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| The Master: John Maynard Keynes |
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| Niall Ferguson, a Scot @ Harvard |
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| Robert "Baron" Skidelsky |
A short while ago I
wrote about Jeff Sachs’s criticisms of Paul Krugman on fiscal stimulus. Since
then, in an intellectual volley worthy of a Wimbledon final (all Brit, no less)
pits Niall Ferguson on behalf of Cameron-Osborne austerity against Robert Skidelsky
representing proponents of Keynesian stimulus. The two have squired off at in
order: Ferguson
1, Skidelsky
May 19, Ferguson
May 19, Skidelsky
May 28, Ferguson
June 1 ). As I set forth in my Sachs-Krugman post, I’m more persuaded by
the Keynesian position. Following Ferguson, I agree that Keynes indeed was an austerian
when austerity was appropriate (around the wars). But a Keynes quote cited by
Ferguson—hoping to hoist Keynes biographer Skidelsky on his own petard—captured
my attention. Ferguson writes, quoting Keynes:
Responding to some early critics of his General Theory, Keynes showed that he recognized the
importance of uncertainty in economic life, and consequently the difficulty of
making predictions. “The whole object of the accumulation of wealth,” he wrote,
“is to produce results, or potential results, at a comparatively distant, and
sometimes at an indefinitely distant, date.”
But, Keynes continued, “our knowledge of the future
is fluctuating, vague, and uncertain.” There are simply too many things – from
the “prospect of a European war” to the “price of copper and the interest rate
20 years hence” – about which “there is no scientific basis on which to form
any calculable probability whatever.”
Ferguson doesn’t mention it, but Keynes wrote about probability
and uncertainty in his A Treatise on
Probability. Keynes was a complex and deep thinker, perhaps muddled? Did he
contradict himself by writing the above about uncertainty while (at times)
recommending active government intervention in the economy by way of fiscal
stimulus? I think not. And this brings us to the crux of my concern.
While Keynes at times recommended stimulus and at other times
austerity, there is no reason to believe that his appreciation of the
uncertainty about the future and the consequences of any current course of
action upon the future changed with his policy recommendations. Yet even in the
face of acknowledged uncertainty, he acted. He chose (or recommended) courses
actions that he believed would most likely bring about a desired result. Was
he certain of either cause or effect? No, but as any decision-maker, he was
confronted with choices to spend or not to spend, to provide only one example. He
or any policymaker could, of course, chose to do nothing, but barring ignorance
or negligent indifference, that too is a choice. So with any economic decision.
We don’t very often have the luxury of knowing for certain that our choices
will bring about the results that we intend. That’s been the downfall of many
an economic prediction. Thus, when we make economic decisions, we have (but do
not necessarily know) a range of probabilities that our choice will bring about
a desired effect, much like a weather forecast (“a 50% chance of rain today”).
If we cut the price of our widgets, we’ll probably sell more. Probably. If we
invest in Acme Corporation, we may make money, or we may find out that the
market for widgets has collapsed, and with it our investment. Only rarely can
we act with a sense of certainty, especially in a complex system like the
economy.
I think that wise decision-makers put faith—and money—on the
soundness of the decision-making process and not on theories about results.
Repeated experience is the best guide, but it’s often only available by
analogy. History can provide many lessons, but it’s easy to apply the wrong
lesson to a problem. And history never—exactly—repeats itself. (“History does
not repeat itself, but it does rhyme”—attributed to Mark Twain.) We judge by
analogies. Humans, societies, governments, and economies: all are complex
organisms that defy consistent mechanical interpretation and manipulation. Human
culture mutates too quickly to pin too much certainty on a mechanical
prediction of action. We can gain some insight into behavior demonstrated by
large numbers, but even that method is subject to change.
So when Ferguson says to Skidelsky and Krugman that you can’t prove that the British economy would have performed better with a fiscal stimulus instead of austerity, he’s correct in a limited but
inconsequential sense. Ferguson is talking about an alternate course of history, a
counter-factual, as Ferguson has used and practiced the concept. (See his Virtual History, a book of counter-factual essays that he edited and contributed to.) The only path we know with (some) certainty is the path
taken—and even then the contours of that path are hard to discern, as the
Ferguson-Skidelsky war of stats shows.
The NYT recently published a feature on Paul Ehrlich’s The Population Bomb that predicted social and economic collapse
with rising population within a decade or so of its publication. It didn’t
happen. Ehrlich was wrong—but how wrong? Is Ehrlich wrong because there are no
limits to the carrying capacity of Earth to support any human population? I
don’t suspect many knowledgeable people will support this conclusion. If so, at
some point, over-population could trigger a catastrophic decline in human well-being.
(If you don’t believe that an over-stressed environment could lead to
civilizational collapse, then you should brush up on your Diamond (here
under Social Science and here
via Stephen Walt), Tainter,
Homer-Dixon (here and here),
Ophuls,
Mark
Buchanan, and Ferguson*,
for starters.) We can conclude that Ehrlich’s initial predictions were
inaccurate, but we can’t conclude that his basic premise (limits to human
population) is unfounded.
This leads us to territory explored by Nassim N. Taleb, who
has argued along lines I believe appropriate. Because we don’t know the
magnitude or probability of some risks, we should not take the risks. That is
to say, we are in a territory marked by uncertainty, no probability. We should
not run some experiments where, if the experiment turns out badly, N=1 because
we are no longer able to repeat the experiment. For instance, how much do we
want to experiment with nuclear war? How many times could humanity run a
nuclear war experiment? Taleb argues
that genetically modified foods and human-caused global warming should be
addressed with the acknowledgement that we don’t know with any real certainty
the potential consequences or the likelihood of a catastrophic (or slow motion)
event. Without referring to it directly, Taleb seems to follow a negligence
theory that judges behavior by the magnitude of the risk of harm (perhaps measurable, probably not) times the likelihood of the occurrence of the risk
(perhaps measurable, probably not) to decide whether a particular course of
action should be undertaken. (Taleb would add “skin the game” as well:
consequences if the wrong choice is made. But in some of our examples, we’d all
suffer the consequences.) The difference of course from a court of law (one of
many) is that this formula can be applied to judge what action to take (or not)
prospectively to avoid loss instead of using it to apportion loss
retroactively. (I’ve written more on this general topic in this
earlier blog post, “Thinking Like a Lawyer and Antifragility”.)
In both economics and population predictions, the other wild
card variable is human action, which is responsive and strategic. Did Paul
Ehrlich’s cry of wolf affect the wolf and not just the villagers? (And this
assumes that population is not a problem; based on personal observation from
living almost three years in India and China, I’m not willing to concede that
population density doesn’t remain a crucial challenge.) Does the possibility of
stimulus or austerity change the calculations of innumerable economic
decisions? Certainly, and you can observe that most easily in markets. But what
you see may surprise you and upset your expectations, for instance, some—like
Ferguson—have not seen the high interest rates and inflation that they
predicted with lose monetary policy from the Fed and a bit of fiscal stimulus.
Even the common benchmarks can fail. Krugman, on the other hand, has called it
right on the inflation issue.
So what are we left with? Educated guesses, uncertainty,
caution, and a need for resilience when things don’t turn out as we hoped. The
public dialogue can at its peril ignore risks and probabilities, but we do so
to our detriment. We should specify our judgments about likelihoods of benefits
and harms and our standards of proof. Voters, unlike jurors, get a second bite
at the apple, and we should keep a track record of those who seek to guide and
lead the public. And decision-makers and those who advise them would do well to
become more sophisticated in this perspective. Our future depends upon it.
*This article by Ferguson displays a lot about Ferguson. The first
part draws upon a deep ground of historical knowledge and sheds light on the phenomena of collapse by applying current
thinking about complexity. Thus, as Ferguson argues, “declines” are less
dangerous than precipitous “falls”. In a complex system, including financial
systems, a system can collapse very quickly, or as Ferguson’s felicitous prose
describes it, there can be a “sudden shift from a good equilibrium to a bad
mess”. Financial collapses and regime changes, such as the French Revolution, Ming
China, the fall of the Hapsburg and Ottoman Empires, and the disintegration of
the Soviet Union, happened quickly and to widespread surprise. Although
Ferguson doesn’t make the point, such examples should provide some measure of
humility in making predictions. However, he goes on to suggest that the Obama
Administration and the Fed in spending and printing money might trigger a
financial collapse (this was published in 2010). His forecast is vague but
ominous. Once again, Ferguson the historian gets sidetracked by Ferguson the
political hack. But I must say overall, the article is well argued and
perceptive when it sticks to history and avoids forecasting.
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