The rigger's log

British Economist John Maynard Keynes has been hugely influential because of ideas he developed while studying the Great Depression, which was then ongoing.

His key observation was that when an economy has been dealt a severe blow, such that there’s mass unemployment and shuttered factories, then the economy if left to itself could take a very long time to recover. That’s simply because unemployed people spend as little as possible, and businesses only re-open factories or build new ones to meet rising demand for goods. Even if, as theory recommended at the time, wages and interest rates dropped to the point where many more people would be hired, those workers’ spending power would be too low to drive growth in the short or medium term.

Keynes proposed that in such a case, government could speed the recovery immensely by borrowing money (interest rates were low and business were not borrowing to build) and funding productive work. Workers would have money to spend for current consumption, and roads, bridges, schools, etc. would be built to make future growth more efficient.  When the recovery came around, the special projects would wind down and the government would use the increased tax revenues to pay down the debt.

Some people hated the idea, not least because it gave a very big role in the economy to government. Arguments have raged, and good and bad points have been raised.

Seven of the most common bad points are discussed by Mark Thoma in The Fiscal Times:

Seven Myths about Keynesian Economics

Megabanks are not our friends.

That probably sounds obvious to you. I know that there are no megabanks who would invite me over for dinner, nor I them. Same for you?

In economic theory, though, there’s an argument that megabanks, the largest dozen or so banks in the world, are somehow filling a macroeconomic niche, so that our whole economic ecosystem works more efficiently. It’s an Invisible Hand argument: the megabanks pursue their own interests, but we all benefit from the consequences.

That theory has been taking a thumping from many sides. Most of the arguments have been sociopolitical rather than econo-financial, but here’s a good presentation of the economic arguments against the megabanks, in the form of a rebuttal to a recent attempt at a rigorous defense of the super-sized. It’s a bit technical in spots, but I think anyone who keeps up with current events will be able to follow along. For the technically inclined, there are some good links for further reading.

Simon Johnson writes in the New York Times’ Economix blog:

The Case for Megabanks Fails

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There’s a joke among economists, “We can see that this works in practice, but we’re not sure it works in theory.”

Unlike in real sciences, economists hold on to theories long after the actual data has swept them aside.

A blogger offers a good example of a theory and the data that falsifies it.

Quote:

There’s a good reason why almost all major economies abandoned free market economics. It’s that such economies didn’t and couldn’t avoid mass unemployment.

Read the entire article here:

 UNEMPLOYMENT & THE FREE MARKET

I was recently sent a survey by a socially responsible investing (SRI) advising group, asking what approach I preferred for including or excluding fossil fuel extracting, refining, and marketing companies from SRI portflios. In a nutshell, the choices were 1) drop them all now, 2) drop them all soon, or 3) keep them all.

I’d have liked to have seen at least one question about trying to rank the fossil fuel companies from worst to best (least bad), and using conscious selection of ecologically better companies for candidates to include in the portfolio.
A set of ideas I learned from listening to prominent eco-activist groups is:

• You don’t have much influence on a company if you just wag your finger and say “You’re bad.” You give them no way to respond except to shrug.

• You can influence them by saying “We didn’t invest in you, but did invest in company X, because they follow policy Y and you don’t. If you adopt Y, you’ll be on the ‘includable’ list.”

• Keep the target moving forward. Whatever the most progressive practices in the fossil fuel industry are, push everyone to adopt them.

Eco-active groups have tons of data on who and which policies they dislike most, and why. I think we in the SRI corner of the investing industry need to start using that.

Another aspect is that I want this fund’s Social Responsibility definition to be free of b.s. and hypocrisy. As an individual and a founder setting the culture of a company, I make an effort to be a responsible consumer. At this point in our society, though, fossil fuels are woven into everything we do, even when we try to live a low-footprint life. For me, it doesn’t make sense to say “no fossil fuel companies, no way” when in fact I use fossil fuels every day. Instead, I try to use as little as possible, try to use greener energy when possible, and as described above, try to get the fossil fuel portion of my energy needs from companies that are at the leading edge of responsibility in their industry.

An easy example here is coal companies. Coal is by far the dirtiest, highest-CO2-producing fuel we available commercially. It also tends to be one of the dirtiest, most ecologically disruptive to mine. Coal companies would be off my “ok to invest” list until such (hypothetical) time as they can make “clean coal” a technological reality rather than a hollow misleading public relations slogan. They have a lot of work to do to get there.