Sunday, March 29, 2009

The Animal Spirits of Capitalists

John Maynard Keynes argued that the business cycle was a function of the animal spirits of capitalists, the bull and bear moods of large financial investors. Writing during the great depression, Keynes was skeptical of the pure free market system that yielded deep three long depressions (including the great depression) before World War II. The eocnomic sytem that was founded on his economic theories made an effort to buffer the foul mood of the market with government intervention and regulation.

Many Americans, particularly those with great wealth, believe that these moods and their corresponding impact on markets are the most efficient way to run an economy. This religious belief in the unfettered invisible hand of the market went underground for three decades after the great depression. But the seeds of the unraveling of the new deal started with a handful of libertarians who met in the apartment of literary giant Ayn Rand in New York City that included Alan Greenspan.

Eventually, these libertarian views became mainstream. Greenspan became chairman of the Federal Reserve Board and far right economist Milton Friedman became the dominant mind in American economics for over a decade.

Today, the tables have turned and the excesses of the market are again obvious. Greenspan, writing for the Financial Times confessed that perhaps the self-interest of finance capital and that of the economy as a whole are not the same.

“In August 2007, the risk-management structure cracked. All the sophisticated mathematics and computer wizardry essentially rested on one central premise: that the enlightened self-interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring their firms’ capital and risk positions. That premise appeared incontestable but, in the summer of 2007, it failed."

1 comment:

  1. Is there any reason why after you put up a handful of posts here, you take them right back down?