"The Keynes Solution" by Paul Davidson (1) - Insignificance of Ideas and Omnipresence of Regulation

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I am reading "The Keynes Solution. The Path to Global Economic Prosperity" by Paul Davidson. Is it going to be bumpy reading? I was arrested at least twice when perusing the first page. I have to object to the quote from Keynes which starts the book, and to a claim made by the author a couple of lines further down the page.

1.

[T]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.

- John Maynard Keynes

I do not think this proposition is right at all. What makes me especially sure of my judgement is the exorbitance of the last sentence - "the world is ruled by little else."

Compared to the momentum of real politics, ideas take a back seat. Especially clear and systematic ideas. Ideas are naturally introverted. On entering the bustle of mankind they go mad at once before they can make anyone go crazy. Even in an intolerant society, with little open contention, every mind exposed to an idea splits the original into a new fragment or an adulterated copy. Ideas are a mere primitive impulse compared to the sophistication of fully worked out reality.

In the active world, ideas are resorted to for fanfare and as fig leaves. They are made to serve as wraps - they are not the thing inside. There is too much out there that breaks and scatters them in an uncontrollable pattern of dispersion. If anything is not ruling the world it is the ideas of economists and political philosophers. Their ideas are props for a carnival of feint. Their ideas are the language for alien messages. They are a common dialect in which people express their own thoughts, their own punch lines, their own ulterior motives. They are a conduit, becoming a delta into which their original meaning ramifies.

It takes an ivory tower for ideas to work. Outside of it they are like words twisted and rearranged by coastal gusts. The ideas of economists and political philosophers are not even powerful enough to withstand corruption by Chines whispers.

After all, the master himself states,

When my new theory has been duly  assimilated and mixed with politics and feelings and passions, I cannot predict what the final upshot will be in its effects on actions and affairs ...

Paul Davidson, The Keynes Solution, 2009, Palgrave, p. 13

2.

The other remark that halted me was this one by Paul Davidson on page 1:

What is rarely noted, however, is that what is significant about the current global economic and financial crisis is that its origin lies in the operations of free (unregulated) financial markets.

Rarely noted? I ask you! In every free Western country the very presumption expressed in the above quote is among the staple articles of faith of comfortably half the politically concerned part of the population.

To begin with, a world without regulation does not exist. There simply is no business in modern society that is not subject to regulation, even in the absence of business-specific prescriptions. When untouched by regulators, free markets bustle with politics and tend to regulate themselves, for better or worse. And, of course, the legal net encloses all firms, all the time. That is certainly true of banks, who assign substantial portions of their resources to dealing with compliance issues pertaining not only to commercial regulation but general legal demands. We may discuss the effectiveness of the rules that banks are expected to follow; but such discussion will tend to reveal that the GFC is probably linked both to (a) an absence of appropriate regulation (which in part may be mere cheap talk after the event) as well as (b) bad regulation with its own share in the bundle of causes that gave rise to the crisis.

I am not trying to distract from criticism and efforts at better regulation when I hope to remind my readers that regulating the financial sector is an intrinsically complex task with little prospect of final solutions. The strong presumption especially in the left that the capitalist economy is prone to dislocations would of itself seem to insinuate that regulation is powerless to smooth the amplitudes for good.

Hyman Minsky seemed to have admitted as much. Differences of economic philosophy alone make it hard to come up with consistent, non-cyclical regulation, doing away with the perennial crises of regulation to begin with; but even if unencumbered by the challenge of dissent, Minsky and other honest proponents of regulated capitalism have found it impossible to tame the beast with cut and dried corseting schemes.

I suspect, matter might improve somewhat once the opponents in the debate begin to study very carefully - and learn from - one another's reasoning. Which is what I am trying to accomplish by reading Davidson's book.

Continued here.