Saturday, March 30, 2013

Yanis Varoufakis on the "twin peaks" and the limits of economics

Yanis Varoufakis recently gave an economics presentation at the OECD, in which he elaborates his idea of a "twin peaks" crisis in a talk called There is no such thing as a Debt Crisis: The Euro Crisis, Asia's Woes and America's Dilemma in a Global Context 03/01/2013. The "twin peaks" concept is the subject of his book The Global Minotaur, which has just been released in a revised edition. In the text version of his talk, he says of the euro crisis:

Europe is the laboratory of our collective global future for a number of reasons. The first being, it is the largest economic bloc at a time when the world is in this state of imbalance and in a major recession. A deeper recession than the current is certain to happen should the Euro zone break-up. This would be detrimental to the prospects of, not only Europe, not just the US, but Africa, which has started growing after a very long time, and the Asian hardworking countries. Europe in the past 100 years has twice dragged the rest of the world with it into mire – we are perfectly capable of doing this again. The problem with the Euro zone is that it constitutes a kind of Gold Standard, a monetary union designed to remove internal shock absorbers while at the same time guaranteeing that when the inevitable shock happens, as it did,both its probability and its magnitude are enhanced.
He adds, "The principle of the greatest austerity to the economies suffering the greatest recession would be quaint if it were not the wind that blows into the sails of misanthropy, and in the case of some countries, Nazism."

As that indicates, provocation is part of his presentation. He says of its title rejecting "debt crisis" as a description of the curent situation, "It is an analytically unhelpful term that softens us up and prepares us to accept a creditors’ agenda at a time of a debt deflationary crisis which is, in the end, bad for the creditors themselves – as we know from the Latin and Central American crises not that long ago." (my emphasis)

At the end, he tosses this in:

We also need an element of the Occupy Wall Street movement to inject a radicalism that has completely disappeared and we need to understand that development is very different to growth and that societies have an increasing need for the quality of life and productivity enhancing green energies and green concepts. These can only be built on genuine recovery as opposed to continuing disintegration.
Here is how he describes his broad concept:

When I say there is no such thing as a debt crisis I do not mean that there cannot be a debt crisis; indeed in the so called third world in the 70s, 80s and 90s there was a major debt crisis which could be uniquely and legitimately described as such. What I am saying is that in our generation's 1929, which is of course what happened in 2008, we did not have the creation of what can be usefully termed as a debt crisis, at least in the west – in the EU, the US and in Japan. Instead, we had what I call the twin peaks crisis. We have a mountain of un-payable debts and banking losses, which is what provokes people to talk about the debt crisis. Behind that mountain there is a second peak, a mountain of idle savings of surpluses too frightened to be invested productively and in a manner that produces the income by which to repay the losses and the debts.

So what we have is a failure of recycling of surpluses which are flooding the private sector banks and various other instruments, incapable and too paralysed by fear to be invested in the economic activity which would generate the income from which the current debts would be repaid. I suppose we can talk about a debt crisis today, but equally, we can also talk about an accumulation of too much money – nobody of course talks about a crisis of too much money and of idle savings, it is however the other side of the same problematic coin. I prefer to state that instead of a debt crisis, we have a crisis of recycling. Economists like to assume that markets have the capacity to sort out these lumps automatically and through suitable adjustments in various prices, and to create the circumstances by which the idle savings get energised through suitable movements of interest rates, of profit rates, of wage rates and of all sorts of price signals that will cancel these two mountains out. [my emphasis]
He elaborates this point by framing the problem of economics as an intellectual discipline in a way that I don't recall encountering before:

Why can’t markets sort out this mess? Well we never really had a reason to believe that they could. As economists – I don’t know how many of you here have been afflicted by that condition – we should be weary of the limits of our 'science'. We should understand that since Adam Smith, we have spectacularly failed to create logically coherent models which managed to account simultaneously for complexity and for time. We can have models of great complexity of multiple sectors and in general equilibrium, but with no time. And we can have models of Robinson Crusoe-like single sector economies, or Ricardian corn models, which evolve through time. But we cannot have complexity and time in the same model. We have been trying and I will go as far as to say that it is not just a hard task, but we have not managed to do it because it is an impossible task. It is impossible to combine complexity and time in an economic model without introducing hidden assumptions that defy basic rules of logic. An anecdote comes to mind, I remember many years ago Gérard Debreu was presenting a model of general equilibrium which he had famously invented with Kenneth Arrow. He was asked by a younger economist about the relevance of the model for taxation purposes. Debreu stated "my dear fellow, you are confusing that which is interesting with that which is useful. This is merely interesting." [my emphasis]
In describing the development of capitalism over the past centuries, he writes:

Finance was central to that process, it was not something that was added to the general equilibrium models assuming that it made no difference to the real economy. The role of the financier in that world, in capitalism, is instrumental because the entrepreneur uses finance as a means to stretch an arm through the timeline into the future, to grab a piece of value from the future which has not been created yet, bring it to the present and put it into work so as to produce and generate the value that will happen in the future. Therefore, capitalism involves a recycling of present and future value through finance. The more that succeeds the more value and profit is created and suddenly there is a tendency of the financier to utilise that position of power over the rest of society in order to create a great deal of profit for himself.

We have known this since the 18th and 19th Centuries. John Maynard Keynes in his General Theory wrote: "speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation." When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done. And since I am mentioning the General Theory, which was authored in 1936 in response to the crash of 1929 (which was that generation’s version of 2008), let me ask a very simple question. What was the lesson that we economists ought to have learnt from the experience of the 1920s and 30s? It is very simple, when you have an attempt to create a common currency – the gold standard of the time, the Euro now, or to fix exchange rates as the Bretton Woods era; unless you introduce with the fixed exchange rate regime a mechanism for recycling surpluses through a degree of political planning, the markets are not going to do it for you. [my emphasis]
Tags: , , , ,

No comments: