Friday, September 6, 2013
"Well, it doesn’t work according to the textbooks. If you look at economic textbooks, the whole world is meant to work according to the logic of differential calculus; there are these reciprocal relationships - one side goes up and one side goes down. But deep within it there’s a paradox. On the one side you have Adam Smith, where everyone is pursuing their own self-interest leading to an outcome which is better than any of them could have intended. On the other, you have John Maynard Keynes. Today Keynes is thought of as someone who just talks about deficit spending and so on, but that’s just complete rubbish. Keynes’s central message is that individual rational action can be collectively disastrous. So, if you have a series of economic models in a text book where everything balances out, it’s much more attuned to the world working the way that Smith would like to tell us.
But what if it works the other way? That basically there are fallacies of composition and collective action problems at the base of everything, which means that your own individual best first strategy can lead to everybody having a second best outcome. That’s how I think about the world. Take climate change, for example. Everybody agrees that it’s a problem – unless you’re a crank. Why is it then so difficult to do something about it? Because everybody pursuing their own self-interest can be a really good thing, and it can lead to lots of innovation. But it can also lead to the fragilities that brought us the financial crisis and our inability to solve climate change. So where’s the space between Smith and Keynes? To me, that is where you should look for how the world works."