The Institute of Ideas’ Economy Forum website has recently been updated to include a recording of my introduction to a discussion of Adam Smith’s The Wealth of Nations. Scroll down to view. There is also a recording of my earlier introduction on neoliberalism.

My review of Tyler Cowen’s Average Is Over: Powering America beyond the age of the Great Stagnation (Dutton) was published on the spiked review of books on Friday.

Suppose you go on a date and are faced with that perennially tricky question: does the other person fancy me? The answer is not always easy to gauge, particularly if wishful thinking clouds your judgment. Now imagine that, fortunately in this case, a solution is literally at hand. You discreetly reach into your pocket to check a device that scans the other person and tells you if you are in luck. No need to fear the potential awkwardness of rejection. For Tyler Cowen, a professor of economics at George Mason University, this is not the stuff of science fiction. As he reflects in his new book, Average is Over, artificial intelligence is advancing so fast that such a scenario is probably not far off.

Of course, the implications of artificial intelligence go far beyond dating. As early as 1997, the IBM Deep Blue machine beat Garry Kasparov, a chess grandmaster and arguably the greatest ever player, in a chess match. Now it is possible to download free chess programs that can decisively beat even the best human player. It is true that chess is, in some respects, relatively easy for computers to play, as it has clearly defined and unambiguous rules. But, Cowen argues, it will not be long before computers can manage trickier tasks. Google, for instance, has already devised a driverless car that in many situations operates better than if a human were at the wheel.

Cowen’s main concern in Average is Over is the impact technological advances could have on society. In particular, he argues that they will lead to even more social polarisation. The 15% or so of the population who are adept at using the new technology will thrive, he argues, while the remaining 85% will fall behind. He contends this shift will bring with it the end of the American dream, which, traditionally, means most people attaining the wealth and luxury of the middle classes. Social mobility will fall, he argues, as the boundary between the elite and the masses becomes firmer. Nor is it likely, he continues, that there will be any mass uprisings as a result of this new polarised society. Since the average age of the population has risen over the years, it is likely society will begin to view the bifurcation of America in quiescent style.

Google’s driverless cars are a prime example of the type of transformative technology to which Cowen attaches so much importance. He acknowledges they could allow people even more time to do what they want to do, including working or simply relaxing. On the other hand, they could put a large number of people who make a living out of driving, such as truck drivers, out of work.

Education is another area where Cowen sees advanced technology having a profound effect. Traditional teaching methods could be replaced by online instruction. This trend is already becoming apparent with such services as Coursera and Khan Academy. Cowen concedes that online teaching is not as good as the best face-to-face learning, but it has the important advantage of low costs. There is a parallel with the success of McDonald’s, where the food is way below the standards of the finest restaurants but, due to low costs, the hamburger chain can still thrive. However, what Cowen doesn’t acknowledge is that, while traditional teachers are likely to suffer as a result of the move to online learning, a new breed of coaches, highly skilled in motivational techniques, could prosper. This is a skill that cannot easily be delegated to machines. Hong Kong already has glamorous celebrity tutors, called ‘tutor kings’, who are good-looking and photogenic. Some reputedly earn as much as $1.5million (about £900,000) a year.

There are several reasons to question Cowen’s gloomy prognosis. For a start, he exaggerates the current pace of technological development. Despite the excitement around smartphones and other mobile devices, the overall pace of change is relatively slow at present.

Robert Gordon, a professor of economics at Northwestern University in Chicago, has clearly spelt out how the current round of innovation is slower than it has been previously. In a paper published in 2012, he argued that what he called the ‘second industrial revolution’, from 1870 to 1900, brought the widespread use of electricity, the internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals and petroleum to America. In his view, these innovations helped pave the way for productivity growth all the way up to 1972. In contrast, the ‘third industrial revolution’, from 1960 to present, has brought computers, the web and mobile phones. These are all important technologies, but they have not had the transformative effect associated with either the first or second industrial revolutions. Indeed, Cowen himself nodded towards this point in his 2011 book, The Great Stagnation, in which he argued that the ‘low-hanging fruit’ – the easy technological gains – had mostly been picked already. Although this is a narrow way to view the phenomenon, it does implicitly acknowledge that the rate of innovation has slowed.

In the context of slow innovation, it is also worth noting that even within the IT sector the pace of change is often exaggerated. In a paper published this year, Robert Gordon pointed out that industrial robots were produced by General Motors as far back as 1961. Of course, the latest generation of robots are much more sophisticated than those of half a century ago. But, as James Woudhuysen has previously argued on spiked, while the rate of adoption of such technology is rising, it is not rising as rapidly as is often assumed.

Another key weakness in Cowen’s argument is that he underestimates the structural inequality that has long characterised American society. It may be true that most Americans identify themselves as middle class, but it does not follow that the US is genuinely equal in economic terms. In that sense, he is wrong to claim that ‘average is over’ – it never existed in the first place. America’s ongoing economic inequality is indeed seen as inevitable, even by the slew of authors who have written books criticising it. All of the key critics of inequality – including Robert Reich, Joseph Stiglitz and Thomas Piketty – see it as inevitable and, indeed, necessary. The thrust of their criticism is simply that the degree of inequality has become too extreme. For better or worse, no significant figure is arguing that America could or should be a truly equal, that is classless, society.

The widening of inequality since the 1970s has more to do with the rise of finance than technological change. That is why it is ‘top inequality’ – the difference between the top one%, or even the top 0.1%, in terms of income and the rest of society – that has grown so starkly. Members of the top strata of society only receive a small proportion of their income from salaries. Instead, the bulk of their income comes from such sources as share options and cashing in on their investments. As a result, they benefit disproportionately from the rise of stock markets and property prices. That explains why top inequality has risen in parallel with the inflating of financial bubbles in many markets.

But the gravest flaw in Cowen’s argument lies in his core assumptions. He follows what could be called a hi-tech Malthusianism. In other words, he underestimates the capacity of human beings to transform their conditions. Thomas Malthus (1766–1834), an Anglican cleric and academic, argued in An Essay on the Principle of Population that population tended to grow faster than the food supply. Therefore, humanity was destined for a future of mass starvation and wars which would, in turn, keep population growth in check. With the benefit of more than two centuries of hindsight, it is clear that Malthus’s argument was woefully misplaced. The current world population is about seven times what it was when Malthus’s essay was first published, yet, on the whole, we are far better fed and have hugely higher living standards. The world is far from perfect, but people’s lives are overwhelmingly better than they were when Malthus made his dismal prediction. Yet, there was no problem with the internal logic of Malthus’s argument. If population growth did outstrip the food supply, it would indeed have awful consequences. Instead, the weakness of Malthusianism is its flawed premise: it underestimates the capacity of human ingenuity to overcome challenges.

Cowen makes a different version of the same error. He assumes that the adoption of advanced information technology must necessarily widen inequality. But it is hard to see why that would be the case. At least, in principle, high technology could lead to rising living standards for the bulk of the population, and perhaps even the narrowing of inequality. The rapid spread of mobile phones in Africa in recent years gives an inkling of this possibility. Mobiles are now common on a continent that had relatively few fixed-line phones. Indeed, mobile-payment systems in Africa are now widely regarded as more advanced than those in Europe.

Average is Over is a flawed book. It overstates the extent to which America could, in the past, be described as a truly middle-class society. It also overestimates the actual progress of technology in recent decades, while underestimating its potential to benefit all. A more thoroughgoing adoption of advanced technology still holds the possibility of improving our lives; it can, in principle, boost prosperity, improve communications and eliminate drudgery. Whether or not it achieves these goals is up to us.

With inflation dipping down to only 0.5% in March there is much speculation about whether the European Central Bank (ECB) will finally embrace quantitative easing (QE). The pundits are busy pondering whether it will belatedly follow other central banks in taking unconventional monetary measures to stave off deflation. This is a misleading way to discuss the question.

As Open Europe, a think tank, has pointed out two factors have prompted the excitement about QE. Most importantly a speech by Mario Draghi, the ECB president, talked of using “unconventional instruments” and in the subsequent discussion he confirmed this included QE. There was also a report in the Frankfurter Allgemeine Zeitung, an influential German newspaper, saying that the ECB is modeling the impact of QE of €1 trillion (£820 billion) a year.

Those who are puzzled by the ECB’s apparent hesitancy should remember that eurozone rules officially prohibit the use of QE. Article 123 of the Treaty on the Functioning of the European Union forbids the ECB’s direct purchase of newly issued government debt.

There is some sense to this rule as it prevents the authorities from monetising their own debt. That is the government issuing debt which is then purchased by the central bank. Such a process can be beneficial in the short term, helping to at least postpone a slump, but in the longer term it can have damaging effects. The most widely discussed of these is rampant inflation but in recent times it has mainly helped governments to avoid tackling fundamental weaknesses such as low investment. Monetisation in effect simply stores up bigger problems for the future.

What most of the current discussion misses is that the ECB has long practiced what is known as “back door QE” or “QE in disguise”. This was apparent as far back as 2011 when the ECB encouraged banks to buy government debt. In effect it lent money cheaply to the banks so they could more easily profit from such transactions. This process is known as the longer-term refinancing operation (LTRO).

Back door QE was extended in August 2012 when the ECB announced the introduction of outright monetary transactions (OMT). These involved the purchase of government debt in the secondary markets although the central bank still avoided purchasing new issues.

Of course the exact impact of these schemes differs from those implemented by the Federal Reserve or the Bank of England. As far back as 2012 a study noted that the ECB’s balance sheet had increased massively but, unlike with its peers, much of the liquidity was parked in overnight deposits. The fact that the eurozone is a monetary union rather than a sovereign state also inevitably complicates the operation of QE.

Nevertheless all the main western central banks, including the ECB, are involved in a dangerous game. They may not admit it but they are in effect helping to monetise their own sovereign debt. The government is issuing debt which is then, through direct or indirect means, purchased by the central bank.

In effect the authorities are conducting an experiment in alchemy. They are passing money from one hand to another in the hope that underlying economic weaknesses will magically disappear.

This blog post first appeared today on Fundweb.

I will be debating Nick Dearden, the director of the World Development Movement, at the national conference of ResultsUK on Saturday 10th May. The event is on the weekend of 10th-12th May at St Lukes Community Centre, Old Street, London.

This is the text of a box within my latest Fund Strategy cover story on Japan.

Tensions between Japan and its regional neighbours represent one of the greatest threats to any positive scenario for the country’s recovery. Strains in Asia more generally represent one of the gravest threats to global stability.

The rows between Japan, on the one hand, and China and South Korea on the other, often take the form of disagreements over history. Both these neighbours of Japan were furious when Shinzo Abe, the Japanese prime minister, visited the Yasukuni shrine to Japan’s war dead in December.

The angry exchanges over the shrine show how differently the two sides perceive such affairs.

From the perspective of Japan’s leadership the prime minister’s visit was a straightforward matter of honouring all of its war dead. They saw it as in a way roughly akin to the ceremony at the Cenotaph on Remembrance Sunday in?the UK.

In contrast, China and Korea saw the Japanese leader’s visit to the shrine as a gross insult to their war dead. In their view, Abe was showing respect to, among others, Class A war criminals. In the eyes of Japan’s neighbours, Abe had failed to demonstrate remorse for the millions of people Japan killed during its occupation of their countries in the first half of the 20th century.

There is also an angry dispute over what Japan calls the Senkaku islands and China calls the Diaoyu. Japan took control of the islands in the Sino-Japanese war of 1894-5 but China is insisting increasingly loudly that it wants them back.

Although the details of the historical disputes are obscure, the contemporary consequences are all too real. Andrew Rose, a Japan fund manager at Schroders, acknowledges that such rows “could have an economic impact in the short term”.

He points back to 2011 and 2012 when Japanese exporters suffered as a result of Chinese boycotts of their goods over the island dispute. Consumer brands, such as Canon, were particularly hard hit,

There is even the prospect, although fortunately it does not appear to be an immediate one, of military skirmishes. Both sides are bolstering their already formidable military machines.

There are even reports, though some dispute them, of the Chinese planning a swift military operation to seize the islands.

To make matters worse, the row between Japan and its neighbours is only one of a complex set of tensions in the area. Many other Asian nations, particularly the Philippines and Vietnam, feel threatened by China’s growing power. Meanwhile, America is concerned that China will become the dominant military force in the region.

These tensions have a knock-on effect on Japan. The Japanese authorities are concerned that America may not be willing to protect it against external threats, particularly from China, under the terms of the US-Japan security treaty.

Japan cover story

8 Apr 2014

This is the main text of my recent Fund Strategy cover story on Japan’s experiment with “Abenomics”. Note that I had to be a guarded in expressing my own opinion as my brief was to write a feature based on the views of others.

Three arrows held together cannot be broken, according to a Japanese folk tale. That is the inspiration behind ‘Abenomics’, Shinzo Abe’s radical three-pronged reform policyfor the country’s economy. A year on from its launch, how well is the policy working?

Perhaps the most striking figure illustrating the recent plight of Japan is 38,957. That was the record high for the Nikkei 225 stockmarket index achieved way back on the last trading day of 1989. In contrast, at the time of writing, nearly a quarter-century later, the index stood at only about 15,000.

To be sure, the steepest falls were in the early 1990s, with the Nikkei already trading at about its current level in 1992. Since then the index has risen above 22,000 at its height and just topped 7,000 at its lowest. So those investors who have bought and sold at the right time have made a lot of money while others have suffered heavy losses. However, the market has not enjoyed a clear upward trend for almost 25 years.

Of course, equity prices do not translate directly into economic performance. But in Japan’s case the economy has performed relatively poorly from the 1990s onwards. Japan’s nominal GDP this year is at about the same level as it was in the mid-1990s.

Japan remains a relatively rich country despite more than two lost decades. In terms of GDP per head, it is at about the same level as Britainf. But if Japan’s stellar growth rate of the 1980s had continued the country would by now have the largest economy in the world by far. It is all too easy for observers today to forget that until the 1990s Japan was considered easily the most dynamic of the large economic powers. As events have turned out, it is not only smaller than America in economic terms but China has overtaken it.

This extended period of economic stagnation provides the backdrop for what has become known as ‘Abenomics’. That is the policy of ambitious economic reform pursued by Shinzo Abe, the Japanese prime minister, since late 2012. In his favoured term the programme consists of three ‘arrows’: monetary policy, fiscal policy and structural reform.

The terminology comes from a Japanese folk tale in which a father shows his sons that three arrows held together cannot be broken. In other words, the three arrows represent complementary components of a strong reform package.

This article will examine the impact of Abenomics on the economy and asset prices with the benefit of more than a year’s worth of hindsight. It will start by examining the forces driving Japan towards radical economic reform. Then it will consider the impact of the three arrows of Abenomics. In conclusion, it will consider the likely impact of the strategy over the coming years.

Driving force

More than two decades of economic stagnation provide the context for the introduction of Abenomics. The Abe government is intent on wrenching Japan’s economy out of its deflationary spiral and bolstering asset prices in the process.

This raises the question: why now? Japan’s leaders could have taken decisive action five, 10 or even 15 years ago. Instead, they waited till the end of 2012 before committing to the move.

One possible answer to this puzzle is that Japanese governments have not had strong mandates until recently. The country had five prime ministers between September 2007, when Abe ended a year in office, and late 2012. For just over three years of that time the Democratic Party of Japan was in office. Then, in 2012, Abe’s Liberal Democratic Party (LDP) was elected with a substantial majority. Its rule was further consolidated when it won elections to the upper house in July 2013. Barring any dramatic developments, the LDP looks set to dominate Japanese politics for several years.

For some observers this political shift is sufficient to explain Abenomics. The government is finally introducing radical reforms because it is in a position to do so.

However, others have argued that there is another element at work. Japan has finally got round to implementing a decisive economic programme because of the perceived threat from China. For Japan’s leaders the country needs to be strong enough both to weather Chinese economic competition and to deter any potential military confrontation. In that sense the programme is said to be a return to the Fukoku kyohei (rich country, strong army) policy of the late 19th century.

From that perspective, Abe’s hawkish attitude to history (see box on tensions with Asia) is closely tied to Abenomics. Both are designed to ensure that Japan maintains what it regards as its rightful place in the world.

Three arrows

The first of Abe’s arrows is aimed at monetary policy. Both the government and the Bank of Japan are intent on substantially increasing the money supply in an effort to head off the deflation that has plagued Japan for many years.

Behind this policy is the idea that Japan is stuck in a liquidity trap. In other words, falling prices create a disincentive for Japanese consumers to spend. Why pay, say, a million yen today for something that will cost less tomorrow and even less the day after?

The idea that this is Japan’s main challenge goes back at least to 1999 when Paul Krugman, a US economist, who has since won a Nobel prize, published a book called The Return of Depression Economics. In his view, Japan needed to avoid deflation by pursuing a monetary stimulus. It has taken the Japanese authorities 14 years to embrace his ideas, but now they are pursuing them in earnest.

Judging by the headline figures, the policy seems to be successful. Core inflation in 2013, which excludes fresh food, was up 1.3%. Japan seems to be moving towards its recently declared 2% inflation target.

However, on closer examination the result is not so clear cut. Part of the rise is the result of a one-off increase in energy prices. Since the yen has fallen sharply, the local cost of energy, of which Japan imports most of its requirements, has surged. But the increase is not likely to be sustained in the years ahead. In other words, its contribution to overall inflation looks set to fall.

Andrew Rose, a Japan fund manager at Schroders, says a rise in people’s earnings is vital to the success of Abe’s monetary policy.

“The key is for that inflation to be more embedded,” he says. “That comes down to whether wages will pick up”.

Asset prices have enjoyed an indisputable surge as a result of monetary expansion. The Nikkei 225 performed remarkably strongly in local currency terms in 2013 although, with the falling yen, not nearly as well when expressed in terms of foreign currency. Much of the rise happened in the first half of the year, when Abenomics enjoyed its great impetus. Meanwhile, yields on Japanese government bonds (JGBs) are remarkably low, with 10-year yields at only about 0.6% at the time of writing.

If the monetary policy is relatively straightforward, at least in principle, the fiscal policy is the opposite. In its initial phase the idea is to bolster public spending as a way of complementing the monetary boost. That is why Japan implemented two supplementary budgets in 2013.

However, over the slightly longer term the idea is to rein back the fiscal stimulus. That is because Japan has an enormously high level of public debt that dwarfs even the levels in Greece. The comparison is not exact because domestic investors hold most JGBs whereas foreigners own a lot of Greek debt. Nevertheless, the Japanese authorities are intent on reducing government debt levels over the medium-term.

This reverse course in fiscal policy is scheduled to start in April with an increase in Japan’s equivalent of VAT. For investors, the reaction to this move will be particularly important to watch. If the economy or markets get spooked, the authorities could well take counteracting measures such as introducing a new stimulus package.

Perhaps the most difficult arrow of the three to gauge is structural reform. That is because it includes a hotchpotch of policies, including measures relating to agriculture, energy supply, immigration and the labour market.

John-Paul Temperley, a Japan fund manager at Martin Currie, describes it as “a very disparate collection of other policies”. The idea is that these reforms will help make the Japanese economy more productive.

It is widely accepted that, so far at least, Abe has not gone far in putting these structural reforms into action. Abenomics in this area consists more of a statement of intent than practical measures.

Optimistic observers take the view that such reforms take time to implement. Schroder’s Rose says: “Structural reform doesn’t happen over night.” He points to the example of Margaret Thatcher’s reforms in Britain in the 1980s to show that such change can take time.

Nicholas Weindling, a Japan fund manager at JP Morgan in Tokyo, takes a similar view. “Taken overall, it’s going much better than anybody would ever credit.” From such a perspective, it is far too early to judge Abenomics either a success or a failure.

For the pessimists, in contrast, the reforms are either long overdue or they miss the point.

Charles Dumas, the chief economist at Lombard Street Research, argues that Japan has steadily lost competitiveness in recent decades. “Thirty years ago, what did you buy? It would have been a Honda Accord, a Nintendo Game-Boy, a Sony Walkman, a Sharp fax machine or any number of Japanese hi-fi makes. Now, you do not buy Japanese things unless they price their way into the market by being cheaper.” (Daily Note, 20 December 2013).

In Dumas’s view, Abenomics is likely to make Japan’s plight worse rather than better, only perpetuating the featherbedding of Japanese companies. Cash-rich corporates are already enjoying further benefits, he notes, while cash-strapped households are being squeezed even harder.


As time goes by, it will no doubt become easier to assess the success or otherwise of Abenomics. At this point those who accept that a liquidity trap is Japan’s main economic challenge are likely to be upbeat. It is hard to believe the Japanese authorities cannot stoke up inflation if they really put their minds to it.

As Willem Verhagen, a senior economist at ING Investment Management, says: “If you want to end deflation, at least in theory you can always do so.” The challenge could be keeping inflation under control if they take such drastic measures.

Those who emphasise the importance of structural reform are likely to be more downbeat. Judging by their record, the Japanese authorities look set to move extremely cautiously in this area.

Equities are likely to benefit from the continuing monetary boost in the immediate future. The Japanese authorities are also taking measures that should help shore up equity prices. They have already introduced the Nippon Individual Savings Account, or Nisa, based on Britain’s Isa. Millions of Nisa accounts have been opened since the start of the year. Soon an Individual Retirement Account (IRA), designed to encourage longer-term savings, will be introduced.

Of course, some opportunities will be more attractive then others. JP Morgan’s Weindling points out that consumer electronics brands such as Panasonic, Sony and Toshiba have lost out to foreign competitors such as Apple and Samsung. In contrast, Japan is a world leader in robotics, while the ageing population also provides a theme that investors can play.

Overall, those fund managers who are willing to brave the Japanese stockmarket are guardedly optimistic about its prospects for the next year or two. Although they do not expect a repeat of the stellar performance of 2013, they see the potential for significant gains.

Global fund managers are heavily committed to Japanese equities, according the Bank of America Merrill Lynch. A net 30% were overweight Japan in January.

Whether or not the stockmarket fulfils its expected potential over the coming months, the economic impact of Abenomics remains far from certain.

My latest Fund Strategy column examines the worrying trend towards slower economic growth in emerging economies. By coincidence the World Bank today revised downwards its forecast for growth in East Asia.

A disturbing new tag has become attached to the emerging world in recent months. The term “fragile five” has started to compete with Brics and Mints as a label for a distinct group of developing economies.

Morgan Stanley, an investment bank, is usually credited with coining the term in a paper published in August 2013. It referred to the five EM economies with large current account deficits – Brazil, India, Indonesia, South Africa and Turkey – which had recently suffered market turmoil. Their currencies had fallen, stockmarkets plummeted and bond yields surged.

Although the term was new, the initial talk of tapering by America’s Federal Reserve last May precipitated much of the concern. The fear was that the Fed’s tightening of monetary policy would attract capital back to America from the emerging world. As a result, countries with large current account deficits would suffer

After the initial damage, the Fed moved to reassure the markets. It emphasised that tapering meant a gradual slowdown in the rate of quantitative easing rather than an end of its easy money policy.

Nevertheless, the Fed had inadvertently highlighted the vulnerabilities of key emerging economies. Each one had to hike interest rates to stabilise the markets and all face challenges with elections due this year.

This is a long way from the upbeat view of emerging economies exemplified by the talk of Brics (Brazil, Russia, India and China) since Jim O’Neill of Goldman Sachs, an investment bank, coined the term in 2001. The label was never just about those countries themselves; it helped convey the idea that the emerging economies as a whole were growing more rapidly than the developed world.

The more recent use of the term Mints was meant to apply this optimism to a second tier of large – as opposed to gigantic – economies: Mexico, Indonesia, Nigeria, Turkey and South Africa.

The sharp-eyed will have noticed some overlap between the fragile five and the other two categories. This suggests two related trends rather than one distinct development. First, growth in the emerging world as a whole is slowing down. International Monetary Fund (IMF) figures show that GDP growth in those countries fell from 7.5% in 2010 to an estimated 4.5% in 2013 – the lowest since 2001 apart from a dip in 2009 following the global crash.

Even China seems to have lost its edge, recently announcing a GDP growth target of 7.5% for 2014 – substantially below the average rate in recent decades.

But the Chinese economy is in better shape than those of the fragile five, having long enjoyed a current account surplus. This contrast points to the second key trend – some developing countries seem to have acquired major structural problems. They are not just suffering from contagion as a result of unwise comments from the Fed. More fundamental forces are at work.

A recent paper by the Federal Reserve Bank of San Francisco (FRBSF Economic Letter, 3 March 2014) highlighted this development, noting that “a country’s domestic economic conditions, together with its relative internal and external imbalances, are likely to have influenced the relative severity of retrenchment in capital flows following the news about Fed tapering”.

Indeed, the importance of internal domestic factors was already hinted at in the earlier Morgan Stanley paper. According to author James Lord: “Currencies will be held back by high inflation, large current account deficits, challenging capital flow prospects and potentially weak emerging growth. The prospective normalisation of Fed monetary policy simply exacerbates these underlying fundamental weaknesses.”

If anything, these two authors understated the challenges facing the emerging world. External volatility originating in developing countries has merely added to their problems.

This is bad news for the global economy, pointing to lower growth overall and the potential for high volatility in some markets. It looks like a bumpy ride ahead.

I am delighted to be speaking on the opening keynote panel at the Liberty League Freedom Forum in London next weekend. Tickets are available here.

Economics may have ignored financial markets in the past but it has gone way too far in the opposite direction. Nowadays finance has become an obsession while there is little talk about the real economy.

I was reminded of this trend while listening to a recent BBC Radio 4 Analysis programme presented by Duncan Weldon. At the time the documentary was made he was a senior economist at the Trades Union Congress but he has recently been appointed to the role of economics editor at the BBC’s Newsnight programme.

The appointment brought predictable howls of outrage of left wing bias from publications such as the Daily Mail. Less commented upon was the fact that Weldon was evidently once a partner in a small fund management firm.

The focus of the programme was the work of Hyman Minsky, a heterodox American economist who died in 1996. He is best known for his financial instability hypothesis. Essentially this argues that stability creates conditions of instability.

Minsky essentially saw finance as going through three stages. In the first there is caution about lending as financial institutions remember the excesses of the past, then banks gain confidence as the economy expands, finally it reaches a “Ponzi” stage of speculative excess. Eventually the bubble has to burst before the cycle starts all over again.

In the aftermath of the financial crisis of 2008-9 the deceased economist has gained a new respectability. Janet Yellen, recently appointed as chairman of the Federal Reserve, gave a positive speech on Minsky back in 2009. The Analysis programme also included positive comments from Laurence Meyer, a former Fed board member and once a colleague of Minsky, and Adair Turner, a former chairman of the Financial Services Authority.

Minsky’s work has also found favour among prominent academics. Steve Keen, a professor of economics at the University of Western Sydney, and Wendy Carlin, a professor of economics at University College London, both praised his insights.

Two conclusions can be drawn from this sketch. First, Minsky’s hypothesis is strictly speaking not a theory at all. It is simply a description of the stages finance can go through in a boom and bust cycle. It does not even attempt to explain why finance has become so much more important in recent years. Nor does it probe the nature of the relationship between finance and the real economy.

Second, although Minsky’s theories were once considered unorthodox the central banking establishment has felt comfortable adopting them. As Adair Turner notes on the programme the hypothesis leads naturally to policy conclusions such as the need for more rules and macroprudential regulation.

This turn leads to a hypothesis of my own. We have apparently entered a peculiar world where the outlook of the state functionary is viewed as left wing. Although Minsky was an academic his essential concern was how the authorities could manage financial instability. He wrote a tract that naturally appealed to the preoccupations of central bankers.

This is a long way from the traditional left wing project of transforming society. The spectre of Duncan Weldon presenting items on Newsnight need not haunt even the most conservative BBC viewers.

This blog post was first published yesterday on Fundweb.

My profile of Petter Stordalen, an anti-capitalist billionaire from Norway, was published in Financial Times Wealth on Friday. The original link can be found here.

Is it possible to be an anti-capitalist billionaire? Many would assume the question is absurd. Surely the greatest beneficiaries of the market economy should be its staunchest supporters?

Not so fast. There are several examples of the fabulously wealthy going on record as having deep reservations about capitalism. George Soros has written extensively of “the capitalist threat” to what he calls the Open Society and excoriated those he dubs “market fundamentalists”. Others, such as Jeremy Grantham, have argued that capitalism could destroy us all by destroying the environment.

No doubt some cynics would dismiss such pronouncements as spin. But why would billionaires feel the need to make such statements if they were not sincere? They are not under any particular pressure to do so. There seems to be something deeper going on.

Petter Stordalen, a Norwegian hotel owner and investor, is unusual even for an anti-capitalist billionaire. Not only has he made many public pronouncements, particularly on environmental matters, but he has also taken part in protests. In 2002, he joined a group of Norwegian activists to protest against the UK’s Sellafield nuclear reprocessing plant. In 2007, he was charged with trespassing after he entered a restricted area at Malmøyakalven, an island near Oslo, to protest at the dumping of toxic mud.

But Stordalen’s green outlook also permeates his working life. This is apparent from his business card, which reads “there is no business on a dead planet”. “For me it’s that simple,” he says. “If we don’t take responsibility when we run our businesses our planet will go straight to hell.”

In practical terms this means that, among other things, smoking is banned, even in guest rooms, in his Nordic Choice Hotels in Scandinavia and the Baltic. Nor is pornography available on pay TV. The hotels have meat on the menu, but guests are encouraged to go for healthy eating options if possible.

Stordalen gives two sets of reasons for promoting a green outlook. In his view, science shows the planet and its people are at risk if they fail to respect natural limits. Although the current generation might survive, the lives of future generations are at stake. He also argues green thinking is good for business as it helps promote efficiency. Stordalen sees no conflict, at least over the long term, in these two strands of thought. “What is good for society is also good for business,” he says.

Yet Stordalen was not born into an environmentalist background. His attachment to the outlook originated with practical concerns. “It started when we started to look at energy,” he says. “We wanted to save energy because we wanted to save money.” It was only later that he came to see the environment as important for its own sake.

His wife Gunhild, who is a medical doctor and holds a PhD, has played a crucial role in shaping his thought. The former model co-founded the Stordalen Foundation, which supports sustainability initiatives, and runs GreeNudge, which promotes behavioural change to combat climate change.

Given the usual trappings of the billionaire lifestyle it is inevitable that the Stordalens are open to charges of hypocrisy. No doubt deep greens would argue it is impossible to square concern for the environment with owning a big house and several fast cars.

Stordalen describes himself as a “techno optimist” who has a duty to promote new technology as a catalyst for change. He bought two of the first Tesla electric cars in Norway and his Ferrari runs on biofuel. Another initiative was an investment in Think Global, an Oslo-based electric car company that has since ceased production. “Don’t ask about the financial results,” he says. “It was a disaster.”

Of course, it is possible to be an environmentalist without being anti-capitalist, but the two are more closely related than is often realised. If the planet is viewed as facing an existential threat as a result of the pursuit of profit, it suggests a fundamental flaw in the market. For instance, in the words of the Stern Review, a landmark study produced for the UK government, climate change “is the greatest market failure the world has ever seen”.

For Stordalen, as for many others, the challenge is to replace naked capitalism – sometimes called the neo-liberal model – with a more sustainable version. “The capitalism I see today is in a kind of crisis,” he says. “I want to see a capitalism that manages resources in a new, much more long-term manner.” This means business people taking on green values and governments being willing to engage in stricter regulation.

This is a world away from the politics of Karl Marx or Leon Trotsky. It seeks to curb what it regards as the excesses of the market economy, rather than erect a different social system, and it does indeed stretch into the world of billionaires.