The Past Speaks

A really interesting paper was presented by Professor Geoffrey Hosking (UCL) at last weekend’s Economic History Society Conference in Cambridge. It stood out in a stellar cast of academic performers. His paper was part of a plenary session on  “The Struggle for Economic Security and Trustworthy Economics: how to get history into policy making”. His fellow panelists were: Professor Simon Szreter (University of Cambridge) and Professor Jim Tomlinson (University of Dundee).

In my humble opinion, Hosking’s paper was of really first-rate importance, although this may just reflect my own research concerns, which increasingly centre on issues of trust and culture. Hosking’s paper isn’t yet online on the EHS website, but you can read a modified version of it here.  Perhaps the most interesting part of the paper is where Hosking speaks about the malaise of modern economics, a discipline whose members (with a few honourable exceptions such as Nouriel Robini), totally failed to predict the 2008 financial crisis.

Let me quote from the abstract:

There is a widespread feeling that the science of economics has lost its way. Its current orthodoxy is a belated child of nineteenth century Utilitarianism. It is trapped in a narrow and misleading view of human nature which regards human beings as individuals motivated by material self-interest and making rational choices with a wide range of good information normally available to them. Most economists seem to believe the aim of economic policy should be to promote growth through the medium of markets – which by nature are self-correcting, tend towards equilibrium, assess risk better than any government agency, and ensure the most efficient allocation of resources.

The current economic crisis has cast fundamental doubt on all of this. It has shown that markets do not assess risk well, do not allocate resources efficiently and, when unrestrained, tend towards the unstable disequilibrium of boom and bust. But where are we to look for more reliable guidelines? George Akerlof and Robert Shiller have accused economists of ignoring the vital input of ‘animal spirits’, a term they borrow from John Maynard Keynes. Similarly, according to the Financial Times, at a recent gathering of leading economists in Cambridge to discuss the failures of economics, ‘One of the central conclusions was that economists and market traders alike need to devote far more time to human psychology, rather than just the raw economic numbers beloved of many policy wonks.’

A really interesting thing about Hosking is his career background. Hosking isn’t an economist or even an economic historian. Hosking came to economic history rather late in his distinguished scholarly career. His autobiog on the UCL website says

I have always worked on the borders of political and cultural history. My first book (1973) was on the pre-revolutionary State Duma, and my second (1980) on Russian prose fiction of the 1960s and 1970s, in which I argued that samizdat and officially published fiction differed less than one might expect.

Increasingly my interests turned to the strange and paradoxical situation of the Russians as the dominant people first in the Russian Empire and then in the Soviet Union. Contrary to what one might expect, they did not always benefit from their situation; indeed, one might argue (as did Solzhenitsyn, for example) that they actually suffered from being the main bearers of empire. I examined their fate in what I consider my two most important books: Russia: People and Empire (Harper Collins, 1997) and Rulers and Victims: the Russians in the Soviet Union (Harvard University Press, 2006).

In recent years my attention has turned increasingly to the question of trust as a social phenomenon. This change of direction was prompted partly by the fate of Russian society and the economy after the end of the Soviet Union. It seemed to me then that western politicians and economists were assuming that one could simply graft western economic institutions on to Russia and they would automatically function. But economic institutions – banks, insurance companies, stock exchanges and so on – depend on social trust which cannot be created overnight.

What Hosking is saying isn’t entirely original, as readers of Francis Fukuyama’s book on trust will know. In fact, one could argue that at points he is attacking a straw man, a doctrine that few still believe. Nevertheless his paper is important. His critique of economics should be read alongside this piece by Raghuram G. Rajan.

P.S. I just bought a book on a related subject: