The markets have ruled for a third of a century, but it has all ended in tears. The present economic crisis represents 3 kinds of failure of the market system.
The first was institutional: banks mutated from utilities into casinos. However, they did so because they, their regulators and the policymakers sitting on top of the regulators all succumbed to something called the “efficient market hypothesis”: the view that financial markets could not consistently mis-price assets and therefore needed little regulation.
The second failure was intellectual. The most astonishing admission was that of former Federal Reserve chairman Alan Greenspan in autumn 2008 that the Fed’s regime of monetary management had been based on a “flaw,” that is, that markets were self-correcting. As a consequence, economics itself was marginalised.
But the crisis also represents a moral failure: that of a system built on debt. At the heart of the moral failure is the worship of growth for its own sake, rather than as a way to achieve the “good life.” As a result, economic efficiency—the means to growth—has been given absolute priority in our thinking and policy. The only moral compass we now have is the thin and degraded notion of economic welfare.
It’s therefore hardly surprising, argues biographer Robert Skidelsky, that the global financial crisis has led to a revival of interest into the writings of celebrated economist and crusading moralist, John Maynard Keynes (1883-1946).
He believed that material wellbeing is a necessary condition of the good life, but that beyond a certain standard of comfort, its pursuit can produce corruption, both for the individual and for society. He also reunited economics with ethics by taking us back to the primary question: what is wealth for?
Keynes was someone who instinctively sought an equipoise: not in the timeless equilibrium of classical economics, but in a balance in political economy between freedom and control, national and international wellbeing, efficiency and morality. He was an Aristotelian, who believed that vices are virtues carried to excess. And this may be the saving philosophy for today.
