WEBVTT - Why It's A Big Problem That Economists Still Don't Understand Money 0:00:11.880 --> 0:00:16.320 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:16.440 --> 0:00:20.880 I'm Joe wasn't All and I'm Tracy Alloway. So, Tracy, 0:00:21.040 --> 0:00:25.520 both of us are our careers in financial media. It's 0:00:25.640 --> 0:00:29.000 roughly around the same time, alright, Like right, like you 0:00:29.040 --> 0:00:33.440 started pretty much just before the financial crisis. Yeah, that's right. 0:00:33.479 --> 0:00:37.839 In fact, I joined the Financial Times in September of 0:00:38.120 --> 0:00:41.080 two thousand eight, so actually directly in the middle of 0:00:41.120 --> 0:00:44.400 the financial crisis. Well that was, like, that's the same month, yeah, 0:00:44.520 --> 0:00:47.879 that or maybe October two tho eight I started Business Insider, 0:00:48.360 --> 0:00:50.760 and we really I always thought it was like the 0:00:50.800 --> 0:00:53.840 best time in terms of career timing wise, because there 0:00:53.880 --> 0:00:57.840 was just so much to cover in those days. Absolutely, 0:00:57.880 --> 0:01:00.880 and the best part was because everything that was happening 0:01:01.080 --> 0:01:03.600 was so unusual and so new. You were sort of 0:01:03.600 --> 0:01:06.000 on an even footing with people who have been covering 0:01:06.000 --> 0:01:08.360 it for years and years and years. Everyone was trying 0:01:08.400 --> 0:01:10.560 to figure out what was going on at exactly the 0:01:10.600 --> 0:01:14.240 same time. Yeah, I my thoughts exactly. And then I 0:01:14.280 --> 0:01:17.520 think the subsequent years, the last decade or so has 0:01:17.560 --> 0:01:21.040 also been incredibly interesting. I mean, obviously the news has 0:01:21.040 --> 0:01:24.160 slowed down a bit, but I think one of the 0:01:24.640 --> 0:01:29.759 I guess positive aspects of the post crisis era has 0:01:29.800 --> 0:01:35.880 been this major rethinking about all kinds of conventional wisdom, 0:01:35.920 --> 0:01:40.120 all of the standard dogma about economics and which direction 0:01:40.200 --> 0:01:43.360 should policy go and what framework should best be used. 0:01:43.760 --> 0:01:48.400 They're really coming under even still today, pretty intense, uh 0:01:48.560 --> 0:01:52.280 scrutiny and just sort of rethinking of everything. I mean, 0:01:52.360 --> 0:01:55.400 I'm not sure I would call it a positive development 0:01:55.480 --> 0:01:58.960 because all these questions of economic orthodoxy are sort of 0:01:59.000 --> 0:02:02.880 coming up because people think that economic orthodox ey hasn't 0:02:02.920 --> 0:02:06.400 actually worked, and we still have sluggish economic growth, and 0:02:06.440 --> 0:02:09.480 we still have lots of problems in the international financial systems, 0:02:09.480 --> 0:02:12.400 so people are really trying to figure out what has 0:02:12.440 --> 0:02:16.280 gone wrong. But from a financial media perspective, yes, yes, 0:02:16.320 --> 0:02:19.760 it's been very interesting. Yeah, I think that's a good distinction. 0:02:19.880 --> 0:02:24.679 It's not good that the post crisis economies, especially in 0:02:24.840 --> 0:02:28.919 developed in the developed world, have been so mediocre, sluggish, 0:02:29.080 --> 0:02:33.600 mediocre wage growth, etcetera. But from our seats, from our 0:02:33.680 --> 0:02:37.160 vantage points, it's certainly been been a time of sort 0:02:37.160 --> 0:02:40.800 of a great opening up of the possibilities and lots 0:02:40.840 --> 0:02:44.280 of chances to explore different ideas. Yeah, and it's not 0:02:44.600 --> 0:02:47.200 you know, it's an unusual time when you see headlines 0:02:47.320 --> 0:02:50.800 like the failure of central banks, and we see those 0:02:51.120 --> 0:02:53.919 all the time, Right, that's sort of almost a given 0:02:54.320 --> 0:02:57.639 at this point in time, with everyone talking about fiscal stimulus, 0:02:57.680 --> 0:03:02.040 exactly right. So today I'm very excited about our guest 0:03:02.120 --> 0:03:06.400 because he's probably one of the best positioned people to 0:03:06.600 --> 0:03:13.280 talk about the history of economic ideas, rethinking economic dogma, 0:03:13.360 --> 0:03:17.560 anticipating where policy will go, and UH, during a period 0:03:17.600 --> 0:03:20.120 of such a profound change. We're going to be speaking 0:03:20.160 --> 0:03:23.960 to Robert Skidelski. He's a member of the House of Lords, 0:03:24.000 --> 0:03:28.480 but he's mostly known for having been the most famous 0:03:28.520 --> 0:03:34.000 and authoritative biographer of John Maynard Keynes. He's written extensively 0:03:34.200 --> 0:03:37.800 about Canes and his work, and he is the author 0:03:38.080 --> 0:03:42.200 of a fairly new book. It's called Money and Government, 0:03:42.600 --> 0:03:46.720 a Challenge to Mainstream Economics, and it's about this. It's 0:03:46.720 --> 0:03:50.000 about the history of the ideas that led us up 0:03:50.000 --> 0:03:54.120 to the global financial crisis, and it's a discussion of 0:03:54.440 --> 0:03:57.560 where things are going to go next. So sort of 0:03:57.600 --> 0:04:01.800 the perfect guest for this moment. UH, Robert Skidelski, thank 0:04:01.840 --> 0:04:04.400 you very much for joining us, and thank you for 0:04:04.480 --> 0:04:09.480 asking so let's start with our intro. When you look 0:04:09.520 --> 0:04:11.640 at the post crisis era and you see all these 0:04:11.640 --> 0:04:15.800 different debates going on about the new frameworks and new 0:04:15.840 --> 0:04:19.920 ideologies and new approaches, are you heartened by it? I mean, 0:04:20.040 --> 0:04:24.320 I mentioned as a positive. It's not positive that we've 0:04:24.360 --> 0:04:27.360 had such sluggish growth and that the old dogmas have failed. 0:04:27.839 --> 0:04:31.840 But do you feel excited by the possibilities that this 0:04:31.960 --> 0:04:37.160 is created in terms of new directions and economic thinking. Well, 0:04:36.800 --> 0:04:40.560 we're in an interesting transition stage, n Tree. I mean, 0:04:40.560 --> 0:04:44.000 I always recall that that that old adage the old 0:04:44.040 --> 0:04:46.800 world is dying and the new world is powerless to 0:04:46.839 --> 0:04:51.080 be born. I mean the old world of economic policy 0:04:51.160 --> 0:04:56.640 I think suffered some pretty devastating blows both in two 0:04:56.640 --> 0:05:02.360 thousand and eight, and really area of policy to lift 0:05:02.800 --> 0:05:07.000 economy is back to anything like vigorous growth, since that 0:05:07.200 --> 0:05:12.840 is most economy economies. There's a dissatisfaction with the orthodoxy. Um, 0:05:13.080 --> 0:05:18.039 there's political discontent with the orthodoxy, and that is shown 0:05:19.040 --> 0:05:22.440 right through the political systems of the world. But there's 0:05:22.520 --> 0:05:28.360 no agreed consensus on where to go from here everything 0:05:28.600 --> 0:05:32.080 all you know, lots of ideas are being put forward. 0:05:32.240 --> 0:05:36.120 There's a lot of turmoil, then new developments and economics 0:05:36.160 --> 0:05:40.880 which try to address some of the problems. The political theorists, 0:05:40.920 --> 0:05:46.000 social scientists, anthropologists, they're all feeling they've got something to say, 0:05:47.120 --> 0:05:52.599 but there's no no unified doctrine of economics to carry 0:05:52.680 --> 0:05:56.040 us forward. So just to set the scene a little bit, 0:05:56.240 --> 0:05:59.440 what is it do you that you think economists actually 0:05:59.480 --> 0:06:03.040 got wrong about the two financial crisis, because I think 0:06:03.080 --> 0:06:06.240 that will inform some of your thinking about where we 0:06:06.320 --> 0:06:09.640 might go from here. Well, I think the thing they 0:06:09.680 --> 0:06:13.000 got mainly wrong was their their view of financial markets 0:06:13.040 --> 0:06:18.400 as efficient mechanisms for the allocation capital. I think the 0:06:18.760 --> 0:06:23.800 orthodox view was that you know, with with a minimum 0:06:23.839 --> 0:06:30.440 minimum regulation, financial markets would be efficient and therefore you 0:06:30.480 --> 0:06:33.920 couldn't get crises like like the crisis that happened. There 0:06:34.000 --> 0:06:39.559 was also the view that derivative markets and that whole 0:06:39.600 --> 0:06:45.039 process would spread risk so individual institutions would be less 0:06:45.120 --> 0:06:49.720 likely to fail. As I said that that really came 0:06:49.760 --> 0:06:54.400 out of the Chicago's School Eugene Farmer, and the view 0:06:54.440 --> 0:06:57.120 that financial markets are efficient. I mean that was a 0:06:57.200 --> 0:07:01.599 subset of the view that all markets are efficient provided 0:07:02.320 --> 0:07:05.920 governments kept out in other words, of markets, and that 0:07:06.080 --> 0:07:11.360 markets were properly competitive, and you couldn't do better. And 0:07:11.400 --> 0:07:16.320 then one further requirement. Provided that money was controlled, there 0:07:16.360 --> 0:07:19.120 was very little that could go wrong. Of course, there 0:07:19.160 --> 0:07:23.920 could be shocks which were unanticipated and couldn't be anticipated, 0:07:23.960 --> 0:07:27.800 and that's always possible, but leaving the shocks aside, things 0:07:27.840 --> 0:07:31.240 would run pretty smoothly and there would be some sort 0:07:31.280 --> 0:07:35.920 of optimization going on right through the economic system. And 0:07:36.120 --> 0:07:40.440 so I think that was the core mistake. Because markets 0:07:40.480 --> 0:07:45.000 aren't efficient. Um, They're always going to have frictions and 0:07:45.280 --> 0:07:49.560 severe mis dysfunctions, and it's the task of governments to 0:07:50.000 --> 0:07:54.520 correct them. And if governments give up that function, then 0:07:55.440 --> 0:07:58.400 things are quite likely to go wrong. The title of 0:07:58.440 --> 0:08:02.760 your book, Money in Government, is really interesting, and you 0:08:02.840 --> 0:08:06.400 actually very early on in your book you go into 0:08:06.480 --> 0:08:11.640 detail about theories of money, what money is, where money 0:08:11.680 --> 0:08:15.520 came from, Why is this important? Why is the sort 0:08:15.560 --> 0:08:17.600 of I mean, both Tracy and I are interested in this. 0:08:17.720 --> 0:08:21.360 We've had several episodes about questions of the nature of money, 0:08:21.400 --> 0:08:24.400 but you obviously put a very front and center in 0:08:24.600 --> 0:08:28.280 laying out your book this concept of what is money, 0:08:28.280 --> 0:08:31.040 Why was that, Why why did you do that? And 0:08:31.120 --> 0:08:35.120 why what what do economists in your view, get wrong there. Well, 0:08:35.280 --> 0:08:37.960 you see, I think money has a double function and 0:08:38.000 --> 0:08:41.839 always has and that's sort of accepted, but only one 0:08:41.880 --> 0:08:44.200 of the functions has been stressed. I mean, on the 0:08:44.200 --> 0:08:46.720 one hand, money is what you need to buy things. 0:08:47.920 --> 0:08:50.200 If you don't have any money, you know, you can't 0:08:50.440 --> 0:08:53.120 get the things you need. But it also has a 0:08:53.160 --> 0:08:57.720 different function, which is what economists call a store of value, 0:08:58.320 --> 0:09:03.560 that is as a hedge against uncertainty. And when the 0:09:03.640 --> 0:09:07.800 money you earned is being stored, it's not being spent. 0:09:08.559 --> 0:09:13.599 So when uncertainty increases, people spend less, and so businessmen 0:09:13.960 --> 0:09:18.400 sell less, the market shrinks, you get depressions. So I 0:09:18.440 --> 0:09:21.600 think what happens is that once you have a shock, 0:09:22.280 --> 0:09:26.040 or even if people don't think that the future is 0:09:26.080 --> 0:09:28.800 going to be too bright and start in st starting 0:09:29.120 --> 0:09:34.440 in investing and spending in the expectation that tomorrow will 0:09:34.520 --> 0:09:38.400 be better than today. Um, they think tomorrow might well 0:09:38.480 --> 0:09:41.760 be worse than today, and so they start storing what 0:09:41.960 --> 0:09:45.680 wealth they have. And money is is a prime way 0:09:45.679 --> 0:09:49.560 of storing wealth, and so it's always had that function. 0:09:50.160 --> 0:09:54.640 That's why you need to look to money always to 0:09:54.840 --> 0:10:01.320 understand why things go wrong and why here is uncertainty 0:10:01.720 --> 0:10:06.840 are so bad. Um for for economic life, money is 0:10:06.880 --> 0:10:10.560 the key. If you didn't have uncertainty, money would only 0:10:10.600 --> 0:10:14.480 have one function, which is to exchange goods with each other. 0:10:15.360 --> 0:10:18.960 So what you describe there, obviously, and you know I 0:10:19.040 --> 0:10:23.760 mentioned at the beginning that you're, among other things, very 0:10:23.760 --> 0:10:27.680 well known for your biographical work of John Maynard Keynes. 0:10:28.480 --> 0:10:30.320 It shouldn't be a new idea. I mean, what you 0:10:30.400 --> 0:10:33.480 just said there is something that you know, many people 0:10:33.800 --> 0:10:37.360 or that Canes wrote about nearly a hundred years ago. 0:10:38.000 --> 0:10:41.560 But what is it about his writing and what is 0:10:41.559 --> 0:10:45.199 it about that conception of money that even as recently 0:10:45.440 --> 0:10:49.559 as well right now, somehow economists are still missing because 0:10:49.800 --> 0:10:54.080 it sounds pretty intuitive store of value, everyone saves, spending 0:10:54.120 --> 0:10:58.760 goes down. How is this something that economists still aren't 0:10:58.880 --> 0:11:04.320 truly internalizing in their understanding of the world. Well, I 0:11:04.360 --> 0:11:07.439 think you know, you have to dig into the bedrock 0:11:07.520 --> 0:11:12.160 of economic theory. I mean, if you look at a textbook, 0:11:12.200 --> 0:11:15.120 and this is the way I think economics has been 0:11:15.160 --> 0:11:18.520 taught and conceived from very early days. You have a 0:11:18.600 --> 0:11:20.800 theory of what you might call a real economy, in 0:11:20.880 --> 0:11:24.240 which goods have produced and exchange for other goods and 0:11:24.320 --> 0:11:28.400 money isn't there. Money gets introduced as a sort of 0:11:28.480 --> 0:11:32.880 disturbing influence quite late at chapter six or chapter seven, 0:11:33.240 --> 0:11:36.960 and then and and so the all the old courses 0:11:37.000 --> 0:11:40.640 in economics were theories of value and theories of money, 0:11:40.920 --> 0:11:43.520 and the two things are kept separate. And one of 0:11:43.600 --> 0:11:46.600 the things cass did, which was crucially important, he says, 0:11:46.640 --> 0:11:48.679 you've got to bring in money on the ground floor, 0:11:48.720 --> 0:11:51.560 because money has an influence of its own. It's not 0:11:51.720 --> 0:11:55.800 just something that has an influence when other things go wrong. 0:11:56.120 --> 0:12:00.480 Money is always a factor. It's always a possibility. People 0:12:00.520 --> 0:12:04.880 always have a possibility of retreating to money. And the 0:12:04.920 --> 0:12:09.920 world is uncertain. I think Caine's thought of uncertainty is 0:12:10.040 --> 0:12:14.880 much more prevalent than orthodox economists did, and especially economists 0:12:14.920 --> 0:12:18.280 in more recent times, they've always thought of the future 0:12:18.280 --> 0:12:21.600 as being in some sense calculable. You know. You you 0:12:21.400 --> 0:12:26.360 you find that people in economists and even financial journalists, 0:12:26.360 --> 0:12:30.400 they rarely talk about uncertainty. They talk about risk and 0:12:30.520 --> 0:12:36.040 you know, this thing risks this or this policy risks something, 0:12:36.480 --> 0:12:39.440 as though you could calculate it. But in many cases 0:12:39.480 --> 0:12:42.360 you can't calculate what the risk is. You haven't got 0:12:42.360 --> 0:12:45.080 a number for it, and I think one of the 0:12:45.120 --> 0:12:49.840 things Cain said was, well, we pretend we have probabilities 0:12:49.920 --> 0:12:54.240 of of things happening um and and our institutions are 0:12:54.240 --> 0:12:57.439 based on that pretense. But when the belief in those 0:12:57.480 --> 0:13:01.840 probabilities break down, then you know that the whole of 0:13:01.920 --> 0:13:07.600 the whole of people's thinking, then simply they panic because 0:13:07.640 --> 0:13:12.600 they no longer have an anchor. Economics is responsible for 0:13:12.920 --> 0:13:19.480 misleading people about the cultulability of future events. I think 0:13:19.480 --> 0:13:23.400 it's it's a huge it's an absolutely huge weakness in 0:13:23.440 --> 0:13:27.480 the way economics is done because in some situations there 0:13:27.559 --> 0:13:32.120 is no uncertainty, there's all very little uncertainty, but in others, 0:13:32.200 --> 0:13:37.120 in the in terms of the macroeconomic economy, the uncertainty 0:13:37.160 --> 0:13:39.840 is a huge I mean, just look at what people 0:13:39.840 --> 0:13:43.040 are trying. They're they're looking into the entrails of the 0:13:43.120 --> 0:13:46.000 future and trying to work out where China is going 0:13:46.040 --> 0:13:49.600 to go up, the political repercussions of Russia and the Ukrainia, 0:13:49.960 --> 0:13:56.400 will the disturbances in Hong Kong affect people's views of 0:13:56.559 --> 0:14:00.320 growth in East Asia and the stability of China. And 0:14:00.360 --> 0:14:02.439 then in Europe, what's going to be the effect of 0:14:02.520 --> 0:14:07.520 Brexit and will populists gain ground? What about Trump the 0:14:07.720 --> 0:14:11.240 sort of you know, errant or wandering cause in all this, 0:14:12.360 --> 0:14:15.320 and then they still have models in which you have 0:14:15.480 --> 0:14:21.200 rational expectations, in which people know what the probability of 0:14:21.240 --> 0:14:24.560 all these possibilities is. And that seems to be just 0:14:24.680 --> 0:14:28.680 the wrong mindset. And of course it minimizes the role 0:14:28.720 --> 0:14:33.520 of government, because if you agents and markets have enough 0:14:34.440 --> 0:14:38.600 information to act rationally and on the whole win their 0:14:38.680 --> 0:14:42.400 bets on the future, then government doesn't really need to 0:14:42.440 --> 0:14:44.840 play a very big part. It should get out of 0:14:44.880 --> 0:14:47.040 the way as much as possible. It should make sure 0:14:47.080 --> 0:14:51.160 that there's no fraud, no corruption, that markets remain competitive. 0:14:51.440 --> 0:14:54.680 It should do a bit of welfare, have a safety net. 0:14:54.920 --> 0:14:58.720 But beyond that, there's no obvious case made out for 0:14:58.800 --> 0:15:03.400 government to intervene in these benign processes. So, in the 0:15:03.400 --> 0:15:07.240 theory of the real economy, sort of classical economics, goods 0:15:07.240 --> 0:15:10.640 are exchanged for goods, everyone acts rationally, and the market 0:15:10.720 --> 0:15:14.520 comes to an equilibrium without the need for government interference. 0:15:15.400 --> 0:15:19.200 But the Kanes argument or your argument, is that money 0:15:19.320 --> 0:15:22.640 changes that equation because it can act as a store 0:15:22.640 --> 0:15:27.120 of value and basically allow people to store up their 0:15:27.200 --> 0:15:31.760 spending because of uncertainty. So I'm curious if you were 0:15:31.880 --> 0:15:36.240 to factor in the fact that money was impacting the 0:15:36.360 --> 0:15:43.240 economy itself, how different would developed market economies actually look 0:15:44.000 --> 0:15:48.800 and what role would the government have in such an economy. Yeah, 0:15:48.880 --> 0:15:52.960 that's just that the one thing you mentioned attains in 0:15:53.040 --> 0:15:56.480 his view of equilibrium. You can think of what's happened. 0:15:57.200 --> 0:16:01.520 What happens when when people stopped to be more uncertain 0:16:01.560 --> 0:16:05.840 about things, is that they increase their precautionary saving. That's 0:16:06.080 --> 0:16:08.600 why you don't get a bounce back to a position 0:16:08.640 --> 0:16:12.160 of optimal equilibrium. What happens is that you do get 0:16:12.160 --> 0:16:15.440 an equilibrium, but it's an inferory equilibrium. And I think 0:16:15.480 --> 0:16:19.920 Kane's introduced to two economics, the notion of multiple equilibriate 0:16:20.440 --> 0:16:24.000 and you can easily get stuck in an inferior equilibrium. 0:16:24.200 --> 0:16:28.640 And I think roughly speaking, we have been um over 0:16:28.760 --> 0:16:32.080 much of the world since two thousand and eight, and 0:16:32.120 --> 0:16:35.960 there's no obvious way back to an optimal equilibrium. And 0:16:36.000 --> 0:16:39.280 that's why I think he would argue governments have two functions. 0:16:39.600 --> 0:16:42.600 One is to prevent the collapses in the in the 0:16:42.680 --> 0:16:48.120 first instance UM, and the second is to use macroeconomic 0:16:48.200 --> 0:16:55.000 policy um very vigorously to offset the increase in precautionary saving. 0:16:55.840 --> 0:16:58.920 I in other words, the government governments have to desave 0:16:59.280 --> 0:17:03.360 and under the situations, and and of course monetary policy 0:17:03.440 --> 0:17:06.600 also comes into the picture. What I would say is 0:17:06.640 --> 0:17:10.639 that Kyne's thought that fiscal policy was more powerful both 0:17:10.760 --> 0:17:15.040 in prevention and in cure the monetary policy. Going to 0:17:15.160 --> 0:17:18.439 this sort of pre crisis period, a lot of the 0:17:18.600 --> 0:17:22.840 sort of dominant economic ideology, a lot of them it 0:17:22.880 --> 0:17:25.320 would have been. I think the term that people uses 0:17:25.800 --> 0:17:29.280 New Caynsian and New Caynesian School of economics or New 0:17:29.359 --> 0:17:34.040 Caynsian models, and my impression of it is that I 0:17:34.080 --> 0:17:37.400 think it's a it's an attempt to extract some insights 0:17:37.440 --> 0:17:41.560 from Canes, such as perhaps the need for fiscal stimulus 0:17:41.560 --> 0:17:45.920 from time to time, but to ultimately shoehorned back into 0:17:46.000 --> 0:17:50.119 the classical school of economic thinking, in which everything is 0:17:50.280 --> 0:17:55.000 calculable and everything sort of restores itself to equilibrium in 0:17:55.040 --> 0:17:58.639 the ideal state. What do this sort of New Caynesian 0:17:58.720 --> 0:18:04.760 school anomists misunderstand about the economist from whom they draw 0:18:04.800 --> 0:18:08.159 their name. Well, you see, it's a good question that 0:18:08.359 --> 0:18:12.480 I think they bought the rational expectations model, but they 0:18:12.520 --> 0:18:16.600 added frictions of one kind or another. And with frictions 0:18:16.640 --> 0:18:20.520 you get some policy space because things don't sort of 0:18:20.640 --> 0:18:25.320 just optimally very quickly. If they don't adjust quickly, then 0:18:25.359 --> 0:18:28.840 they may adjust to a different equilibrium, so to speak. 0:18:29.320 --> 0:18:35.200 In the end, sure the economies will resume their equilibrium 0:18:35.359 --> 0:18:39.199 of growth path, but a lot of damage can be 0:18:39.280 --> 0:18:42.480 done in the interval, and it's not clear that you'll 0:18:42.520 --> 0:18:46.440 really resume at the place you want to, and and 0:18:46.520 --> 0:18:51.879 so that creates a policy space. So I think Mucinsians would, 0:18:52.400 --> 0:18:56.320 let's say, in working out their fiscal rules and monetary rules, 0:18:56.400 --> 0:19:00.080 they would they would always allow for some central bank 0:19:00.160 --> 0:19:05.679 and and physical intervention, especially central bank intervention to steady 0:19:05.840 --> 0:19:09.480 the cycle, and and and so you know, I think 0:19:09.520 --> 0:19:13.479 that's what happened. That's what orthodox central banking policy was about. 0:19:14.160 --> 0:19:19.240 It allowed space for smoothing, cyclical smoothing. Would you, I 0:19:19.280 --> 0:19:24.199 feel very purist rational expectations person, you don't need But 0:19:24.320 --> 0:19:28.240 that was because of sluggishness of response. I don't think 0:19:28.280 --> 0:19:31.280 they should have called themselves Kansian. I mean, I don't 0:19:31.320 --> 0:19:34.240 think that had anything to do with these actually, but 0:19:35.080 --> 0:19:39.199 they want to distinguish themselves from the hard line Chicago school, 0:19:39.840 --> 0:19:42.840 so they created a bit of extra policy space, but 0:19:42.960 --> 0:19:46.560 it proved much too weak, both to stop prevent the 0:19:46.640 --> 0:20:06.400 crash of two thousand and eight or to bring about recovery. 0:20:08.119 --> 0:20:11.000 So Joe and I alluded to this in our intro. 0:20:11.359 --> 0:20:16.040 But nowadays, you know, it's fairly normal to see on 0:20:16.080 --> 0:20:20.280 a daily basis headlines such as, you know, the failure 0:20:20.320 --> 0:20:25.000 of central banks or um central banks face quantitative failure. 0:20:25.240 --> 0:20:27.639 The shock and awe era for central banks is over, 0:20:28.040 --> 0:20:31.040 and it does feel like there is more focus on 0:20:31.240 --> 0:20:36.680 fiscal stimulus, not least in Europe. Does it feel like 0:20:36.800 --> 0:20:40.080 we're moving in the right direction to you in the 0:20:40.119 --> 0:20:42.560 sense that we are moving to a more active role 0:20:42.600 --> 0:20:45.679 for governments or do you feel that we're doing this 0:20:45.920 --> 0:20:51.160 without a cohesive economic theory actually behind that move? Yeah, well, 0:20:51.160 --> 0:20:53.600 I feel the second of it. We're doing it blindly. 0:20:53.960 --> 0:20:57.320 It was always it was always a delusion to believe 0:20:57.400 --> 0:21:00.359 that central banks could take the place of God months 0:21:00.720 --> 0:21:03.640 in the management of the matter economy, and there many 0:21:03.680 --> 0:21:07.360 reasons why they couldn't, but one of the obvious ones, 0:21:07.400 --> 0:21:11.440 as they lacked the legitimacy to do so, macro policy 0:21:11.480 --> 0:21:16.440 is a responsibility of government. It can't be outsourced because 0:21:16.520 --> 0:21:22.040 monetary interventions by central bankers have political and social consequences. 0:21:22.480 --> 0:21:26.600 People have talked about those, the fact that quantitative easing 0:21:26.640 --> 0:21:28.840 and buying of assets, I mean the people who have 0:21:28.920 --> 0:21:31.840 been selling the assets that people have had the assets, 0:21:31.960 --> 0:21:35.280 and so in a way, you know, it's increased inequality. 0:21:35.800 --> 0:21:38.960 And now that's a political consequence of a policy for 0:21:39.040 --> 0:21:42.160 which someone ought to be held accountable. But the central 0:21:42.160 --> 0:21:45.760 banks aren't held accountable because they're they're said to be neutral, 0:21:45.840 --> 0:21:49.000 politically neutral, but that was always a mistake. They may 0:21:49.040 --> 0:21:53.720 be individually central bankers may individually be politically politically neutral, 0:21:54.119 --> 0:21:57.840 but their policies do have political consequences, and so that's 0:21:57.920 --> 0:22:02.520 one reason why central bank role has to be diminished 0:22:02.520 --> 0:22:05.640 in the macro economy. What they should do, and what 0:22:05.720 --> 0:22:09.600 they are set up to do, is to regulate the 0:22:10.320 --> 0:22:13.960 financial system, regulate the affairs of their member member banks, 0:22:14.640 --> 0:22:18.240 and that is a key role which they rather neglected 0:22:18.560 --> 0:22:23.000 before the crash because they thought that the financialism didn't 0:22:23.000 --> 0:22:27.480 need much regulation. So I think you have to rethink 0:22:27.560 --> 0:22:30.680 the role of central banks. But what we haven't done 0:22:31.000 --> 0:22:35.520 is to really properly we think the role of fiscal policy. 0:22:35.520 --> 0:22:39.959 We're drifting back into into into fiscal policy in words 0:22:40.000 --> 0:22:44.639 like stimulus and things and words like that are being used. 0:22:44.920 --> 0:22:48.520 But when when to stimulate by, what means to stimulate? 0:22:48.840 --> 0:22:53.760 What rules fiscal policy should be subject to, Because we 0:22:53.840 --> 0:22:58.399 need rules, because rules are something that that improves certainty, 0:22:58.520 --> 0:23:03.240 that reduces uncertainty. So we need all those things. But 0:23:03.359 --> 0:23:07.960 we've forgotten, we've forgotten what physical policy is, and so 0:23:08.119 --> 0:23:12.199 that's where we have to think pretty hard. Yeah, I 0:23:12.320 --> 0:23:14.840 wanted to connect this to what you were saying. You 0:23:14.920 --> 0:23:18.080 sort of anticipated my question when you said rules designed 0:23:18.119 --> 0:23:23.080 to prevent or reduce uncertainty. And again, and maybe it 0:23:23.119 --> 0:23:25.520 goes back to this sort of new Candian way of thinking. 0:23:26.280 --> 0:23:30.800 We talk about fiscal stimulus as though, okay, we can 0:23:31.359 --> 0:23:35.200 pretend to identify some output gap and if we spend 0:23:35.200 --> 0:23:37.600 this amount of money and then it multiplies the net 0:23:37.800 --> 0:23:40.480 or turn us to full potential, as if that's a 0:23:40.600 --> 0:23:45.080 noble number, and then we get the economy back on course. 0:23:45.760 --> 0:23:48.600 It sounds like what you're saying, and it sounds like 0:23:48.680 --> 0:23:51.119 in terms of this sort of Canzian idea of the 0:23:51.240 --> 0:23:56.560 sort of incalculable uncertainties. That it's not about replacing a 0:23:56.600 --> 0:23:59.840 certain quantity of money per se or getting us to 0:24:00.119 --> 0:24:03.720 some full idea of employment, but that the presence of 0:24:03.840 --> 0:24:07.240 government as an actor in the economy that can come 0:24:07.240 --> 0:24:10.720 in with force, they can reduce uncertainty. It's not about 0:24:10.720 --> 0:24:14.680 the amount of dollars. It's that there is this institution 0:24:15.280 --> 0:24:18.199 that doesn't have to be swayed by the whims of 0:24:18.520 --> 0:24:21.679 animal spirits, the ball and bear cycle, and can just 0:24:22.119 --> 0:24:27.160 present be a be a stabilizing force. Yeah, I think 0:24:27.520 --> 0:24:30.520 I agree with that. The difficulty is that they may 0:24:30.520 --> 0:24:34.800 not be swayed by the business type animal spirits, but 0:24:34.880 --> 0:24:38.639 they're certainly swayed by politics. And that was really what 0:24:38.840 --> 0:24:42.359 brought the old old Kanes in constitution if you like, 0:24:42.520 --> 0:24:46.000 crashing down the fact is that, you know, and lead 0:24:46.040 --> 0:24:51.040 to Milton Friedman's critique that politicians, they vote, vote hungry, 0:24:51.160 --> 0:24:55.320 and they'll make promises for spending irrespective of the real 0:24:55.440 --> 0:24:58.480 needs of the cycle at a particular time. And you've 0:24:58.480 --> 0:25:01.640 seen that going on today. I fiscal policies coming back, 0:25:01.640 --> 0:25:03.760 but not in the way I would approve. I mean, 0:25:03.800 --> 0:25:06.320 look at look at what's happening in the British general election. 0:25:07.640 --> 0:25:12.280 Both parties making huge spending promises, not not by any 0:25:12.320 --> 0:25:15.560 means of the Conservatives saying we were wrong about austerity, 0:25:15.600 --> 0:25:18.280 we should have done it differently, but just to win votes. 0:25:18.800 --> 0:25:21.679 So they compete in the in the number of billions 0:25:22.200 --> 0:25:25.960 they're promising to spend. Now that is going to discredit 0:25:26.000 --> 0:25:29.960 fiscal policy again. So what what my idea is is 0:25:30.000 --> 0:25:33.440 that fiscal policy should be made as automatic as possible. 0:25:34.119 --> 0:25:37.280 And you have a very valuable concept in the idea 0:25:37.320 --> 0:25:42.080 of the automatic stabilizers. I think automatic stabilizers can be 0:25:42.119 --> 0:25:47.040 made more powerful. I mean automatic fiscal stabilizers more powerful, 0:25:47.280 --> 0:25:51.920 so you wouldn't really be driven back to calculating output 0:25:52.040 --> 0:25:55.879 gaps and multipliers, all of which are pretty uncertain. But 0:25:55.960 --> 0:25:59.840 you would do say something like, well, look, we have 0:26:00.040 --> 0:26:04.480 a public sector job guarantee, and we have and and 0:26:04.480 --> 0:26:07.480 and this acts as a buffer stock for labor in 0:26:07.520 --> 0:26:10.840 the economy, and it increases that not that you know 0:26:10.960 --> 0:26:14.080 that the stock swells when the economy turns down, and 0:26:14.160 --> 0:26:18.320 it automatically diminishes when the economy recovers. I mean, we 0:26:18.480 --> 0:26:22.359 have automatic stabilizers at the moment, they're quite weak, and 0:26:22.400 --> 0:26:24.760 I'd like to strengthen them. I don't think I can 0:26:24.800 --> 0:26:27.360 explain all this in one minute, but I think that's 0:26:27.359 --> 0:26:29.720 the way we ought to be going. The other way 0:26:29.760 --> 0:26:31.680 I think we ought to be going is I think 0:26:31.720 --> 0:26:36.080 we ought to revive the idea of public investment. State 0:26:36.160 --> 0:26:42.280 investment was a huge stabilizing force in the sixties and seventies, 0:26:42.280 --> 0:26:46.119 but is shrunk as a percentage of total investment because 0:26:46.160 --> 0:26:50.840 people now have the idea that all state investment is 0:26:50.920 --> 0:26:54.480 bound to turn sides, you know, does not not going 0:26:54.520 --> 0:26:56.960 to pay for itself. Well, I think you need to 0:26:57.000 --> 0:27:01.400 actually work out what what things are investment, what will 0:27:01.480 --> 0:27:06.639 pay for themselves, what will benefit the economy, and what 0:27:06.840 --> 0:27:09.840 you ought to cover just from revenue. Those are things 0:27:09.880 --> 0:27:13.200 that are still in the melting pub. So you mentioned 0:27:13.320 --> 0:27:16.320 the general election in the UK, and I think when 0:27:16.320 --> 0:27:19.520 we talk about fiscal stimulus, part of the obstacle that 0:27:19.600 --> 0:27:24.560