I have been to this conference before. The critics of standard economics make a devastating critique of the unreality of the conventional economic model. It operates outside of historic time, makes absurd assumptions about self-correcting markets, ignores self-reinforcing behaviors, and excludes shocks that cannot be modeled, as well as cases of plain corruption. The case is just irrefutable, more now than ever, since the financial collapse. George Soros uses the term “reflexivity” to describe tendency of actual economies to defy the premise that the ideal economy will move towards equilibrium. He made his fortune by understanding these irrationalities better than others, and investing accordingly. This Bretton Woods conference, thanks to Soros’ sponsorship, operates at a grander scale than most, and is a superb assemblage of the world’s dissenters. But it will take something like a revolution for these ideas to determine the world’s financial policy. At this morning’s first session, a particularly nice rendition of this analysis was offered by Brian Arthur of the Santa Fe Institute, the father of “Complexity Economics.” This stuff is impossible to argue with--unless your career is invested in the standard paradigm. There is also the case of Asia, much discussed at this conference, which developed and thrived by violating most of the precepts of free-market economics. As I write this, Louis Kuijs, one of the World Bank’s men in Beijing, is displaying a nice chart showing that China’s share of investment in GDP is almost 50 percent which in turn drives China’s 10 percent growth rate, a feat that China achieves, of course, via state capitalism. China and India also both avoided the global financial crisis, by having heavily regulated banks and very simple banking systems. Arthur demonstrated that the western banking system was ungovernable because it became so convoluted and impenetrable to regulators. That didn’t just happen, it was a deliberate strategy of the bankers. As Simon Johnson pointed out, the private benefit to banking executives was salaries, stock options and bonuses in the billions but costs to the global economy are the trillions. So much for efficient and beneficial financial markets. But this disabling complexity is not inevitable. The Chinese experience demonstrates that banks, at bottom do best when they perform very rudimentary tasks – talking in deposits and making loans. No derivatives or securitized loans for the Chinese. What is shocking, after the financial collapse demolished so many of the assumptions of standard economics, is how the profession sails merrily on, largely undisturbed. There are genuflections to the need for economists to study more economic history, or to depart from models that assume rationality, or to measure your model against the very different realities of state-led capitalism in Asia--but you don’t go in this direction if you want tenure at most of the elite departments. The dogmatism of standard economics, coupled with the immense power of financial elites, creates what so many speakers here call the political economy problem. We know how to simplify and regulate the financial system. But the constellation of political power doesn’t allow it to happen. This morning’s first panel opened, over breakfast, at the ungodly hour of 7 a.m. Yesterday’s last session closed at 11 last night. Tonight’s dinner, whose speaker is the octogenarian Paul Volcker, begins at 9. Rob Johnson, who planned the conference, thinks of the period between midnight and 6 a.m. as a break. Dissenters, it seems, need to conference harder to stay in the same place. (For armchair followers of this stuff, the whole conference as well as the excellent papers, are available on the INET website – ineteconomics.org.) Last night’s dinner speaker was the witty, erudite, and relentless Adair Turner, who heads the British Financial Services Authority. Turner is, by a large margin, the west’s toughest financial regulator. Britain’s new coalition government, under Tory David Cameron, plans to fold the FSA into the Bank of England, and to sack Lord Turner. So it goes.
