FE Editorial : Just Keynes won't do

Mon, Oct 12 03:13 AM

Later today, we will know who wins the Economics Nobel for this year. That's a good provocation to ask this question: when will we know economics as a discipline has evolved a bit more. This question, of course, provokes another question: does economics need to evolve at all? Isn't it, in broad principles, a fully mature discipline anyway? Perhaps not. You don't need to be one of those who want to abolish investment bankers or those who see immorality in Goldman Sachs' post-crisis profits to argue that the financial crisis posed formidable intellectual questions. One of the most crucial ones has to do with the 'proven' proposition of mainstream economics that distributing risks is a good thing. This proposition gets into trouble once information asymmetry is brought in. Buyers of bundled and chopped up financial assets not having equal and enough information about risks of underlying assets was at the heart of the crisis. Can economics come up with a theoretical model where the tension between risk distribution and information asymmetry can be addressed? Economists who can do that may not win the Nobel —the prize often ignores the most deserving candidates—but they will be remembered as path-breakers.

Talking of path-breakers, John Maynard Keynes poses the other big question in economics today. A flood of commentary and a rash of books have proclaimed, post-crisis, that Keynes must be the guide to everything sensible that a policymaker needs to do. It sounds so simple. But it isn't. There are two bits of Keynes. One bit that translates into public policy and that, roughly speaking, concerns the role of governments in business cycles. The other bit is all about sublimely intelligent observations that Keynes made on economic behaviour. These are all to be treasured for all times. But their applicability to public policy is not obvious, never has been and never will be. Take what Keynes said about irreducible uncertainty—those looking at economic outcomes always have to contend with that; it implied finance was always going to be unstable. This made beautiful intuitive sense even before Lehman Brothers crashed. But how do we make policy out of this insight? By clamping down on finance? How much is too much? Can this brilliant observation yield even a rough set of policy guidelines? It can't. Many of the other big macroeconomic questions similarly cannot benefit from a re-reading of Keynes. Macroeconomics that assumed complete markets and rational behaviour and advocated public policy deserves to be interrogated. But the supplanting policy framework isn't available in Keynes. Economists, in micro and macro fields, have a lot to do.

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