’ll find that there is hatred towards other groups. That has never been resolved and indeed there’s more of it. I once shared a tutorial with somebody who was a great devotee of Moral Re-Armament, and I reveal my age a bit because the Korean War was going on at the time, and I said: “Do Moral Re-Armament people oppose the Korean War and do they take a pacifist view?” And he said: “No, they fight better.” That was the end of religion for me!
DJ: Edward, what’s your view?
EH: I wouldn’t draw any enormous conclusions from this crisis – it hardly shows the immorality of the system or anything remotely like that. I think it’s a technical crisis, a problem that largely developed because we messed up on one of the things we are supposed to keep track of in running a complex economy. We should adjust for that. I would say that if you want to draw a moralistic lesson from this it is that you should remember that people are not always able to be virtuous and you need certain kinds of checks, whether they are regulatory or competitive, to ensure that they live up to their best nature. This crisis suggests an interesting novel more than a major rethink of public policy.
DJ: In spite of things like Enron. Or do you think this is not a new story, people have always been corrupt?
EH: I think if we had medieval novels, you would discover that the old squire was not really what he was meant to be. Read The Canterbury Tales. But if one wants to address a moral economic issue today, the most outstanding one wouldn’t be financial dysfunction, but be the gap between rich and poor countries and rich and poor people, which now really does have some economic significance. I would much rather focus on the questions of poverty that remain in the world than on the excesses of a few ill-tempered or ill-tethered bankers in a badly-designed system.
SB: I would agree with that, but the countries which have been most successful in emerging from this poverty have been countries – some of them horrible dictatorships that I hate, but nevertheless – that have adopted elements of the market system. Some of them have accepted large inflows of capital, but some of them are actually supplying the West with capital, which seems a little odd. It might seem immoral to some bishops, but in fact a very high savings rate in China and in the Opec countries has not produced a world depression, because the Americans have been consumers of last resort, and have borrowed these savings. Now the only kind of sermon that I can see about it would be Bernard Mandeville’s Fable of the Bees. These were sort of anti-moral moralities that made a lot of people in the 18th century very cross.
DJ: So we end not with Marx but with Mandeville. That’s very good. He certainly seems a more 21st-century figure.
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