Sunday Review: The Road from Ruin, by Matthew Bishop & Michael Green

by Anthony Painter

There are two fallacies about economics. First, that it can explain anything other than the bleeding obvious. It is not difficult to look back at last year’s growth, add or subtract a quarter of a percent or so, then say that will be this year’s growth rate. It would be useful to know if the economy is going to collapse by 5%. Economists don’t see those icebergs.

The second fallacy is that it is difficult. It’s not; it’s dead easy. Some people describe economics as the “dismal science”. They are being generous. It is not a science. See fallacy one for an explanation of why.

In increasing acts of desperation, economists are casting around other academic disciplines to: (i) explain why economics has been getting it so wrong; (ii) try to regain our trust so that they can get it wrong again; and (iii) say something new and clever-sounding given that everything else they’ve been saying is so bleeding obvious yet often wrong.

Psychology is the first victim of this “great plundering”. Hence “nudge”, irrational exuberance and all the rest.

So when Matthew Bishop and Michael Green write, “this crisis brings with it a tremendous opportunity [for economics] to help policymakers, financiers, business leaders, and other practical people do better”, forgive me for ploughing all my savings into the safest, most secure asset I can find. Futures on sales of Keynes’ General Theory would seem to be a good bet.

In many ways, The Road from Ruin, is a counterpoint to Dambisa Moyo’s How the West was Lost. Her message is economic eschatology. The Bishop/Green message is “don’t panic”. It’s a kind of hitchhiker’s guide to the post-crash capitalist economy.

Personally, I’m more drawn by “don’t panic” than “we’re doomed”. Maybe when I’m in my retirement years, the second will seem more attractive. For now, I’m going with optimism. But what Bishop and Green offer is not flighty, idealistic and implausible as, say, the efficient market hypothesis or the “great moderation”. It’s far more practical and well-argued than that. Needless to say, their defence of economics fails – but that’s a tough ask – but their broader argument is more important. Here is where they succeed.

What they offer is a strong argument for meaningful reform, but you have to wonder whether ultimately what they propose is enough. The seductions of new economics seem to suffer from the same rudimentary flaws as the economics that have drawn the world economy towards the abyss. The Maginot line has been pulled back, but the structural flaws – global and domestic imbalances of production/consumption, economic rents/economic servitude, consumption-saving – in the modern economic system are opening fissures in the ground under our feet and “nudge” will prove inadequate to the task.

The crash metaphor is one to which The Road from Ruin repeatedly returns. Financial innovation leads to bubbles, but once they have popped, these innovations can create new investment and risk management opportunities to power growth. “Crashes” are inherent in innovation and are part of the learning process. Trains, planes, cars all had their “crash” phases during their invention and dissemination. So we must accept a degree of risk, learn from it, and not overreact.

Having calmed us down, Bishop and Green then avoid the potential trap of advocating a slightly modified version of the status quo. Instead, they make the case that a new economics is emerging that can help us to understand behaviour in a way that will enable us to shift incentives towards the long-term view. We must look at the economy and financial system as a series of institutions with their own logic. The trick is to design the institutional architecture – with “nudges”, transparency, and proper systemic analysis – to create a long term, socially and environmentally-aware capitalism.

While a new economics will help us to pose new questions, looking to economists for the right answers given their recent record is perverse. At the very least, the economics profession is going to have to surrender its elevated status when it comes to considering the best economic path. That is the price of failure.

However, once this book gets onto the practical nitty-gritty, the experience of its two authors offers some considerably creative and useful suggestions: a more long term outlook for investment horizons through legal changes to fiduciary duty; more active investors empowered by more information to execute sound and socially aware long-term investment; and “living wills”, “bail ins”, and contingent capital requirements for major financial institutions.

Is all this enough? Ultimately, it’s all necessary but unlikely to be sufficient. If the economy is to be re-balanced in favour of higher saving, longer term investment, less inequality, and more sectoral diversity, then there will need to be bigger interventions than “nudge”. The Green/Bishop vision is one of an open economy, competitive higher education, and transparent, reformed financial markets.

Elements of all these things may be part of broader package of getting on the road from ruin, but will they really leave us with an economy that is longer term, with greater reservoirs of capital to invest in innovation, with the type of skills needed for individuals to compete in the global economy? My sense is that they may to a certain extent, but that far more is needed.

Government will have to step in – and that includes a major intervention in the structure of our banks with their herd mentality, over-concentration, social uselessness, and lack of imagination. They were too big too fail and they are too small-minded to capitalise the balanced economy of the future.

The UK version of this book is subtitled “a new capitalism for a big society”. Don’t let that put you off. It has little to do with the big society. It is about how the institutions of modern capitalism can be changed to focus on the long term, drive value and do good.

Throughout the new Labour years, there was a spate of books with “third way” in the title. The most recent one is titled: “Why the third way failed: economics, morality and the origins of the big society.” I’m willing to wager that we don’t have to wait 13 years for a book called something along the lines of “why the big society failed”. It might even be written by Paul Twivy, Nat Wei, or Phillip Blond (whom Bishop and Green treat with a faint degree of disdain.)

The Road from Ruin contains practical ideas that must outlive the “big society” fad. It’s not enough but it’s certainly a major contribution to the debate. Skim the economics with a skeptical eye, but digest the practical ideas- they will improve capitalism and that is most definitely welcome and necessary.

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One Response to “Sunday Review: The Road from Ruin, by Matthew Bishop & Michael Green”

  1. william says:

    !.Capitalism works in democratic societies in that it produces a higher GDP(cf.Russia etc,Saudi Arabia etc).2.The economic cycle is a fact of life.3.Insert a government into democratic capitalism with complicated programmes of tax, subsidy and state intervention, and watch the wealth creation of the private sector disappear.4. Do not tamper with systems of financial regulation that have worked for a reasonable period,with the aim of appearing ‘modern’.’its a new paradigm’…5.Be content with average growth of 2 percent.6 .THE GOVERNMENT DOES NOT CREATE WEALTH.7. Failures of sloganised political programmes (‘third way’.’big society’. communism etc)are political failures.8.Since Adam Smith, with a lot of ups and downs .Capitalism has been a success.9.Economics is a tough subject.

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