Tuesday, June 26, 2012

Reith Lectures: How Niall Ferguson and the markets diverge from reality

Niall Ferguson Protector of the City
I've been listening to the second Reith Lecture on BBC Radio 4, The Darwinian economy, by Prof Niall Ferguson, summarised here.

This is my comment:

Niall Ferguson's central thesis is that deregulation of banks did not cause the crash. However, he needs to establish this thesis in face of the work of David Moss at Harvard Business School.
His key finding is expressed in a graph here:

It relates income inequality measured as share of income held by the top 10% of the pile compared to bank failures going back to 1917. There is a very clear correlation between income inequality and bank failures. It is strong backing evidence for the position of the Equality Trust -  that greater equality is better for social cohesion. 

Of course, correlation is not causation, though causation must always be accompanied by correlation.

Naturally Niall Ferguson will wish in to deny causation, because it negates his free market assumptions. He has an easy task, because it is always impossible to "prove" causation, because it is not a matter of irrefutable positive logical deduction, but rather a matter of inference, of pattern recognition. This recognition is very much related to our basic assumptions, as well as a mounting body of evidence. Neo-liberals will be far slower to recognise causation in David Moss' observation than someone who understand the scientific truth that man is a social animal.

One of the elements necessary for recognising causation is finding a plausible mechanism to relate cause and effect. So the question is, how could income inequality cause bank crashes?

There is a possible mechanism in the capacity of humans to suffer from biolar illness - manic depression as was. If we look at the financial markets through the lens of a psychiatrist, it is very easy to see the parity between the individual mood swings of the bipolar sufferer, and the boom-bust mood swings of the society of market traders.

This idea is developed on this blog here:

The root problem with Niall Ferguson's reasoning is trying to isolate the banking sector from the real economy, which is, or rather, ought to be, founded on ecology. He, as a free market fundamentalist, has come unstuck from reality, just as a bipolar sufferer comes unstuck from reality.


Mike Wake said...

Lots of erudition and allegory from Ferguson, but a bit short on serious reasoning. And his lecturing style, in which his propositions are presented as blindingly obvious, becomes wearing after a while. Anyone who consistently talks about "regulation" as a quantity has to relinquish some credibility. Awaiting his take on this week's Barclays story with interest.

DocRichard said...

Yes, it's going to be fun hearing him dealing with Barclaybastards.

harmonik said...

Could hardly stand listening to Ferguson's program. He does waffle on but you would expect a better argument from an A-level student. Another 'clever fool'.