Adair Turner's critique of free-market economics is coherent and compelling, says David Willettsby David Willetts / December 10, 2015 / Leave a comment
Between Debt and the Devil: Money, Credit, and Fixing Global Finance by Adair Turner, Princeton, £19.95
Adair Turner caused a stir in 2009 when he described much financial activity as “socially useless.” It was part of an interview with this magazine—which he fails to name in his book, instead referring to “a worthy but small circulation intellectual magazine.” Ouch!
Now Turner, Chairman of the Financial Services Authority from 2008 to 2013, has gone much further in this important and ambitious book. The shocking results of that 2008 failure meant that subsequently the authorities, quite rightly, did what they had to do to avoid complete meltdown in the markets. But this book is not a memoir of his role in steering us through the financial crisis. Instead he addresses deeper questions about what got us into such a mess in the first place, and demolishes much of the conventional wisdom about the functioning of financial markets and monetary policy.
Back in the 1980s, free-market economics became the dominant model. Many of its insights remain valid: the obituaries of Geoffrey Howe reminded us how in his first year as Chancellor he removed controls over pay, price and dividends, and then exchange controls. It is hard to see us going back to the world from which he liberated us.
“Virtuous bankers complying with the regulations could nevertheless lead to high levels of debt”
Nevertheless, theories can ossify into a doctrine that loses contact with reality. The crash of 2008 showed how this had happened to financial economics. Financial markets were supposed to be as close to the pure free market as you could get. Since the crash that model has been challenged by distinguished economists and commentators, and now Turner delivers the coup de grace. He comprehensively attacks all the key doctrines on which the conventional models of financial markets and monetary policy rested.
He draws on the parallels between the west’s problems now and Japan’s debt overhang identified by Richard Koo. Martin Wolf has already done a lot to explain how dysfunctional the modern financial system has become. John Muellbauer has shown the extraordinary distortions in our housing market. He identifies Hyman Minsky as one of the few economic…