A number of commentators recently, like Martin Wolf, have commented on the role of the business cycle as a correction to the recession. Wolf, a journalist for the Financial Times and former international banker, is right to be critical of current economic theories and economists for their pro-cyclic dependence. When one studies
modern theories of the business cycle, from people like Schumpeter to
the present, one is struck by the similarity of complexity to the
Ptolemaic theory of the solar system. The growth of cycles within
cycles (Kondratieffs with Juglars and then Kitchins) of convolution to
accommodate exception and make theory approximate reality is striking.
It is especially disturbing as almost all new economic books published
to explain the crisis and to attempt to construct means of a return to
prosperity, depend on some kind or other of a return of the business
cycle. This kind of adherence to dogma would be expected among
magicians or sorcerers but provides us with little foundation for
fashioning a future. It reminds one of Eliade's "Eternal Return" of
primitive religion, or cycles described in some theories of history as
in the work of Vico or Heinrich Heine. Certainly there are cycles in
life as the biological world shows in in the seasons.
Wolf, among others, has praised the work of Andrew Haldane who has
been attempting to place human economy in a biological context, but I
fear the greatest problem we face is addressed by another project of
Haldane's. In his recent Wincott lecture he discussed the issue of
limited liability. Today we live in a world where risk and gambling by
investors is protected by insurance (derivatives, e.g.) or government
bail outs. Should we return to an unlimited liability world of finance
Haldane's description of the failure of the City of Glasgow Bank in
1878 as a model, might produce a more prudent world. As not one
depositor lost a penny, many investors were bankrupted. The present
economic model has made gambling a protected strategy and has created a
more volatile economic system.