The Concept of Trust and the Political Economy of John Maynard Keynes, Illustrated Using Central Bank Forward Guidance and the Democratic Dilemma in Europe

Abstract

Trust is an issue to which Keynesians and post-Keynesians have paid relatively little attention. However, properly understood it is an aspect of almost all activity, including key elements of socio-economic reality. Without trust, market exchange is at the very least problematic, if not impossible. Moreover, trust is intrinsic to a variety of issues with which Keynes, and subsequent Keynesianism have been concerned. In this paper we provide a general social theory conceptualisation of trust and then set out some of the areas where this concept resonates with the work of Keynes in terms of the role of conventions. Conventions quintessentially involve trust and that trust can be unstable, can be withdrawn and can require rebuilding. We illustrate this with reference to central bank policy and the Bank of England's introduction of Forward Guidance. Exploring the problem of trust in the context of banking also highlights a challenge for the continued relevance of Keynes' work. We now live in a neoliberal world and this provides a quite different context for state intervention than was previously the case. Keynes' work is now an argument for the alternative, and as such it requires more than a technical economic argument, it must also address the problem of trust in state policy-makers. We briefly illustrate the challenge this poses with reference to Europe.

Keywords::

• trust
• Keynes
• uncertainty
• conventions
• realism

Notes

¹ Trust has been a significant area of research in organisation theory for some time (see e.g., Kramer 2006; Zucker 1986).

² Consider how the problem of trust underpins issues in environmental economics—the tragedy of the commons, the work of Ostrom (2010), etc.—as well as game theory; whether in fact trust is reasonable and how this is reasoned out is at least implicit in game theory and is also investigated in neuro and experimental economics (e.g., Charness et al.2004; Cox 2004). Within social economics, the most significant work on trust has been done by those who work on aspects of the gift economy, and also issues of care and reciprocity; van Staveren, for example, contrasts heterodox and mainstream models of care (2004, contrast this with Baron 2013, who explores wage premiums in a more orthodox context). See also Davis (2003).

³ Note, this focus on judgement is one which places an emphasis on the existence of reasons as causes and notes also, as old institutional theory following Hodgson also claims, that behaviour may become routine in a certain sense but is always initially grounded in reasons and can be reconstructed in terms of particular forms of reasoned conduct. This focus, however, does not address certain kinds of primary relationships where trust may well be blind (up to some significant threshold), such as the parent–child relationship (we thank Robert McMaster for this point).

⁴ Edited minutes from MPC meetings are published with a short delay. The August 2013 meeting minutes include dissenting comments from Martin Weale concerning the conditionality and construction of Forward Guidance. In a speech to the national Institute for Economic and Social Research, December 2013 Weale also states: “If Forward Guidance has done no more than codify what people had expected the MPC to do anyway then its [real/additional effects] should be expected to be small.” Note also that matters regarding asset bubbles and financial stability are the remit of the Bank's Financial Policy Committee and not the MPC; as such, there is a further problem of institutional integration regarding decision making created by Forward Guidance.

⁵ This had caused sufficient concern at the Bank that the Court of the Bank of England commissioned FED researcher David Stockton in 2012 to produce an analysis of the Bank's forecasting performance. This has also been followed up by Bank commissioned research by Andrew Wood at University of Essex 2013/14.

⁶ The rate of growth of employment without clear signs of wage growth or productivity growth then also exacerbated contemporary debate regarding the UK's “productivity puzzle”—economic growth appeared to be employment led rather than investment/productivity led.

⁷ There are of course new challenges: as former MPC member Andrew Sentence argues, central banks, incuding the Bank of England, have so far failed to state a clear and coherent strategy regarding how to unwind quantitative easing (Sentence 2013); the Bank of England has also failed to effectively encourage appropriate credit provision by banks for small and medium enterprises—the recent economic recovery seems to be despite rather than because of bank commitment to supporting investment. See also BIS, Monetary and Economic Department analysis (2013).

⁸ Consider also the basic contradiction created by reference to a “Minsky moment”. The term was first used by Paul McCulley, Managing Director of Pimco to refer to the 1998 Russian financial crisis as a post speculative market contraction. The term has gained traction since the GFC but is often used to refer to the periodic relevance of Minsky. However, Minsky's point is that the processes that result in financial problems are endogenous and continuous, i.e., that instability emerges out of the conditions of stability. The phrasing “Minsky moment” thus provides an inappropriate sense of the relevance and signfiicance of his work.

⁹ Keynes also discusses institutions in “The End to Laissez-Faire” (1972). Here he considers the need for ‘semi-autonomous bodies within the state. I thank an anonymous referee for this point.

¹⁰ Keynes also comments:

In my opinion it is a grand book. We all have the greatest reason to be grateful to you for saying so well what needs to be said … [M]orally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in a deeply moved agreement. (Keynes 1980: 385, emphasis added)

However, Keynes took great exception to Hayek's review of his Treatise noting “Hayek has not read my book with that measure of good will which an author is entitled to expect of a reader. Until he can do so, he will not see what I mean or whether I am right” (Skidelsky 1992: 456–457).

¹¹ Consider, for example, that the EU has a transparency register for organisations seeking to influence EU bodies, but registration is not mandatory. As of May 2014, the register had 6588 registrant organisations. According to the campaign working group Corporate Europe Observatory, there are at least 30,000 lobbyists working in Brussels (compared to 31,000 EU staff), there is a widespread problem of revolving door employment of MEPs with large corporations and many corporate interests dominate consulting and advisory committees for EU.

¹² In the EU Parliamentary elections of 2013, approximately 60% of the electorate did not vote, whilst of those who did, approximately 25% supported explicitly anti-EU parties.

Additional information

Notes on contributors

Jamie Morgan

Jamie Morgan is Co-ordinator of the Association for Heterodox Economics and is Co-editor of Edward Fullbrook Real World Economics Review, the world's largest circulation open access economics journal. Jamie has published widely in economics, sociology, philosophy and area studies. His current research interests include financial regulation, modern forms of slavery and ethics in economics.

Brendan Sheehan

Brendan Sheehan is a Senior Lecturer in economics and political economy at Leeds Beckett University. He is a member of the Association for Heterodox Economics, the World Economics Association and the Scottish Centre for Economic Methodology. Brendan has published monographs on the economics of J. M. Keynes and the economics of abundance. His research interests extend across all aspects of the economic dimension of the human condition, including different systems of global economy.