Robert Skidelsky on Niall Ferguson

There is a brilliant and insightful review of historian Niall Ferguson’s latest book "The Ascent of Money" in the current New York Review of Books. The author is Robert Skidelsky, whose own Keynes biography is one of my favorite reads of recent years.

Skidelsky’s review is generally very positive. There are, however, some caveats at the end, including the following where Skidelsky takes apart Ferguson a little for his flawed fondness for economics:

Ferguson realizes that mainstream economics is flawed, but then veers away to what I think is the dead end of "behavioral economics" and false analogies between financial evolution and Darwinian natural selection. Behavioral economics claims that we are "wired" to behave "irrationally"; theories purporting to derive from Darwinism claim that finance follows the law of the "survival of the fittest," whereby firms fitted to their environment flourish and weaker ones go to the wall — a process that inevitably involves "creative destruction." These attempts to explain the rise of money in terms of natural processes strike me as being both morally and philosophically naive.

Ferguson’s mistake, I suggest, comes from an incomplete appreciation of the role of money. Evidently money is more than just a facilitator of trades. It is a way of coping with changing views about an uncertain future. Why, Keynes asked, should any rational person wish to "hold money" rather than spend it? Precisely because it is a way of postponing spending when confidence is low and the "conventions" promising a secure future have broken down. Keynes writes:

…A final reflection on Ferguson as a historian. He is overimpressed by economics. Many historians feel that history is in some way inferior to the more exact sciences; the thought that he can "do" economics gives the historian an expanding sense of mastery. I know the feeling, because I’ve lived through it myself. Economics, especially in its mathematicized form, purveys a peculiar vision of society. Society to the mathematicians is a market imperfection. Among other imperfections, the idea is that allocation of resources is not as efficient and information for making choices is not as complete as they should be.

This delusive, but powerful, idea suggests that behind the imperfection lies perfection, a world in which the future will be perfectly known and therefore hold no surprises. Mathematics is the inheritor of the platonic ideal; and mathematically driven financial innovation is its handmaiden.

Read it all here.