 Welcome to Economics and Beyond. I'm Rob Johnson, President of the Institute for New Economic Thinking. This week we're bringing you an interview with Lord Robert Skidelsky. Here's the conversation, which begins with Robert reading a letter that Keynes wrote to Hayek about the road to serfdom. My dear Hayek, the voyage has given me the chance to read your book properly. In my opinion, it's a grand book. We all have the greatest reason to be grateful to you for saying so well what needs so much to be said. You will not expect me to accept quite all the economic dicta in it, but morally and philosophically I find myself in agreement with virtually the whole of it, and not only in agreement with it, but in a deeply moved agreement. Turning to a few special points, I think you strike the wrong note on page 69 where you deprecate all the talk about plenty just round the corner. No doubt this is partly due to my having a different view to yours about the facts. But apart from this, would it not be more in line with your general argument to urge that the very fact of the economic problem being more on its way to solution than it was a generation ago is in itself a reason why we are better to afford economic sacrifices if indeed economic sacrifices are required in order to secure non-economic advantages. It seems to me that it is in this particular matter above all that the communist doctrine is so desperately out of date, at least in its application to the United States and Western Europe. They ask us to concentrate on economic conditions more exclusively than in any other period in the world's history, precisely at the moment when by their own showing technical achievement is making the sacrifice increasingly unnecessary. This preoccupation with the economic problem is brought to its most intense at a phase in our revolution when it is becoming ever less necessary. The line of argument you yourself take depends on the very doubtful assumption that planning is not more efficient. Quite likely from the purely economic point of view it is efficient. That is why I say it would be more in line with your general argument to point out that even if the extreme planners can claim their technique to be the most efficient, nevertheless technical achievement, even in a less planned community, is so considerable that we do not today require the superfluous sacrifice of liberties which they themselves would admit to have some value. One point which perhaps you might have pressed further is the tendency today to disparage the profit motive while still depending on it and putting nothing in its place. The passage about this on page 97 is very good indeed, could not be better, but I would like to have seen this theme a little more expanded. On the moral issue I also find the last paragraph on page 156 is extraordinarily good and fundamental. I come finally to what is really my only serious criticism of the book. You admit here and there that it is a question of knowing where to draw the line. You agree that the line has to be drawn somewhere and that the logical extreme is not possible, but you give us no guidance whatever as to where to draw it. In a sense this is shirking the practical issue. It is true that you and I would probably draw it in different places. I should guess that according to my ideas you greatly underestimate the practicability of the middle course. But as soon as you admit that the extreme is not possible and that a line has to be drawn you are on your own argument done for. Since you are trying to persuade us that so soon as one moves an inch in the planned direction you are necessarily launched on the slippery slope which will lead you in due course over the precipice. I should therefore conclude your theme rather differently. I should say that what we want is not no planning or even less planning. Indeed I should say that we almost certainly want more. But the planning should take place in a community in which as many people as possible both leaders and followers wholly share your own moral position. Moderate planning will be safe if those carrying it out are rightly oriented in their own minds and hearts to the moral issue. This is in fact already true of some of them. But the curses that there is also an important section who would almost be said to want planning not in order to enjoy its fruits but because morally they hold ideas exactly the opposite of yours and wish to serve not God but the devil. Reading the new statesman and nation one sometimes feels that those who write there while they cannot safely oppose moderate planning are really hoping in their hearts that it will not succeed and so prejudice more violent action. They fear that if moderate measures are sufficiently successful this will allow a reaction in what you think the right and they think the wrong moral direction. Perhaps I do them an injustice but perhaps I do not. What we need therefore in my opinion is not a change in our economic programs which would only lead in practice to disillusion with the results of your philosophy but perhaps even the contrary namely an enlargement of them. Your greatest danger head is the probable practical failure of the application of your philosophy in the United States in a fairly extreme form. No, what we need is the restoration of right moral thinking a return to proper moral values in our social philosophy. If only you could turn your crusade in that direction you would not look or feel quite so much like Don Quixote. I accuse you of perhaps confusing a little bit the moral and the material issues. Dangerous acts can be done safely in a community which thinks and feels rightly which would be the way to hell if they were executed by those who think and feel wrongly. So you say in the paper that you wrote about this that Hayek called Keynes a great man but not a great economist while Keynes thought the rule to surf them as you just read was a great grand book but he thought little of Hayek's economics. I think we have a lot to explore today. I agree. Thank you. I often say that economics called forth Inet and our job is to use Charles Dickens. It's the tale of two failed romances. One is the ideal free market unfettered will deliver us from evil and the other is the romance that the state will fix it. I worked in government too long with the senate banking and budget committees in America to ever believe that the state is that perfect. Well the state can't fix everything but it can fix some things. There's a role for each for the market. And they're both tools as a means to an end. And they aren't the end in themselves which I think is part of the confusion in recent years. I know. And I think the two extremes are really I suppose the market, the unfettered market and on the other side central planners. Yes. A central planning. Those are the two extremes and I always think of Keynes as the middle way that he said no you don't have to choose and there are limited interventions that can improve the working of the market and at the same time avoid excessive state. And that's what we've got to hold on to. And this letter from Keynes focused on the road to serfdom which he sent to Hayek really in a very concise way gets right into those issues. Yes. He read the road to serfdom on the way to the United States where he was taking part in the Bretton Woods Conference. And so the road to serfdom came out in June 1944. Keynes read it on board ship. And he dashed off this letter, a four page letter to Hayek and said something rather unexpected. He said this is a great book. And I find myself deeply moved agreement with it. Then he said but. And the whole thing starts with the buts. There were three buts you could make out four buts actually and one of them and the first important but was well you say that any intervention is the thin end of the wedge and the slippery slope to central planning. And Keynes says in his letter he says no it's the inoculation against it. Moderate planning is the inoculation against the extreme version of the disease. Let me see if I understand that if you have an extreme free market and the people in the bottom which could be many or a few become despairing. Keynes' middle way is designed to take the sting out of that and which you might call allow the wisdom of crowds to prevail rather than the madness of crowds to rise up in effect. Very good way of putting it. You can also put it as in the terms of an inoculation. A mild form of the disease actually prevents the full blown variety from developing. I mean one's got to think of this was this debate took place in 1944 and one of the extraordinary things about the road to serfdom is it never mentions the Great Depression. And in fact of course the madness of crowds was very evident in the rise and the share of the vote to the Nazis between 1928 and 1933. Just shot up and then of course the shot up because a quarter of the German workforce was out of work and Hayek never mentions that. And he attributed the rise of the Nazis to the hyperinflation in the years preceding the Depression. Yeah exactly. And so the whole bias of Hayek and in fact Friedman and others who followed in his footsteps has always been to attach much more importance to the dangers of inflation than the dangers of unemployment whereas in fact a sensible view would be that you want to avoid both. But if you had to choose between having half your workforce out of work and some inflation at any rate you allow the inflation. But you don't have to choose. You shouldn't have to choose. Well let me introduce which might call class into this. Very wealthy people don't suffer in a downturn because they have a reservoir of wealth they can draw upon. They do suffer from inflation. If they are disproportionately powerful as in the case of the United States where money in politics is so prevalent we can be in a place where suffering for the many is the result because the survival of politicians depends upon serving the few. And so I think they're how would I say there are all kinds of ways in which things can come unraveled but I think Keynes at the time while he was and you point this out in your essay he was more of a kind of elite Oxford Cambridge person. Hayek viewed himself more on the outside. When I first read that by the way it scared me because it felt to me like Hayek was on the outside representing something that the plutocrats would like and it looked like Donald Trump to me a little bit. Not him in terms of his intellect or the texture of his sophistication but the ramifications of an outsider talking about inflation felt like he had a blind spot towards one of the things that could lead to an authoritarian government which is the disenfranchisement of the many and the despair that results and that feels like much closer to our problem today. A huge blind spot. I think you can understand it in personal terms. He came from Vienna. His family was middle class. They lost a lot of money and they lost a lot of their wealth in the great inflation. It was a hyperinflation by the way. And also he was never part of a governing class really but what Keynes was, it was the English tradition that the ruling class actually had both intellectual and if you might traditional elements in it the brightest people from Oxford and Cambridge went into the civil service and they were part of the government. Keynes was always, I think they called it the term clericy really sums it up. They felt a responsibility for governing and for producing ideas. And I think Keynes fits very much into that pattern whereas Hayek, he was always on the outside. Events, circumstances and of course his personality. I don't think Hayek would ever have been a great administrator or would have seen that as his role whereas Keynes was a very, very powerful administrator as well as a theorist and he spent two important years of his life in the treasury. One of the interesting things toward the end of Keynes' letter to Hayek is how he breathes the need for moral and ethical consideration not only into the decision making but into how the public understands the basis for decision making and he saw that as a way of resisting the run to authoritarian how would I say the polar fear of central planning and authoritarian rule that Hayek worried about? Yes, it's quite a difficult passage in the letter where he talks about that. He says for example dangerous acts can be safely done in a society that thinks and feels rightly which would be the road to hell in a society that thinks and feels wrongly and that's an interesting idea what it suggests is that if you have a liberal tradition in the society then you can do certain things which don't lead to hell which they would in other societies which lacked a liberal and moral basis and a number of American critics of Hayek pointed out that this is why there wouldn't be a road to serfdom from adopting certain types of intervention and that's a powerful argument but what I think is it's a static argument because if you do too many dangerous acts so to speak then you lose the idea of why they're dangerous and you start accepting things which 20 or 30 years ago wouldn't have dreamt and one example of that is we accept degrees of surveillance now which a few years back would have been regarded as intolerable infringements of our liberty, personal liberty but now we accept them. They invoke terrorism and the need to monitor to protect you by surveillance. We just accept that and we get into Orwellian, George Orwell territory where we accept that Big Brother has some rights over us because Big Brother has manufactured threats. Some of the threats are real, some of them are manufactured. Yes. One of the concerns that I have, we talked a little bit about Hayek's blind spot, Keynes is much more comfortable with administration. He appears to me to project a goodness onto administration in the middle path that may or may not be a valid projection. It might have been in his heart, but it might not be something that what I call is there in all weather with all people sitting in the captain's chair and that particularly concerns me in the United States right now because when I watch Trump voters, as you probably know I'm from Detroit, Michigan, and I watch the cynicism that the people in Detroit had vis-a-vis the Clinton family, NAFTA, then criminal justice reform and welfare reform and then the Obama administration come in and do the bankruptcy bailout of the auto companies but allow them to use the money to build plants in places like China and Mexico allegedly. I don't know if that ever happened. But the distrust of the middle liberals in America where with their advanced degrees and their elite degrees and their alleged do-gooding, these people felt their ship was sinking. And I don't know if I trust from my own lens of experience that the elites in America, in the center, are sensitive enough to the lower realms and I'm not talking about 5% of the population, I'm talking about 50% of the population. Well, of course, I think this was Milton Friedman's big criticism of Keynes. I once had a conversation with him about this and he said of course Keynes was a great economist but he grew up in England, not in the United States. Had he been an American, he wouldn't have quite come to the views of the benevolence of intervention because he would have seen the American pork barrel politics and administration in action and he would have realized that you can't trust these people. And that was an important criticism but then you still had the problem. You can't then because you couldn't trust the governors assume that the problems they said they wanted to solve didn't exist like the instability of economies. I think the task we face today now that fiscal policy is starting to come back and everyone now is talking about what sort of macroeconomics should we now have. We've got to confront this issue. There are these instabilities and we can't really, we don't think we can trust the discretion of the politicians because they're always going to be hungry for votes and they'll mismanage all this. How can we find a more automatic way if you like? They may be hungry for votes or they may be hungry for money as a means to use public relations and media to garner votes. The votes are the ultimate currency but how do you achieve them is difficult to comprehend. I think the key is to make the interventions more automatic and less discretionary so that when certain indications of say downturn happen some automatic stabilizers go into action and it's not the politicians changing taxes or increasing their spending they just happen automatically and I think that's the challenge to devise a macroeconomic policy that you see they thought they could do it through independent central banks and that these would be neutral, they'd be technical and they'd operate on purely technical criteria and in fact they turned out not to be neutral and they also turned out to be too weak to do the job. My good friend, the late William Greider who died on Christmas Day used to say to me independence from whom? I think that's a fundamental question. That's a fundamental question and I think monetary policy is shown to be too weak to do the things that people like Hayek and Friedman thought that was all that was necessary for it to do. I think the presumption that the velocity of money is stable is a little bit disproven by experience. Stable demand for money, that's Friedman isn't it? I do agree that monetary policy in the experience of moderate to high inflation can restrain that. It is an effective tool but when interest rates are close to zero they are now you're not going to push on a string as Kate said and get out of the ditch. You know there's a big debate on whether monetary policy did in fact was in fact responsible for the good inflation results before 2008. There's a lot of research that suggests it was much more structural features. Structural supply side innovation. I know the Japanese very strongly. And not the central bankers. There's another issue I think that's terribly important in the Keynes Hayek discussion of 1944 and when Keynes accuses Hayek he says where do you draw the line? As soon as you allow some sorts of interventions you don't tell us when to stop. This is Keynes to Hayek. At least I have a limited objective but you talk generally about the supreme importance of the rule of law. But Keynes is implying laws can be very coercive. They can fulfill the Hayekian criterion and still be extremely coercive. Approach upon freedom. Hayek endorsed conscription. A perfectly general rule applies to everyone. It doesn't discriminate against any groups so it fulfills his definition of a good law but it can be very very coercive and you can think of many others. So Keynes is really saying to Hayek where do you stop? Really you say Keynes says to Hayek you say that I'm the slippery slope but you're actually on a slippery slope yourself because you don't define what the inalienable rights of individuals are. Where can rules impinge and where are they in violation of a deeper moral framework? And what Hayek says which is a real giveaway I think in the Constitution of Liberty he said if we had an omniscient planner there'd be very little case for liberty. He says that you see. So it's all contingent on information deficit. If we could overcome the information deficit then we wouldn't need markets. We wouldn't need any freedoms in the economy at all. I mentioned to you earlier today that when I was a graduate student Joseph Stiglitz introduced me to the notion of Hayek's that the market is an information machine. It reveals, it discovers it signals to us and becomes a part of discovery of what society needs. And I always had a very hard time digesting that because I'd say if you massively provide public goods the market will tell you through its price signals all kinds of the wrong things to do. It won't diagnose the problem and it will leave you on a lower trajectory than would be feasible for mankind if it could envision the proper infrastructure in public goods. Well I think that was a powerful argument and Hayek didn't really have any public goods in his system and therefore he didn't take into account that you weren't pricing properly a whole lot of the economy. He just assumed that if you had a market in everything you would get the correct relative pricing but you can't have a market in everything. I mean there aren't markets in some things which are pretty important. Futures markets and all kinds of financial markets they don't yet exist and so you could get all kinds of things going wrong but he never took that into account and that's why really he took a logical position in the light of his theory which was politically intolerable which is when you have a depression the system goes wrong according to his own views which is too much money is printed and that distorts prices and you mustn't intervene because what you must do is you must let the economy collapse in order to eliminate these malinvestments that have been financed by credit and not by genuine savings fancy saying that in 1931 or 32 I mean it was politically crazy I'm told that he later modified that position and it was followed very very directly from his theory about the causes of slumps and the depth and duration of slumps is not a couple months it can be prolonged it can be decades it can destroy many many lives so that how would I say the temptation to human action is not to sit and watch things cleanse for a decade because somebody made errors 20 years before he was lost and the economy is weakened for years ahead but he was still despite his apparent retraction on this point he was still saying the same sort of thing in 1981 there was a I remember an article he wrote in the Times newspaper in about 1979-1980 and the conservatives had just announced a gradual disinflation strategy over five years Hayek said no this is never going to work what you've got to do is you've got to cut the issue of money right now stone dead 50% of the workforce will be out of work but it's price we have to pay and it won't last long they'll only be out of work for six months but fancy saying that I mean really what world was he inhabiting so he was a great man but there were these blind spots the other side for Hayek for a moment looking at the present circumstance in the United States he talked about the slippery slope of you talked about the need for things more than monetary policy fiscal and I would also call it the equivalent of structural or industrial policy have come back on to the radar but people are frightened of industrial policy people in America look at the military industrial complex spending about a trillion and a half dollars including nuclear stuff in the energy department so called black budgets intelligence budgets and the defense budget and they look at the tattered infrastructure dreadful schools pensions being cancelled and so forth isn't the size and scale of the American military and their influence on the political process the kind of thing that Hayek was warning against well I wonder you see I mean you go back to Adam Smith who says defense is more important than opulence so if you can justify huge expenditures on defense in terms of national security people will buy that who won't buy equivalent expenditures on schools and hospitals so you know it's a hierarchy of needs Americans have always been prepared to accept budget deficits huge budget deficits actually for purposes of defense which if they were incurred for civilian purposes would raise hulls of outrage and everyone going up and say the federal government is out of control and things like that and they'll even pay taxes higher taxes if it's security but that's and that was of course a way a lot of Keynesian policy operated in the 1950s but it's also the question is it defense or offense with the American military and large multinational corporations a lot of the American public think that we're spending a lot of money as pork and we're spending a lot of money to fortify the earnings and balance sheets of large corporations and it really isn't about threats to the continental United States governments have always been brilliant at manufacturing threats in order to justify what they're doing this was the whole point of all 1984 there was a permanent war going on between these three empires and that justified the degree of surveillance so that's also true but I'm not quite as against well there's a case for military spending not on security grounds but for its spin-off effects on the civilian economy and a number of economists actually a number of economists say that a whole lot of the civilian computer industry grew out of the RAND research on deterrence in the 1950s and 1960s and that's one argument Internet, Silicon Valley and many of the things that are in the new information economy if you look we're spawned by the national security agency the central intelligence agency and the defense department when I say spawned funded by and they were the big procurers of these these things but do you have to do it that way I mean do you have to have large military expenditures in order to get any research I mean it's an open question it seems to me because it's in a way it raises the question why are you having technical innovation anyway what drives you what is technical innovation designed to solve what is its purpose how does it augment society's well-being I know and there's a big debate on this and some people say you don't get any innovation unless you have very secure property rights you have a market and then you have patent law and then you get innovation but in fact the experience of countries has been not entirely supportive it's partly that well they say there's good and evil in everything patent there is protection for the existing and there is deterrent to the new challenger that could take you even further we're seeing a lot of that with the aggression of the lawyers that work for Silicon Valley firms already mega size how would I say deterring and sometimes buying at half price start-ups that can't afford to joust with the deep-pocketed well it's again it's the assumption of a market you see all these good good effects that people like Hayek are saying are suggesting all depend on very very great amount of competition and of course he admits that so he says the main task of government should be to attack monopoly and prevent monopoly they talked about that form of planning the rules and enforcement that set up to ensure competition and Keynes and Hayek agreed on that they agreed on that and although Hayek was marginalized for years in the Anglo-American economies he wasn't marginalized in the German economy and auto-liberalism was influenced by Hayek and then that influence fed into the way the European Union was constructed so we also have an Anglo-American bias in the way we think about economics I remember reading the histories that Phil Morowski and others did of the Mount Pellerin society and how people like Frank Knight and Hayek were marginalized Simon's was Henry Simon's were marginalized because the people who funded the Mount Pellerin society was called the Volcker Foundation from the Midwestern United States seemed not to want to address the question of monopolies they would address the question of labor unions but not monopolies but Hayek is also a bit naive here I think because he thought you wouldn't have a monopoly unless the government unless the government created and supported it he thought all monopolies were really state creations and that was true in much of Central Europe and historically but of course it's not a question of one creating the other it's a symbiosis between big business and big government yes that really produces this and if the same people are in the government and also heading the large monopolies how can you say well it's rather empty then to say that monopolies are the creation of the state and they wouldn't exist without it the arrows go in both directions Ken Galbraith called the countervailing powers of organized labor and their voting power when they don't exist it becomes a two-way game rather than a three-party negotiation and I think one of the problems today is certainly all over the western world we've emasculated the third bit and the trade unions are a shadow and globalization which of course is why so many people were in favor of globalization which has achieved exactly so many influential people numbers of people there's one other thing I'd like to raise in this discussion because it's to do with the question of scarcity and abundance I think Hayek's he assumed scarcity was always going to be with us he took that definition of economics so economic efficiency that plays a much bigger role in well-being whereas Cain says yes but of course we are moving into an era where we won't have to pay so much attention to efficiency or therefore we don't actually need planning either and he then says to Hayek if you could launch your anti-planning crusade on a more moral basis that in fact we are in the course of solving our economic problems and therefore we can actually revert to the real basis of a moral outlook on how to live wisely, agreeably and well these are Cain's term then you wouldn't you wouldn't be just arguing this in terms of economic efficiency and which is more efficient than the other you'd be able in a position to say well actually we don't need efficiency so much in our part of the world we can think about other things I always admired Cain's awareness and articulation that the economy was a means to an end not an end in itself which is tantamount to saying that material well-being is a necessary condition at the foundation but it is not all of what constitutes a good life exactly and the difference was Hayek in the road to serfdom said morality comes out of the pursuit of efficiency and Cain said morality starts when efficiency is no longer that important that's right I think there's a huge difference there which again would have been the subject of a great argument had they lived to have it I think towards the end of the letter where he's talking about he says what we need therefore in my opinion is not a change in our economic programs which only lead in practice to disillusion with the results of your philosophy perhaps on the contrary namely an enlargement of the programs greatest danger ahead is probable practical failure of the application of your philosophy in the United States in a fairly extreme form now what we need is the restoration of right moral thinking to proper moral value in our social philosophy so Cain's at some level is asking Hayek to embed material conditions in a broader moral philosophy not assume that material conditions constitute what you might call a sufficient condition for achieving moral goals I think Hayek would have probably agreed with that but on the other hand he was so committed to you see Hayek was trapped in a way because economic efficiency that's what the market promises it promises much better economic efficiency than the planning system that's the ground on which he wants to fight planning the ground of economic efficiency and Cain says but look there's a better ground for fighting planning if you get away from the economic efficiency argument planning really destroys the moral basis of a society because it destroys free choice which is the basis of morality and in a way Hayek accepts that but he can't quite say it in the end he has a feeble defence of individual liberty I think because he then says well you have to have individual liberty because the planner doesn't know everything but that's a very instrumental view of individual liberty it's a contingent view if the planner did know anything you wouldn't need individual liberty and Cain says but that's wrong of course even if the planner does even if the planner is omniscient you still need to have a system in which your own moral choices affect the outcomes of things in other words you have to have rights so I think one way of putting it is it's an argument between a rights based view of individual liberty an Isaiah Berlin view if you like and a utilitarian view is that liberty is useful I may constrain you but you'll be better off as a result of my vision and design being implemented which is kind of a paternalistic sensibility that not a lot of people have faith in today I agree they were both wigs in the European sense they were neither of them were conservatives and they were reformers of a tradition but then the question is I think you need them both if I had to if I had to sum it all up I think there is a slippery slope but at the same time you need intervention and the task is to get the intervention without the slippery slope I remember when I was young I read a book by Kenneth Boulding who lived in Colorado in the United States and he said there are all of these debates about central planning, markets and so forth he said we know we don't know everything so I think having decentralized poles of influence and control was much better than concentrated because the scope for error and the responsiveness to adjustment favors the system where some one entity's big errors can't destroy us and I thought that was a interesting injection into the way to think about economics and when I look at both high concanes you can kind of see them oscillating in and out and I wanted to ask you about there's a gentleman Jeffrey Mann who is now a fellow at the Institute for New Economic Thinking he was with us in Azizi and Jeff wrote a book called In the Long Run They're All Dead his last chapter is called Revolution After Revolution and what he said was this when he came to look at social dynamics this was roughly 2015 he took he thought that Keynes counter cyclical macro economic policy took the pain out of the downturn in the business cycle and anesthetize the necessary political mobilization that was needed for structural reform inside the economy and if you did that over several business cycles the inner structure would rot but then he said he saw after the 2016 election Brexit the AFD in Germany, Marie Le Pen and others again that phrase that the wisdom of crowds the small D democracy might be a romantic fallacy and the thrust towards authoritarian nationalism maybe Keynes was right that if you allowed too much pain you wouldn't get structural reform you'd get authoritarian craziness whereas when you anesthetize things it allowed the body politic to be less despairing and stay on a more even keel yeah of course I think that's the perennial debate a small amount of anesthetics but if it becomes total then of course you become supine no but the debate goes on I mean you see why I think that Keynes isn't isn't just counter cyclical it's that he really doesn't believe that his interventions are changing relative prices because he doesn't believe the economy is normally achieving its full potential of production it's not a scarcity it's not a scarcity issue when we engage you see Hayek will always say look if you have these interventions you're distorting relative prices Keynes said not if you have underemployment underemployed resources you lift everyone up together he has this phrase all the boats are lifted up together you're not distorting anything and at the same time you're preventing possibly political catastrophe in other words you're saying to Hayek you're really treating the wrong disease because you're not accepting the fact that an unmanaged economy doesn't actually maintains continuous full employment so I think there was wisdom there but of course the danger is as you say that anything little small any little small fluctuation becomes the excuse for intervention whereas in many cases you just say look it's not going to be serious it's a necessary tonic if you like a way of improving the structure of the economy we don't do very much about it we just let it happen but you've got to be alert then to really serious some serious downturns and then you've got to be prepared to go in and you can't risk what Hayek was prepared to risk in 1929 1932 and in fact they did go in in 2008-2009 the governments use the big weapons to stop stop the downturn really becoming catastrophic and in some level you could see which I might call the win-win game of not going into a deep depression but the distributional consequences of who got bailed out who couldn't have spawned the change of the House of Representatives from Democratic to Republican eventually the Senate changed and eventually Donald Trump was elected and what was his what I'll call elevator speech the system is rigged we were how would I say at the onset of INET many people would come to me and they would say well this is proven this 2008 crisis that unfettered free markets don't work but what they didn't see was that the faith entrusted government to repair was damaged badly by the nature of the structure of the bailout and by the way I don't blame the operatives in the Obama White House because I think the problem was structural the power of the financial sector was so great if you had imposed a great deal of the distributional burden on them they would have stopped and we would have gone into depression and that's a structural flaw in the nature of American political economy but the long-term ramifications I actually often conjecture I can't say I know this but I do have a question that the demoralization of American people towards government in 2008 is one of the greatest inhibitors of addressing the challenge of climate change now I think you may I think you may be right on that but I mean going back to 2008-2009 what would Hayek have suggested would he have said okay let the system go bust that would have been a logical implication of his policy I mean there was just a whole lot of malinvestment connected with the financial system so and it's not a case of a single bank going bust which is a lender of last resort kind of argument possibly or letting a single firm collapse there was a whole globally interconnected systems which was essentially insolvent by 2008-2009 so what would governments have done should have done well I think they were right they had to stop the hemorrhaging of the banking system but beyond that you see they then went into quantitative easing and that was the wrong step in my view they should have done much more on the fiscal side you can make a political decision where you want the money to go whereas if you do it if you do quantitative easing and especially the way they did do quantitative easing you just increase the assets of people who already have assets and therefore increase in equality and if the distribution of wealth is narrow highly concentrated at the outset a very small proportion of the population is going to benefit greatly I mean if you have a bond buying program who owns the bonds I know Amir Sufi and Atif Mian wrote a book called House of Debt where what they suggested was that had the bailout structure allowed for very large write downs of underwater mortgages therefore the need to write down the creditors of banks and recapitalize banks with our fiscal injection the distributional consequences would have been much fairer to what you might call the polluters would have paid the financial sector that made the mistake but the other thing they emphasized is those people whose mortgages were underwater have a much higher propensity to consume than the beneficiaries of quantitative easing and so you would have got much more bank for the buck going in that direction well I think this is straight out of Keynes the propensity to consume but it's not out of Hayek Hayek thinks crises are caused by too much consumption yes too much finance consumption too much finance consumption and not enough saving so his whole take on this would have been very very different yes I know your fellow member of the House of Lords and Inet Senior Fellow Adair Turner in his book Debt in the Devil he said this entire structure of protecting the financial sector is essentially fostering inflation or increase in the price of positional goods in the real estate which is collateralized it's not feeding the growth of productivity the metaphor people use is that the productive structure of society is facilitated by credit allocation and that the residual in the long term is productivity has gone up and society can afford to pay that debt back and Adair suggests that the current what I'll call sectoral allocation of credit doesn't have very much to do with productivity argument with Eugene Farmer's argument that you deregulate the financial system and it starts allocating capital efficiently because the risk at lowest risk you get a more efficient allocation and that must be good for economic growth it also is non distortionary what's wrong with that argument because that was the argument behind the deregulation theoretical argument behind the deregulation of the banking system and allowing so to speak all these things to happen and it was all done in the name of economic efficiency and I think we have to probably understand exactly what was wrong with that argument was it that there was a monopoly position in the financial sector or was it that they ignored the element of uncertainty and they assumed that risks were properly being judged I think there's still an argument about that and I'm not sure of radical uncertainty your quantitative model based on recent quarters of price behavior or whatever how do I say the past does not foretell the future little metric you give the top management at night so he can go home and sleep well when he's the bank president may have nothing to do with the challenge that's on the horizon in a world of structural flux and there's also a political element which is I think Hayek would recognize and there was government government policy to get poor people houses and therefore they encouraged they encouraged by certain types of subsidy they encouraged actually the housing bubble and the subprime mortgage collapse Rogan Rajan wrote a book about exactly that theme I guess my experience working in Capitol Hill is that that notion of poor people's housing was less emotive than the ability because of the complex derivatives that were being created the people who originated mortgages could push these things in for big fees into these packaged derivatives and the complex derivatives made fees for Wall Street and things like Freddie May and Fannie Mae and Freddie Mac stood behind basically as the sump to take over the bad loans that which I might call turbo charged excessive loans and the other problem of course was a lot of the poor people who got a house got a house for a very short period of time before it was repossessed and they got wiped out of what down payment and little wealth they had so they I think the noble desire to provide housing for poor people could be accomplished in ways that weren't quite so profitable for Wall Street for poorer populations I agree with that and that's a big argument against overemphasizing the efficiency of the market because markets in the long run may be more efficient than to go back to our original discussion of the central planning system but it's what happens in the short run that can be absolutely that can completely wipe out that long run argument if the short run lasts 10 years or 20 years then it has effects that actually go forward into the future and they contaminate the next 20 or 30 years after that so you can't distinguish in that easy way between short run and long run as Hayek what would have liked to I think I think there's a real danger right now to follow on from what you just suggested too big to fail banks have shown their political power they got bailed out what's the ramification of that afterwards there what you might call the risk premium related to bankruptcy and their funding costs goes down and concentration big large concentrated banks have a funding cost advantage relative to smaller banks smaller banks can fail, bigger banks are too big to fail capital will go through the bigger banks now there's a big argument afoot which is things like our lower house in the House of Representatives in the United States and parliaments around the world know the voters are resentful of the financial system as a result they won't vote for the bailout and they'll be like Hayek let us go and have that depression we can't afford that and I'm sympathetic to that we can't afford that and we're going to fortify the bailouts we are exacerbating the cost advantage of the too big to fail banks and not only will they gain market share they'll be more aggressive because its heads they win tails the taxpayer loses our fiscal capacity can be utilized in a very bad way we haven't mastered in the western world and my board member and friend Richard Vague has just written a book about this what we haven't mastered is prior restraint of credit allocation if you guarantee downstream contingent on a collapse you've got to be able to restrain upstream otherwise the bailout you're going to do is going to be even bigger and what Richard mentions in his book it's called a brief history of doom is that almost every financial crisis was foreseeable almost in his book they all emanate from the private sector yeah well I'm sure that's true I think crises emanate from the private sector but I mean what do you then but what do you do about banking I mean in the early days of the crisis I mean I think actually President Obama said no bank should be allowed to own more than a small percentage of the total wealth assets of the country that didn't get through the idea was to make smaller banks smaller and therefore you could allow under those circumstances a bad bank to fail without involving the whole of the banking system I mean I think that was the logic behind it it was an antitrust idea but then of course you can't do that just in one country you have a globally interconnected banking system in which capital is flowing fairly freely between different financial centers do you try to stop that capital interrupt it, tobin tax or even more in order to disaggregate the financial system and thus lower the risk of a failure of a propagation through one to the other that whole idea of a disaggregation and making banks smaller has simply disappeared I mean it was strong in 2009 2010 then it's vanished Well you had mentioned to me earlier in this discussion in passing the role of computers in replacing the market and a lot of people that work in the financial sector now tell me that the economies of scale of having everything aggregated under one roof means that large complex financial institutions are almost like natural monopolies that if you break them into 10 pieces the system is much less stable and the system is much less which you might call efficient than if you allow these increasing returns to scale to be aggregated under one roof which is that intertwined nature and the spillovers for society But that assumes the computer is an omniscient you see I mean if suppose the computer made one large mistake one mistake then everyone is affected by the mistake they're never going to be a mistake Absolutely there is a very powerful example of that which was the derivatives that worked off production pricing in the complex mortgage derivatives had every bank using a computer and they were marking to model they weren't marking to market but because they all had a similar model they would come up with similar prices until the crisis erupted and the whiff of bankruptcy risk entered into that which wasn't specified in that model and everybody was showing I'll just pick a number 93 is the cost of this what was face value $100 and they go out in the market in the market give them 20 so the mark to model collectively made a mistake and you know just one I suppose we shouldn't go on forever but I remember wonderful remark partly intended as a joke not entirely by Thomas Sargent the Nobel Prize winner and he said well what's our ideal God and the Economist in the same model said that at a public lecture God and the Economist in the same model Okay well my retort to that would be in our conversation today we've talked about two brilliant men and there is yin and yang as the Asians say in everything there's good and evil in everything if God and the Economist are in the same model where's the evil thanks very much this has been a delightful conversation very enjoyable that was Lord Robert Skidelsky award-winning economic historian and the author of a dozen books including most recently money and government past and future of economics and check out more from the Institute for New Economic Thinking at InetEconomics.org