AND ANOTHER THING
How to stay sane in a manic-depressive world
PAUL JOHNSON
Some of the papers presented at this year's British Association for the Advance- ment of Science have attracted unusual attention, none more so than the denuncia- tion of the 'science' of economics as 'pre- Newtonian' by Paul Ormerod, head of the Henley Centre for Forecasting. He is par- ticularly hard on the methodology of macro-economic modelling', of the type used by governments to plan policy. He says its record of prediction 'has deteriorat- ed since the mid-1980s'. It is in fact pretty useless. Norman Lamont, for one, would agree with him. He has been misled by Treasury forecasts into saying a succession of silly things over the last two years.
Where I disagree with Ormerod is in believing that 'the Newtonian revolution in economics' -will sooner or later occur. This presupposes that, somewhere, there are a set of economic laws waiting to be discov- ered. Why should there be? Adam Smith, who after all was a philosopher not an economist by profession, correctly noted that economic events were not settled by inanimate forces moving according to pre- determined rules, like pieces on a chess- board, but by real, individual human beings operating according 'to motions of their own'. As a young man, one of my duties was to turn Dr Tommy Balogh's quasi- Hungarian into English and I discovered from this that he was not so much a scien- tist as a preacher, laying down 'laws' more properly 'commandments' — tailored to fit what he thought ought to happen. Economics is not an inchoate science, as Ormerod supposes, but a pseudo-science, rather like astrology. When telescopes came along they did not transform astrolo- gy but made it necessary to create the new science, this time a true one, of astronomy. But there the analogy ends. We are not going to get the equivalent of a telescope which will give us the key to economic behaviour. We already know what happens, even to some extent how it happens; what we don't know with the degree of certainty which will enable us to forecast the future is why. I doubt if we ever will.
For many years now I have been giving talks about likely geopolitical events to senior business types in exotic spots where they gather for relaxed enlightenment. I shall be so engaged this month in Aspen, Colorado. I always advise them not to waste their time studying economics but, instead, to read economic history. It will not tell them what will happen next but it will give them valuable insights into the fol- lies, misjudgments and illusions of busi- nessmen, politicians and 'experts' as they hurtled down and up the switchbacks of the cycles. I say to them: 'A businessman who has lived through a whole cycle in real life is wiser, or at lest better informed, than one who has not. Why not learn the easier way by reading, in your armchairs, about how your forebears got it in the neck?' The best forecaster I ever came across, in the narrow but difficult field of the gold price, was a historian by training.
The first true modern cycle, affecting nearly all the civilised world, occurred in the 1820s: the London bull market ran from summer 1824 to autumn 1825 (having been building up since 1819-20) and culmi- nated in a most almighty crash in Decem- ber 1825, leading to years of recession. Banks, which had been incredibly irrespon- sible in loaning cash to speculators, gim- crack businesses and foreign governments, went bust — or survived, as the Annual Register put it, 'by screwing almost to destruction every farmer, manufacturer and other customer in the country'. Now where have we heard that before, or rather since? Poor Walter Scott went down for the then colossal sum of £104,081 and had to spend the rest of his life writing furiously to try to pay it off. Young Disraeli, who cele- brated his 21st birthday at the height of the panic, had been speculating, telling lies and issuing false prospectuses — an embryo Bob Maxwell, indeed — and should have gone to jail; he survived, but was also debt- ridden most of his life. Lord Palmerston got involved with rogues, two of whom did go to jail, and so was not made Chancellor by Canning in 1827 — thus probably chang- ing English history. The real estate collapse meant that my present house in Bayswater was built 15 years later than intended.
History may not repeat itself, but to the historian current events often have a feel-
`It's about royalties.' ing of cleja vu. At some point in every busi- ness cycle, there is a swing, often a savage one, from over-optimism to over-pes- simism. These mood-swings are a combina- tion of rational calculation and irrational greed, followed by still more irrational fear. During the manic phase, people in their optimism prefer goods and property to money, and buy them recklessly, usually with money they have borrowed. Disraeli bought and flogged South American min- ing shares and set up a newspaper to rival the Times; Scott was involved in the biggest printing-publishing combine in the country — echoes of Maxwell again! — and Palmerston was in iron, coal, copper, lead and slate. Ordinary consumers bought and bought, the balance of trade turned against us, gold left the country and suddenly the banks tightened credit and the manic mood turned depressive overnight. All at once, money seemed worth more than goods and those who had it were sitting pretty while those left with the goods, and debts — like Alan Bond today — were in trouble or jail. The optimism of the 1980s was more marked than that of the early 1920s because the end of the cold war and the collapse of communism was even more up- cheering than the opening up of Latin America then. The resulting mood-swing has thus been stronger, though cumulative rather than violent, and the pessimistic phase, when money is king and goods at a discount, has already lasted a long time. History teaches, however, that it will end, sometime, as human nature does not sus- tain moods indefinitely. It is also a histori- cal fact that each complete business cycle has left the world permanently richer than before, as I have no doubt this one will do. That is because an optimistic view of human capacity and chance is closer to the truth than a pessimistic one. But at the time there is not much a government can sensibly do to hasten the new mood-swing. In a socially archaic society like Japan, where collective attitudes can still, to some extent, be influenced by rulers, large-scale pump-priming may help — we shall see. Here, I would not advise anything more than bringing forward capital spending a bit, and then only if a freeze is imposed on public sector pay. So I tell the Chancellor publicly what I have already told him pri- vately: sit tight — and maybe read a bit of economic history. For the rest of us: patience.
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