Where are our Pyramids?
One of the most thought provoking lines in Keynes’ General Theory is the question why the Egyptians were able to maintain a stable civilisation for 2,000 years.
Keynes believed the answer lay in two activities: Construction of the Pyramids and the search for precious metals (gold etc). Why? Because, unlike most goods, the pursuit of these articles does “not stale with abundance”. You cannot get too much of religion (the pyramids) or of gold. The Egyptian gold rushes, one assumes, like our nineteenth century discoveries, led to inflation and full employment. Keynes, like Bernanke today, believed full employment and inflation was a much better thing than unemployment and deflation.
Keynes was referring to ancient Egypt’s solution to the problem of surplus capacity (unemployment of resources) in a highly productive economy. Egypt had its Nile agriculture. What about us though? Global resource sharing, specialisation and innovation under a market economy make us wealthier still. Where are our pyramids?
The theme to which Keynes returns again and again in his writing is that economies are not like households and firms. These players (us as individuals) suffer from scarcity of resources. Their main problem is efficiency – how to make scarce resources go further. Rich, highly productive societies as a whole have a very different problem. A problem of excess, rather than of scarcity. These societies (our society as a whole) attains such high levels of production that they become unstably rich. I often think this when driving around the motorways in the UK. Every second or third car is a GBP 25,000 German marvel of engineering. We attain levels of wealth that seem giddily high, and, it is true, when a shock occurs, we all panic about it. We all, simultaneously, conclude we were living beyond our means. We retrench. That is what happened last year. As Jeremy Grantham points out, the world was not any less wealthy in terms of goods and services on offer (potential GDP). It just felt a lot less wealthy since we all, in a nasty feedback loop, decided to consume at a lower rate, and thereby lowered aggregate consumption.
Anyway, back to the pyramids, it is highly pointless for a Robinson Crusoe to build pyramids, or to mine gold. He is the ultimate household faced with scarcity. He needed to do productive things.
Our society, on the other hand, has more than enough productivity to live well. We need “higher order” things, with high “income elasticity”, on which to vent our creative energies (or, more precisely, our competitive search for status).
Keynes’ only partly ironic point is that, with goods like sexy-state-religions (the pyramids), the less useful they are, the more likely it is they will keep being demanded and produced, no matter how much comes forth.
What then are our pyramids today? Clearly the fashion industry. Probably holiday travel and other forms of leisure expenditure. Definitely housing. Our smarter and smarter and more prestigious houses are, for sure, our societies’ totems. Our higher order infinite elasticity means of expressing ourselves. Our pyramids.
These activities are, then, suitable high elasticity explanations/expressions of the remarkable level of wealth in our economy today. How do the authorities regulate the building of these “pyramids”, and, indeed, influence who gets to build them?
Here I would argue that banking in particular, and finance in general, has become, in the west, our greatest pyramid builder.
The endless moving around of money is, in itself, a largely pointless activity. But, because it is financially lucrative it is massively pursued. Why do our governments allow a pointless activity to be so lucrative?
The answer, and we partly have Keynes himself to thank for this, is that the banking sector, and in particular the credit markets (the market in bonds) is used by the authorities (our modern Pharonic court) to pump up the economy whenever it is down (the equivalent, after seeing unemployed Egyptians on street corners, of ordering e.g. a pyramid or two to be built/torn down/moved/whatever). Our fund did not make 70% odd this year because we outwitted the market. Oh no. It made 70% because the authorities wanted to pump up the entire (wholesale) capital market. We were just experienced enough bond traders to know a banking system reflation when we saw one. We invested in bank subordinated bonds back in March ’09 in order to play our pre-destined part in the reflationary process.
Crazy though it seems to me (and it must seem even crazier to those not bond traders) the above system does seem to have worked. Keynes’ legacy has, it seems, “fixed” the problems of boom and bust that marred so many lives before he came along. The world has paid a price in nouveau riche bond traders fanning out to fill their pre-destined roles creating employment on mansions in the Cotswolds (and numerous other places), but, maybe, it has been a price worth paying. After all somebody had to be the transmission mechanism, the pyramid builders.
Right from the time of publication of the General Therory Keynes’ critics have complained about his subversion of the markets’ natural tendancies. Subverting the market’s desire to reach its own equilibrium can work for a while, but, his critics argue, in the long, run, are we not storing up an even bigger crash?
Keynes’ standard response to this point was that “in the long run we are all dead”. Well, is that long run now coming?
I am not qualified to judge whether the price of Keynesianism has been worth paying. It appears to have worked remarkably well for a long time, but during that time some truly frightening excesses have built up (of consumption, of leverage, of reliance on a pumped up banking sector, of inequality).
I do however have a much more immediate and unambiguous complaint about Keynesian management, at least as it is currently implemented. And this is something I don’t think Keynes could have foreseen.
We have only discovered in the past 10 or 20 years that man-made climate change is likely to either disastrously raise the temperature of the planet, or, alternately, force us to massively scale down our use of fossil fuels, i.e. massively change the energy basis of our economy.
Keynesian reflation as currently conducted urges massive fiscal and, in particular, monetary/credit expansion at the time of unemployment in order to reflate the economy. Put simply, it is an invocation not to save, but to consume. This is not the pathway climate scientists would urge us down.
Conversely the path the climate scientists are urging us down (to create a ruthless carbon cartel and squeeze the hell out of the use of carbon i.e. organise a massive energy terms of trade shock) is exactly the pathway our macro-economists DO NOT want to see occur. Energy shocks have been the undoing of Keynesian reflations before (in 1973, in 1979 and arguably in 2007). They undermine reflations.
So. Expect the emerging consensus at government level behind a Western / Chinese alliance around a carbon cartel to come into direct conflict with the traditional economics community (and the business community who also don’t like energy shocks – they are not good for stock prices).
Who is right? What is the right thing to do? Well I think the answer is clear. We need to take Keynes insight about the Pyramids and modify it so that our Pyramids are no longer fancy houses and cars. Instead (and fortunately, my sense is that Larry Summers and team understand this answer), we need to shift our Pyramids (our surplus) onto the environment. We need to devote the amazingly creative and productive capacity of modern capitalism to correctly solving the biggest problem it has ever faced – environmental destruction. This is a massively high elasticity destination for our productive surplus. It is also a most worthy destination.