Though the mills of God grind slowly; Yet they grind exceeding small;
Though with patience He stands waiting, With exactness grinds He all.
– Henry Wadsworth Longfellow, “Retribution”
The 2008 disaster was a long time in the making. Every time we have a crash, it is because we stubbornly entertained the wrong ideas for many years beforehand.
The seeds of destruction in 2008 were primarily ideological; they grew out of widely accepted but flawed ways of thinking about capital, economic growth, and financial regulation. Instead of basing economic growth on an honest free market model that privileges concepts such as equity, transparency, production, and prudent and limited regulation, those in positions of influence chose the path of debt, opacity, speculation, and wholesale deregulation.
There were two problems with this approach. First, the United States does not have a genuine free market; government regulation and crony capitalism play an enormous role in distorting incentives and interfering with market processes. Second, this regime is based on the radical error of pretending that markets are efficient and investors are rational when precisely the opposite is true.
A capitalist system inherently prone to booms and busts became even more susceptible to disequilibrium. In order to understand what happened and in order to rebuild a more resilient system, we must dig deeply into basic economic principles and reevaluate them.
And in order to do that, you absolutely must have a grasp of these four writers…
There’s No Substitute for These Four Intellectual Giants
There have been many influential economic thinkers whose work would greatly benefit market participants. In order to better understand the death of capital in 2008, four particular thinkers are worthy of extended discussion-Adam Smith, Karl Marx, John Maynard Keynes, and Hyman Minsky. But these thinkers need to be approached in a way that transcends economics. Three of the seminal works of economic theory that I recommend below –The Wealth of Nations (1776); Capital (1867); and The General Theory of Employment, Interest and Money (1936)-are best considered intellectual performances that far exceed the discipline of economics and qualify as both great literature and great philosophy that have influenced intellectual debate in a variety of disciplines for generations. Each of these works has been analyzed and debated endlessly in academic and policy circles for years and continues to provide rich material for thinkers in a variety of disciplines. This is a tribute to the genius of their authors and the fact that the concepts discussed in these works are subject to multiple interpretations and misinterpretations.
It is my contention that these intellectual giants provide insights into the nature of capital that have largely been misunderstood by investors, regulators, and policymakers. The result is that little progress has been made in effectively managing the boom and bust nature of free market capitalism, which in turn has caused capitalism to fall far short of reaching its full potential to contribute to the growth and welfare of human society.
That means, of course, that it’s absolutely vital to get a grasp on these authors to understand not only what is happening to us right now, but what will inevitably happen later if we are not careful.
Here are the works I recommend by each one of these authors (as well as some additional resources for further study). I hope you find them useful.
Smith and Marx
The first two thinkers, Adam Smith and Karl Marx, stand at opposite sides of the ideological spectrum yet share an enormous amount of common ground. These philosophers remain two of the most insightful students of capitalism long after their work began to influence the world. Adam Smith saw capitalism as a force for good, while Marx saw it as a cause of conflict and abuse. Their work provides important insights into the characteristics that render capital inherently unstable and crisis-prone.
Smith and Marx speak to several of the key intellectual and moral underpinnings of our economic collapse. Both men describe markets governed by complex human relationships that at their basic level are strongly affected by people seeking social approbation. They also make powerful statements about the fact that human economic interactions, and the relationships between money and goods, are highly mediated. Their writings help to illuminate some of the forces that drive economic actors to behave in certain ways that are ultimately very harmful to the long-term interests of society. By better understanding the profound truths that Smith and Marx described, we can hopefully address some of these flaws more effectively as we work to design a more productive economic system that serves the interests of all of us, not just the most privileged among us.
- Adam Smith, The Wealth of Nations (New York: Random House, 2000)
- Adam Smith, The Theory of Moral Sentiments, Knud Haakonssen, editor (New York: Cambridge University Press, 2002)
For further study:
- James Otteson, Adam Smith’s Marketplace of Life (New York: Cambridge University Press, 2002).
- Karl Marx, Capital, Vol. 1 (New York: International Publishers, 1967)
- Karl Marx, The Eighteenth Brumaire of Louis Napoleon (New York: International Publishers, 1972)
- Karl Marx, Grundrisse (London: Penguin Books, 1973)
For further study:
- Francis Wheen, Marx’s Das Kapital: A Biography (New York: Grove Press, 2006)
- Francis Wheen, Karl Marx: A Life (New York: W.W. Norton & Company, 1999)
- Leszek Kolakowski, Main Currents of Marxism (New York: W.W. Norton & Company, 2008)
Keynes and Minsky
The last two thinkers wrote more recently and were particularly prominent in recent discussions surrounding the financial crisis of 2008. John Maynard Keynes and his most important modern interpreter, Hyman Minsky, understood the psychological aspects of capitalism as well as anybody who ever studied the system. In fact, Keynes may best be considered the greatest psychologist of economics, a mantle that Minsky assumed in warning of the dangers of financial instability. By focusing on the ways in which economic actors react to their environment, both men not only demonstrate great insight into human behavior but provide a road map for investors and regulators charged with navigating financial markets. Students of Minsky were undoubtedly the best prepared to recognize the unstable financing structures that led to the 2008 crisis, how these structures developed, and why such structures are endemic to the nature of capitalism and remain a serious threat.
John Maynard Keynes
- John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace & Company, 1964)
For further study:
- Hyman Minsky, John Maynard Keynes (New York: Columbia University Press, 1975)
- Hyman Minsky, Stabilizing an Unstable Economy (New Haven, CT: Yale University Press, 1986)
- Hyman Minsky, “The Financial-Instability Hypothesis: Capitalist Processes and the Behavior of the Economy,” in Financial Crises Theory, History & Policy, ed. Charles P. Kindleberger and Jean-Pierre Laffargue (New York: Cambridge University Press, 1982)