The Great Recession

Martin Wolf is one of the best financial and economic commentators in London. His 2014 book on the theory and policy implications of the 2008 financial crisis offers as solid and credible an analysis of what went wrong and what needs to be done to prevent a recurrence as a reader can expect to find. Briefly, banks need to work with lower capital ratios, to be more methodical in their risk assessment for consumer lending, and to separate high street banking from investment banking, while governments need to ensure that banks structured to maximise profits never become too big to fail. Further, central banks need to take a leadership role in regulating the money supply and to understand that deflation, with the ensuing unemployment and stagnation, can be a worse outcome in terms of opportunity cost than inflation with its destabilising effect on prices and savings. More locally, the euro crisis that followed the financial meltdown shows the catastrophic effect of a single currency on economies that lack centralised fiscal discipline and on governments too weak to resist policies that increase deficits. Wolf argues all this cogently at a level that will convince a professional audience. What seems worth pondering in addition is the wider framework of ideas within which such economic and financial management is pursued. The economic theory of our time rests on an understanding of national and global societies and markets that invites deeper and more philosophical reflection. The social and personal psychology of value for both producers and consumers conditions the role of costs and benefits in an economic system in ways conventional theory tends to neglect. This is not the place for a new theory of value, but human appetite and physical scarcity interact more subtly than graphs of demand and supply can easily reflect. In particular, our demand for goods, based on their value for us, varies unpredictably with our social environment and individual situation, as well as with technological and psychological factors relating to substitutes or alternatives for those goods. This variation affects demand directly