The Institute for New Economic Thinking, George Soros’ new $50 million plaything, will be launched today at King’s College, Cambridge. The location is significant; a tribute to its famous alumnus, John Maynard Keynes. The Institute seeks a paradigm shift in economic thought, but if it is rooted in the thoughts of Keynes this is neither new nor welcome. The fact that Anatole Kaletsky defends its existence in the Times, suggests that it is likely not fit for purpose.
Kaletsky is swift to blame free markets and monetarism for what he calls ‘the near-death experience of the world economy’. He insists that free-market ideas have captured policy makers since the early 1970s, creating an academic hegemony out of touch with reality. So taken in by the efficiency of markets, politicians, he claims, have never dared to second guess market. However, he neglects to mention the cheap credit and the resultant housing boom, the moral hazard of bailouts and inept regulators, and the persistent political obsession to still avoid any contraction in the value of housing.
Kaletsky looks to the Institute for New Economic Thinking to revolutionize our understanding of economics, who will it seems, seek inspiration from Keynesianism. However, Larry Elliot’s article in the Guardian illustrates why Kaletsky and this ‘new’ economics is the wrong approach. Individuals will always offer the most efficient and risk free way of ordering the economy. Mervyn King, quoted in Elliot’s article, seems to gets it: "Beliefs adapt over time in response to changes in the environment; and this in turn affects how economic systems behave…..there are probably few genuinely ‘deep’ parameters or relationships in economics.”
Given that there are indeed no perfectly rational beings with perfect information, an economy under Keynesian strictures is no way forward. A group of small, ideologically driven experts will not be better able to command the economy than simply letting people get on with their lives, spending and saving their money as they see fit. Kaletsky argues that economists frequently get things wrong. Quite right. The less they are able ‘manage’ the economy the better.