I don’t often receive hate mail for this column, but on the few occasions that I have, it seemed always to be from Thatcherite professors of economics accusing me of stupidity for the opinion I’ve expressed several times here that markets aren’t infallible. After the economy-shaking events of the past few months, only a saint or a superhero could forego a quick gloat and I, alas, am all too human so: “I TOLD YOU SO!”


For some reason, the efforts of the US and UK governments to dig out our overpaid investment banking community from the pit they’ve dug for us all reminds me of a very un-PC joke I was told recently: an Irish father walks in on his son who is snorting a line of cocaine and shouts: “If I catch you doing that again I’ll rub your nose in it!” Similarly, it would appear that the cure for spending too much of other people’s money is to give them even more of other people’s money.

But enough of this populist rabble-rousing. I’m that most unfashionable of beings, an unreconstructed Keynesian (remember him, the bloke who saved the world last time), and we Keynesians have to accept that massive public spending may be necessary to unpick the mess when unregulated markets crash.

If you want to really understand the ideology that led us into this mess, the best book by far is Thomas Frank’s 2001 work One Nation Under God: Extreme Capitalism, Market Populism, and the End of Economic Democracy. Frank explains how Wall Street financiers stole the Left’s populist rhetoric to stoke a hugely popular investment boom, the ultimate beneficiaries of which were themselves, via grossly inflated bonuses, rather than the suckers whose pensions, mortgages and mutual funds end up worthless.

I must hasten to add that I’m not advocating abolishing markets altogether in favour of any sort of a command economy. Free markets distribute the social product more effectively than bureaucrats pulling prices out of thin air could ever do. The problem arises when you fetishise markets, attribute God-like prescience to them, and make mad claims about them aggregating all information with perfect efficiency. Markets aren’t concrete entities that could possess such properties – they’re the net effect of billions of human interactions, and humans aren’t entirely rational but also emotional creatures.

Keynes understood this, that confidence was one of the most valuable commodities of all. To overlook the emotional content of market behaviour is to fatally oversimplify the way markets work, making them appear to be always self-correcting, always seeking a stable equilibrium. No such luck. Now and again, panic turns into a self-reinforcing downward spiral, which won’t correct itself without hands-on Keynesian intervention (and lots of other people’s money).

Markets are complex oscillatory systems that share some aspects of their behaviour with other such systems such as car suspensions, computer circuits and musical instruments. Over the years, I’ve studied the technology of computer, motorcycle and hi-fi design, and the lesson they teach is that they’re all difficult and sometimes unpredictably unpredictable. What does that mean? In an unpredictable system you have little idea what it will do next, as with the flow of water in a mountain stream considered at the scale of millimetres. A predictable system’s behaviour can be predicted with reasonable accuracy, like the flow of that stream at the scale of metres and kilometres. An unpredictably unpredictable system is predictable most of the time, but rarely, and without warning becomes radically unstable due to resonance. Poor violins are like that, where the instability is called a “wolf note”. A car suspension wobbles dangerously under certain rare conditions. Markets crash.

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