Felix Martin on Money (1)

I have just finished reading Money: The Unauthorised Biography by Felix Martin. He has an interesting comment about the disconnect between the disciplines of economics and finance.

From the moneyless economics of the classical economists, there evolved modern orthodox macroeconomics: the science of monetary society taught in universities and deployed by central banks.

From the practitioner’s economics of Bagehot, meanwhile there evolved the academic discipline of finance, the tools of the trade taught in business schools, used by bankers and bond traders.

One was an intellectual framework for understanding the economy without money, banks, and finance. The other was a framework for understanding money, without the rest of the economy. The result of this intellectual apartheid was that when in 2008, a crisis in the financial sector caused the biggest macro-economic crash in history, and when the economy failed to recover afterwards, because the banking sector was broken, neither modern macroeconomics nor modern finance could make head nor tail of it.

The answer to the Queen’s question – why did no one of the economist see it coming – is simple. Their framework for understanding the macro economy did not include money.

And by the same token, the question that many were keen to put to the bankers and their regulators – why didn’t they realise that what they were doing was so risky – also turned out to be simple. These frameworks for understanding finance did not include the macro economy.

It would have been comical, had it not ended in such a cataclysmic disaster.