Archive / Magazine / Current / Financial crisis / Debate | 09/01/2009

Tales of money

Since the fate of the world has hung upon the future of finance, the European press has increasingly looked for insight to the literature of classical economics. What texts are being cited, and how?

During the tulip mania in 1637 large and small dealers miscalculated in their speculations, according astronomical prices for tulip bulbs from Turkey and Armenia. During the South Sea Bubble of 1711 – 1720 the British South Sea Company bought up the national debt and sought to finance it through shares. The "mother of all crises", the Great Depression, began with Black Thursday on Wall Street. They are all now history, but they figure prominently in the literature of classical economics. In search of guidance in today's financial crisis, the European press sifts through the economic classics, old and new.

Theories past and present

On October 18 the daily Le Monde published an excerpt of US economist John Kenneth Galbraith's "A Short History of Financial Euphoria", published in 1990. In it Galbraith investigates the recurring economic bubbles – and how they burst. Galbraith's words, the paper wrote, are still valid today: "The lessons of history are often disconcertingly ambiguous, and perhaps that goes especially for the economy. This is because economic life is subject to a continual process of change, so that what the wise ones of the past – Adam Smith, John Stuart Mill, Karl Marx, Alfred Marshall – observed is consequently no guide for the present or the future."

Photo: AP/Steven Senne

High up on the list of old theorists are Karl Marx ("Das Kapital") and his critique of capitalism, John Maynard Keynes ("General Theory of Employment, Interest and Money") advocating state intervention in the economy, and Milton Friedman ("Capital and Freedom"), champion of monetarism. In the December issue of the English monthly magazine Prospect, economic author Edward Chancellor ("Crunch Time for Credit?") took a critical look at the current fixation on the theories of Milton Friedman: "This leading exponent of monetarism famously denied that any relationship existed between the speculative boom of the 1920s and the great depression which followed. Instead, he blamed the world economic crisis on the Fed's failure to prevent the money supply from contracting."

Keynes vs. Friedman

In the European press a posthumous dialogue – so to speak – is now taking place between Keynes and Friedman. While some hurl themselves into the breach for Keynes and call on the state to step in, Friedman plays the role of the bogeyman with his laisser-faire theories. György Ivány wrote in the left-liberal Hungarian weekly newspaper on November 5 that the myth of the strong state has undergone a renaissance with the global financial crisis: "To master this crisis radical steps must be taken. ... Expanding the guarantee for savings accounts and giving banks cash injections may be more dangerous – to use the words of economist Milton Friedman – than the illness itself, but whether we like it or not the state must now intervene."

Jean-Marc Vittori confirmed the return of Keynesianism with the current economic crisis in the French business newspaper Les Echos on November 24: "After the burst of the biggest financial bubble in history, asset prices, real estate and share prices are all plummeting. People lack funds and bankers are having to plug the holes in their financial statements, which puts a damper on their lending fervour. Consumers, for their part, hardly want to borrow. Demand is sinking and no longer provides for full employment. We are really in a 'Keynesian' situation which justifies strong public intervention. ... Milton Friedman, in the meantime, remains in his role of architect. His laisser-faire may help us construct a more efficient system when the economy is in good shape, but not when it is almost suffocating."

Wolfgang Uchatius went so far as to call Keynes the "saviour of capitalism" in the German weekly newspaper Die Zeit on November 6, while maintaining that 62 years after his death Keynes' ideas "possibly faced their biggest challenge". But Keynes, Uchatius wrote, is also unthinkable without the "invisible hand": "With this metaphor the Scottish moral philosopher Adam Smith described the mysterious self-management of the market economy one and a half centuries before Keynes, in his 1776 book 'The Wealth of Nations'. For Smith the market needed no human planner or organiser to provide people with food and work. This was done by supply and demand."

While Smith believed in self-regulation in the spirit of the Enlightenment, Keynes was more sceptical. For him the market is inherently unstable and accident-prone – but it can be repaired. Karl Marx, the fourth theorist now most often being cited, saw things differently, assuming in his works that capitalism would ultimately overcome itself. The Finnish historian Tapio Bergholm asked in the daily Helsingin Sanomat on September 23 what Marx can still teach us today: "Karl Marx predicts the victory of socialism. ... Marx's prognosis seems improbable both for Western Europe and for North America. ... The huge resiliency of capitalism is underscored by China's opening up to Western markets. ... But is global capitalism forcing the nuclear powers into an impasse? ... Time will tell whether this passing market turbulence or the phenomenon of Chinese capitalism will lead to a violent 'chain reaction' ... and ultimately a deep hole."

Alternative economic theories

When the old and new theories are of no avail the call for new alternatives is not long in coming. Jean Rhein appraised alternative economic theories in the Luxembourg daily on November 6: "Let us try out something else! For example applying different economic and social theories that do not lead directly to unbridled liberalism. ... There are alternatives to the dominant economic models – and not only those of the globalisation critics. There are foreign economic theories which, while propagating casino capitalism, also adopt a sustainable attitude to material and human resources."

On January 30, 2008 the Neue Zürcher Zeitung had already spotlighted the "hottest thinker on the planet" who compares stock market crashes with other extreme events: "Everybody is talking about the 'Black Swan' theory of US scholar Nassim Nicholas Taleb. According to his book of the same name, such extreme events come out of the blue and far exceed what people had hitherto imagined. For this reason the risks they entail are not to be accounted for. The metaphor of the 'black swan' refers to the Europeans' previous belief that all swans were white – until Australia was discovered in the 17th century and with it the black swan."

Along the same lines Mohamed El-Erian maintained in the Financial Times on December 3 that only innovative thinking can save the global economy from "black swans". Winner of the 2008 Financial Times Goldman Sachs Business Book of the Year award for his book "When Markets Collide: Investment Strategies for the Age of Global Economic Change", El-Erian proposed four principles for governments to put an end to the current economic chaos. For him things will only get better "if there is a shift in thinking in both the private and public sectors". We must leave behind the hope of a return to business as usual, he wrote, and devote ourselves to the reality at hand. "First, intervention should be limited to sectors at the centre of the healing process. … Second, wherever they can, governments should partner the private sector which, in most cases, would involve voluntary co-investments. … Third, they should address upfront exit mechanisms. Finally, they should not let the best be the enemy of the good: crisis management inevitably results in inconsistencies that a subsequent reconciliation and reform effort must address."

Reform ideas were legion at the end of 2008, from the American Federal Reserve's interest rate cut to 0 percent to the German government's non-implemented plan to distribute 500-euro vouchers to all German citizens to stimulate consumption, to calls for stronger regulation of the financial market – especially of foreign accounts.

Nikola Richter

Nikola Richter, born 1976 in Bremen, lives in Berlin. She works as an editor for euro|topics and as a writer. Her latest publications were "Schluss ...
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