And all I can do is roll with him.
I’m not especially well-versed in either orthodox or unorthodox economists, but I agree completely on the essential role of the entrepreneur in wealth-generation. Jim takes this point in the direction of reinforcing skepticism about the dominant policymaking paradigm at the moment, focused on things like aggregate demand rather than the congeniality or uncongeniality of the environment for entrepreneurship.
Myself, I’m inclined to believe that if you have a fiat currency, which should mean you can mitigate the impact of commodity-based external shocks on the supply of credit (which is the problem you run into with a commodity-based currency), you really do have to do your best not to create “artificial” shocks by keeping money “too” tight or “too” loose. That, in turn, is a problem “orthodox” economics is pretty much organized around trying to solve.
I want to take his point in a different direction. He and I may disagree about central bankers. But what about banker bankers.
If entrepreneurs are the motor that drives economic progress, capital is the fuel. And banks are (still) the central institution in the economy responsible for supplying that fuel. Their job is (still) to take savings and turn it into capital – and then allocate that capital.
But how do they allocate that capital?
Well, the dominant investing paradigm falls prey to exactly the mistake that Jim highlights in his post: the confusion of risk and uncertainty. Indeed, pretty much all of modern finance theory and practice is devoted to the project of measuring and managing risk. This professional predisposition to fear uncertainty and focus on risk is reinforced and magnified by our regulatory paradigm.
What this has meant in practice is that banks (and other institutional investors) all use the same tools to construct the same kinds of “optimal” portfolios so as to minimize risk. Of course, all this does is squeeze all the profit potential out of these kinds of portfolios. Competition, then, drives these same investors to use additional leverage and more sophisticated “risk-management” techniques to squeeze more profits out of this same compressed investment space. And so the bubbles grow until they burst.
Fifty years ago, banking was a sleepy profession, with easy hours, comfortable but not extraordinary salaries, and a professional culture that was anything but entrepreneurial. Now, it’s an extremely aggressive culture, but all of that aggressive, competitive energy goes into figuring out better ways to rig the same game. A lot of people think the solution is to go back to what banking was fifty years ago. I’m not sure that’s possible, and I’m pretty sure if entrepreneurship is as important to the economy as Jim thinks it is that it’s not optimal. Rather, we need bankers with more of an entrepreneur’s appreciation of uncertainty.
How to get there from here, though is something about which I’m afraid I’m uncertain.