Sunday, August 30, 2009


One of the things that I am very proud of is being able to assist, albeit in modest ways, young and upcoming artists. I am member of the Advisory Board of Tanzania House of Talent - an organisation that provides home, refuge, mentorship and training for young people who desire to be performing artists. The successes of THT since its founding are evident. Praise go to Ruge and Seba who founded it and Rebecca Young who is running it on day to day basis.

It is heartwarming to see young kids coming to THT with absolutely nothing but determination to succeed, but now have houses, cars, and steady income. One of these kids is Marlaw. When Marlaw stepped into the doors of THT (straight from Iringa) few years ago, he distinguished himself for discipline and humility, and of course talent and quiet ambition.

And he has succeeded. Now, he is fully booked until end of September. His song PiiPii is now an anthem in Dar. But, for me, this tune, Rita, recorded last year, is the best....and the story is heartbreaking. The production was done by the talented Marco Chali and the video was made by my friend Adam who has moved videography in Tanzania to the next level. Enjoy!

Friday, August 28, 2009

The Idea of Justice

Book Review: The Idea of Justice by Amartya Sen

The Times of London

Polymathic brilliance among scholars is now generally agreed to be a thing of the past. The advance of knowledge means that providing intellectual leadership in economics, political theory and ­philosophy, as John Stuart Mill did, is not possible. Academics need to pick a subject and burrow into it as deeply as possible. But someone forgot to tell all this to Amartya Sen.

An accomplished mathematician, a brilliant economist (he won the Nobel prize in 1998) and now a giant of contemporary philosophy, Sen has also worked for the UN on human development. As a young man, he kicked off by reshaping welfare economics. One of his earliest and most famous claims was that famines do not occur in properly functioning democracies with a free press, because the pressure of public opinion forces the fairer distribution of food. As so often with great public philosophers, a childhood experience profoundly shaped his outlook. As a nine-year-old, Sen witnessed first-hand the 1943 Bengal famine, when hundreds of thousands died in the British colony under the cover of a news blackout.

Democracy, especially in the shape of public argument and debate, plays a key role in Sen’s latest work. Public reasoning is the “primary hero” of The Idea of Justice. It is up to individuals to determine their own course through life, based on their own reasoning and reflection — in this sense Sen is an indefatigable liberal — but the tackling of injustice and the shaping of progress rely on a constant, engaged public conversation. For Sen, democracy is not, at heart, a set of institutions and rules. “The working of democratic institutions, like that of all other institutions,” he writes, “depends on the activities of human agents.”

It is clear that this volume is intended to be the “Essential Sen”. All the primary themes of his previous five and half decades of work are here, in synthesis. For those who know Sen’s work well, there is a strong sense of déjà vu about many of the chapters. But anybody sufficiently motivated to have read Inequality Re-examined or the doorstop treatise Rationality and Freedom will probably not mind.

The Idea of Justice, though, wouldn’t be a book from Sen if it did not also provide something fresh. And the most important new intel lectual notion here is a working through of the fundamental distinction between two competing approaches to justice.

Most modern political philosophers are concerned with finding the right rules, institutions and social contracts for a just society. This school of thought — dubbed “transcendental institutionalism” by Sen — found its greatest 20th-century exponent in John Rawls, who built on foundations laid by Kant and Rousseau.

Sen characterises the institutionalists as engaged in a “long-range search for perfectly just institutions”, and a hunt for “spotless justice”.

For Sen, these philosophies are ultimately regressive, because societies full of actual human beings will never agree on a final, perfect set of institutions and rules. He quotes his old friend Bernard Williams, who wrote that “disagreement does not necessarily have to be overcome”. More immediately, the search for a perfect set of arrangements for society can distract us from tackling real-life, immediate injustices such as access to education for women in the developing world or action on climate change. The perfect becomes the enemy of the good.

The competing vision of justice Sen prefers is a “comparative” one, which examines “what kind of lives people can actually lead”. The heroes of the comparative pantheon are Condorcet, Wollstonecraft and Mill. For them, as for Sen, abolishing slavery or giving women the vote would free people to lead lives of their own choosing, even without creating a perfectly just society. The keystone of judging the lives people can actually lead is an assessment of what Sen has labelled their “capabilities” — or, as he explains, “the power to do something”.

Freedom, in Sen’s eyes, does not consist merely of being left to our own devices. It also requires that people have the necessary resources to lead lives that they themselves consider to be good ones. The focus on the individual has led some critics to accuse Sen of “methodological individualism” — not a compliment. Communitarian opponents, in particular, think that Sen pays insufficient regard to the broader social group. In response, Sen — usually an unfailingly courteous writer — becomes a bit cross. He points out that “people who think, choose and act” are simply “a manifest reality in the world”. Of course communities influence people, “but ultimately it is individual valuation on which we have to draw, while recognising the profound interdependence of the valuations of people who interact with each other”.

Nor is Sen easily caricatured as an egalitarian: “capabilities”, for example, do not have to be entirely equal. Sen is a pluralist, and recognises that even capabilities cannot always trump other values. Liberty has priority, Sen insists, but not in an absurdly purist fashion that would dictate “treating the slightest gain of liberty — no matter how small — as enough reason to make huge sacrifices in other amenities of a good life — no matter how large”.

Throughout, Sen remains true to his Indian roots. One of the joys of the volume is the rich use of Indian classical thought — the debate between 3rd-century emperor Ashoka, a liberal optimist, and Kautilya, a downbeat institutionalist, is much more enlightening than, say, a tired contrast between Hobbes and Hume.

Despite these diverting stories, the volume cannot be said to fall into the category of a “beach read”: subtitles such as “The Plurality of Non-Rejectability” provide plenty of warning. But for those who like their summer dinner tables to be filled with intelligent, dissenting discourse, the book is worth the weight. There’s plenty here to argue with. Sen wouldn’t have it any other way.

The Idea of Justice by Amartya Sen
Allen Lane £25 pp496

Monday, August 17, 2009

Economist: Asia's astonishing rebound

the Chinese govt just announced that they would focus on maintaining growth rather than reducing inflation. That means they'll keep buying US debt to allow them to maintain the renminbi peg where it's at now.

Re: dollar as reserve currency...where would FCB's put their money other than the US? Euro...I don't think so...EU has worse deficits, bigger inflation problem, and is recessionary, along with demographic time bomb. Yen...nope...everyone's been shorting the yen and yields on JGB's are zilch. Plus Japan's national debt is sky high.

Interesting article on this week's Economist.

IT NEVER pays to underestimate the bounciness of Asia’s emerging economies. After the region’s financial crisis of 1997-98, and again after the dotcom bust in 2001, outsiders predicted a lengthy period on the floor—only for the tigers to spring back rapidly. Earlier this year it was argued that such export-dependent economies could not revive until customers in the rich world did. The West still looks weak, with many economies contracting in the second quarter, and even if America begins to grow in the second half of this year, consumer spending looks sickly. Yet Asian economies, increasingly decoupled from Western shopping habits, are growing fast.

The four emerging Asian economies which have reported GDP figures for the second quarter (China, Indonesia, South Korea and Singapore) grew by an average annualised rate of more than 10% (see article). Even richer and more sluggish Japan, which cannot match that figure, seems to be recovering faster than its Western peers. But emerging Asia should grow by more than 5% this year—at a time when the old G7 could contract by 3.5%. Western politicians should brace themselves for more talk of economic power drifting inexorably to the East. How has Asia made such an astonishing rebound?

Out of smoke and mirrors, say some Western sceptics. They claim China’s bounceback is yet another fake. The country’s numbers are certainly dodgy: the components of GDP do not add up, and the data are always published suspiciously early. China’s economy probably slowed more sharply in late 2008 than the official numbers suggest. But other indicators, which are less likely to be massaged, confirm that China’s economy is roaring back. Industrial production rose 11% in the year to July; electricity output, which fell sharply last year, is growing again; and car sales are 70% higher than a year ago.

And surely the whole of Asia cannot be engaged in a statistical fraud. South Korea’s GDP grew by an annualised 10% in the second quarter. Taiwan’s probably increased by even more: its industrial output jumped by an astonishing annualised rate of 89%. India was hit less hard by the global recession than many of its neighbours because it exports less, but its industrial production has also perked up, rising by a seasonally adjusted rate of 14% in the second quarter. Output in most of the smaller Asian economies is still lower than a year ago, because they suffered steep downturns late last year. But at economic turning points, one should track quarterly changes.

Thursday, August 13, 2009

Financing Kilimo Kwanza: Commodities Markets or Agriculture Bank

In his search for the agriculture development in Tanzania, President Kikwete (JK) has been trying all the tricks in the bag. He first called for the change in the law in order to introduce lease financing so farmers can purchase equipment, especially tractors. Then he went through many initiatives in his monthly speeches to the nation, including introducing seed research center. Recently he unveiled “Kilimo Kwanza” program – an expected holistic way of introducing green revolution in the country. The program is supposed to give access to farmers on research, sustainable market, credit – from the soon to be created Agriculture Development Bank, and many other promised goodies in the bag.

His heart is in a right place, and God bless him, but the path that he is taking is historically well ploughed with dismal result and an anemic economic growth.

The main deficiency here is that as hard as this administration tries it has not fully abandon its state sponsored economic development model in favor of a full private sector driven one. Kilimo Kwanza – or the New Impetus for Agriculture— as per the Daily News, is a model which begins with a thought that the state knows what the farmer’s problems are and therefore it is going to make the solutions readily available to them in the form of services given. This idea is a common mistake in the development arena. Like Mkukuta and Mkurabati before it, the Kilimo Kwanza bag of goodies from the government will only make a small dent.

The Kilimo Kwanza program has many aspects: research for better yielding seeds, providing market access to farmers, using old Nyumbu factory to produce tillers etc. In this piece I will focus only on agriculture financing part of the program. In facilitating credit to farmers there are two ways to go about it, first a dedicated agriculture bank and second a market based capital distribution – commodities market.

Government sponsored credit system led by an agriculture development bank by nature can not efficiently utilize information about the utility of the program. The information that the bank gathers from its clients will not be disbursed to the population at large. When a bank provides a loan to the farmer, the information that it collect will immediately be filed away in the drawer for safe keeping; and it becomes private information instead of it directly becoming public information.

Furthermore, in order for banks to add value to their portfolio and hence survive, they have to lend responsibly. For that to happen, they require collateral – that eternal elusive specie to any farmer in a poor country. And if banks lend without collateral, maybe due to the political pressure of lending to the farmers, the fate of that bank is clear.

For argument sake, let’s assume the long promised title deeds will come true and farmers are going to be able to use them as collateral, banks will still have to figure out how they will get paid back. No bank in the world lends with an intention of confiscating collateral at the end of the credit process. In order for the bank to be paid back, farmers will have to sell their products and therefore gain income first. So the quandary here is that farmers need capital during planting season but they can only pay back after the harvest. Unless there is a way for a bank to be able to estimate how much will the farmer’s income approximately be, there is no way to know how much can it safely lend to that farmer.

Therefore, based on the above mentioned reasons and many others, one can pre-tell the demise of the agriculture bank before it is established. It is not because I can see the future but because agriculture banks in poor countries are hardly successful.

And that is where the power of capital market and its information comes in.

The alternative to the government owned agriculture bank is commodities market. Commodities market is a type of a market which buyers and sellers of agriculture and mining products gets to trade their goods. However, this market due to the nature of agriculture business is a unique market. The market is structured in such a way that solves the farmer’s cash flow timing problem. The market allows farmers to issue a paper – technically in the form of IOU contract — during planting season that let them payback after a specific period of time that will coincide with their cash flow intake. This process most of the time gives farmers the much needed working capital to buy seeds, pay helpers and sustain themselves while the food silos are empty. There is no need of collateral in the commodities market as the market act as an independent third party between the buyer and the seller.

In addition if the farmer does own the land, this market mechanism can be stractured in a way so that the farmer can use the land to raise funds– assuming he does get the title deed—for a capital expenditure like buying a tractor, a harvester, or building an irrigation canal.

This arrangement will give the farmer both types of financing: short term working capital to bridge the cash flow and therefore sustain the production cycle while at the same time allowing access to a long term capital expenditure which will boost the quantity and the quality of his product.

A well function commodities market biggest addition to the society is not just movement of capital from the savers to the users; but also the ability it has to accumulate information from its participants and at the same time making that information readily available to any interested party. Markets normally have many buyers and sellers who come from different backgrounds with different knowledge bases and interests. When these market participants pull their motives of buying and selling the same (or similar) products they technically act on the information that they have accumulated. The act of collective buying or selling at particular price level reveals what market participants think of the value of the good that they are buying or selling at that point in time.

So for example, bwana Mkulima Maridadi who is trying to plant cassava walks into the bank branch and applies for a loan, the branch manager can access the market for the information. The market will allow the manger to quickly ascertain what the current expected value of the cassava that will be harvested three months from today. That way the banker can decide to give Mkulima Maridadi a loan that is not only suitable but at a fraction of the value that he would have estimated that the farmer will rip after harvesting thus increasing the likelihood of profitable repayment.

In addition, Bwana Mkulima could have walked in any bank and not necessarily the government agriculture’s bank to ask for that loan. Because now any bank can quantify, monitor, limit and therefore understand the risk of lending to the agriculture sector. Therefore, what the market would have done technically is to move the agriculture sector away from the opaque informal sector to maybe a translucent area if not a complete transparent formal economic zone. In so doing, the market will disperse the risk of a whole agriculture sector – which in Tanzania is 40% of the GDP, a considerable one—to different banks and not to concentrate it in one institution. The disbursed credit risk will increase the sustainability of financing of the agriculture sector.

Though I am advocating commodities market in place of the agriculture bank, I am not doing it blindly. Markets normally are as good as participant’s knowledge. Therefore, they are susceptible to the highs and lows driven by the risk appetites of its participants. Those who will be borrowing from this market will have to do so responsibly or risk losing everything. Therefore, an education program of how the market works and how to best utilize the funds from the market will have to be in place. Furthermore, in the long run markets normally have more highs than lows and since the rational commodities market participant factors the expected future inflation in today’s prices, the cost of food tends to increase over time. However, if the funds are indeed used wisely, higher food prices do come in tandem with the higher production and quality of food. But since food is a vital resource, commodity markets normally, to certain extent, disfranchise the poor especially the urban poor by making food relatively more expensive.

This last point brings me to the tangent, a line that I don’t want to cross now because it will deviate to a much wider topic: the relationship between food production and hunger or I should say famine. That will be a subject for a next write-up. But just to leave you with a sense of that debate, research has shown that there is no fixed relationship of any sort between the amount of food available and the breakout of a famine.

However, there is a very high correlation between a country’s economic growth and a vibrant financial market of a sector which represent a considerable part of the country’s GDP. Henceforth, JK’s Kilimo Kwanza program should use its limited capital pool to start a commodities market instead of an agriculture bank. Once there is an efficient market, then let all banks, saccoss, and other financial institutions do what they do best: give responsible loans to those who can add the most value to the economy.

Tuesday, August 11, 2009

What is your Developmental Leadership Quotient?

When I was 10 ten years old my parents sent me to a Christian Leadership Camp on the shores of Lake Michigan (USA) where I was indoctrinated with “The Fourfold Way” of becoming a leader by growing Mentally, Physically, Religiously, and Socially. The acronym for this development theory was thus MPRS, for which the Bible text was Luke Chapter 2: “And Jesus advanced in wisdom and stature and in favor with God and men.”

Fifty years later, when I became president of the World Institute for Leadership and Management in Africa, WILMA claimed that the four key attributes of leadership for national development are Character, Charisma, Know-how, and Vision. WILMA’s first website, now online at, featured a PowerPoint show that illustrated this point by four clear-eyed gnus that were leading “The Great Migration” of Africa out of dependency on foreign aid. Rarely are these attributes combined in a single person, and when the exception appears, we can only say “Wow.” For example, Barack Obama is such an exception, and so is his wife, Michele.

An individual’s development as a leader by balanced growth of her MPRS maps into a country’s Great Migration with those gnus in the lead:
· Character is the religious dimension: the passion within empowers a person to lead.
· Charisma is the social dimension: leaders are empowered by inspiring love in others.
· Know-how is the physical aspect: leaders are good at engineering social change.
· Vision is the mental aspect: leaders see ahead and, though uncertain, ask “Why not?”

The capacity to lead social transformation (Joseph Stiglitz’s definition of development) can be measured by a person’s ratings on these four dimensions, which in principle can be tested and combined statistically as his/her Developmental Leadership Quotient (DLQ). No such test presently exists, and inventing one would be material for a Doctoral dissertation. A parallel test is the Myers-Briggs test. (You can Google Myers-Briggs to find many services offering this testing of a person’s likelihood of success in various occupations.) The prevalence of high DLQs in a given affinity group (family, tribe, community, or nation) would then be a measure of that group’s capacity to transform itself—socially, economically, culturally…whatever the dream may be.

If we had such statistics measured across countries and across time, outside investors could gauge where to place their bets on successful development. Governments could measure their progress in providing an “enabling environment” for development. The private sector could assess its potential for change.

Many Tanzanians, especially young professionals, seem to feel that Tanzania’s DLQ has declined—that some sort of “social engineering” may now be needed. Where have the clear-eyed gnus of Tanzania’s Great Migration gone? Who can restore the salad days of the Revolution, with its faith, hope, and passion? Where are the Oscar Kambonas of Tanzania’s future?

In my view, the “Cheetah Generation” of Africa is alive and well in Tanzania. For example, Oscar’s daughter, Neema, has just published the second issue of “StartUPBiashara: A magazine promoting small businesses, offering inspiration and empowerment to local businesses.” This is a point of light for the future, and there are many more like it, including WILMA’s program for Tanzania.

Future contributions to January’s blog might well reflect on how to raise Tanzania’s DLQ. I myself have some views about this question and look forward to sharing them.
Paul Armington, August 11, 2009

CDCF: When they want it, they get it.

The Constituency Development Catalyst Fund (CDCF) essentially provides additional resources for development at the local level by channeling money to constituencies under the management of Members of Parliament. The introduction of CDCF to Tanzania is thus supplementing the existing funding mechanisms for local government. Importantly, it may not represent an increase in funding, since funds may be taken away from other parts of the budget in order to finance the CDCF.

Your Member of Parliement just passed the bill last month, in case you didn't know. Article 63. (2) Of the Constitution of the United Republic of Tanzania states “The second part of Parliament shall …have the authority on behalf of the people to oversee and advise the Government of the United Republic and all of its organs in the discharge of their respective responsibilities in accordance with this Constitution”

The CDCF will seriously undermine the ability of Parliament to perform its oversight function independently and thus effectively, since a legislature that is involved in introducing and/or implementing spending proposals compromises its ability to question these initiatives and therefore to hold the executive to account.

The CDCF also creates a parallel structure alongside the existing local government structures and this increases the burden on the already overwhelmed local government officials. This parallel structure also increases the cost of administering local funds by using money which could have been used to increase the resources available for the projects themselves.

MPs claim that they act as ‘ATM machines’ in their constituencies because citizens assume that they have the resources to solve many of their problems. They claim that their income is not sufficient to cater for expectations from voters and that CDF will relieve them of this burden.

However, the role of MPs is to work with citizens to hold the government at central and local level accountable for resources allocated to solve development problems in their constituencies. MPs are not obliged to address these problems themselves unless they choose to do so willingly and have the necessary resources. This is the job of the executive. To take on the role of the executive will compromise their ability to perform their legitimate role.

MPs argue that they are expected by their constituents to deliver development projects despite the fact that they do not have control over where these projects are allocated.

Again, they get it wrong. MPs should work in collaboration with CSOs to educate citizens on the role of MPs. MPs should not make philanthropic promises to voters during elections unless they are sure of their ability to deliver these promises once elected. Normally campaign promises should either be in line with the candidate’s party manifesto or promises that the candidate intends to implement from his or her own sources of funding as philanthropic activities.

MPs claim that TASAF is not democratic hence CDCF will provide a more democratic means of empowering communities at the grassroots level to take an active role in their own development.

But MPs should seek to improve whatever challenges exist in the implementation of other local funding mechanisms, such as TASAF and the Local Government Capital Development Grant since they already seek to address the core purpose that CDCF seeks to address without the additional problems likely to result from the CDCF.

The challenges facing the very concept of CDCF and its implementation make it a highly risky venture for government to undertake. Further, evidence from different experiences at community level, and from previous studies like PEFAR, indicates that the poor quality of service delivery at the local level is not due to lack of funding, but more to systemic weaknesses, poor capacity, political interference, low civic competency etc. This establishment of a CDCF is likely to make this situation worse rather than better.

Additionally, given the existence of other development funds which serve the same purpose as a CDCF in Tanzania, it is recommended that the systemic and systematic challenges compromising the efficient and proper implementation of these devolved funds are contended with, rather than creating an additional fund which is likely to only exacerbate existing challenges.

Thursday, August 6, 2009

Needed: Social Engineering?

You will recall Mwalimu's summation for what we need for development: watu, ardhi, siasa safi na uongozi bora - people, land, proper ideology and good leadership. I was thinking about the simplicity and the idealism in this summation. But, you will notice that in these four "necessities" for development, only two are prefixed by adjectives (uongozi bora - good leadership; and siasa safi - proper ideology). These four necessities I think are still relevant. We can replace "proper ideology" with "proper vision", we can see "land" as indicating "resources" in general terms. The point about good leadership has been amply dealt with here. Let us talk about people now. I think that we need, not just people, but good people: honest, hardworking, law-abiding, and thrifty.

But people, in their "natural occurrence", cannot be the agents, the manifest or rather the end of development, and certainly cannot act as a community and for the collective good of the community. So, socialisation - to get the "good people" - is needed. The development of man himself - his attitude, his psyche, his character - is critical before we expect him to be an agent of development or before we think of him as the end of development.

Enter the idea of social engineering. I came across this concept a while ago, in school in fact, but never so much explored it. In thinking about some of the contributions in this blog, and in imagining solutions to what many point as moral decadence in our society (which breeds corruption, dishonesty, fatalism, etc.), I thought about social engineering. The definition from wikipedia refers to efforts to influence popular attitudes and social behavior on a large scale, whether by governments or private groups.

The Cultural Revolution in China from 1966, in which the language, arts, culture and indeed the Chinese national identity was reconceptualised, was in fact an exercise in social engineering. It was sort of a middle-course correction to anchor the 1949 Revolution as a reference point for the modern China's social and political life. About two decades after what was essentially a peasant Revolution, they were beginning to see decadence and corruption. The idea was to entrench a new Chinese social outlook. We also know that after the overthrow of Czar in Russia, the Bolsheviks sought to create a new identity for the Russian people, indeed creating "a new Soviet man", as the campaign was called, with fundamentally different ideals.

Now, come to think of it, our own Azimio la Arusha (Arusha Declaration), Vijiji vya Ujamaa, compulsory National Service, and so on, were exercises in social engineering. To some of my friends, we are what we are as a nation, the good and the bad, because of the collective impact of these initiatives and many other state social experiments. Of course, after the colonial rule, which also engaged in its own social engineering to get the natives to acquiesce to, or at least live with, subjugation, social engineering was necessary in an effort to build a new nation. But these social engineering initiatives were undertaken in the context of a certain era in global political and economic alignment. That era has ended, we have embraced a different socio-economic philosophy but still haven't undertaken to undo the psyche developed by the socialisation of that era.

Now, do we have to undo it or are we okay and this is not an issue? If we do, what kind of social engineering interventions that would create "a new Tanzanian man" with a new ethical outlook? Obviously, the kind of social engineering that can take place is limited by the prevailing political dispensation. Democracy, and whole panoply of activists, limits the kinds of interventions one can undertake. Authoritarian regimes - for better or for worse - have more room to undertake extensive social engineering initiatives. Of course authoritarianism is not option. Political scientists talk about "democratic social reconstruction" in which it is possible to transform outlooks and attitudes in the frame of a democratic dispensation. But there has to be a consensus on the ingredients of an ideal society we all want to build. This is one of our challenge.

Rebuilding a shamed subject

A piece from the Financial Times, By Robert Skidelsky, August 5 2009

It was to be expected that our present economic traumas would call into question the state of economics. “Why did no one see the crisis coming?”, Queen Elizabeth reportedly asked one practitioner. A seminar at the British Academy tried to answer and the FT has taken up the discussion.

The Queen’s question is understandable, given the subject’s claims on its own behalf. Ever since modern economics started in the 18th century it has presented itself as a predictive discipline, akin to a natural science. Since the future a year ago included the present slump, it is natural that the failure of the economics profession – with a few exceptions – to foresee the coming collapse should have discredited its scientific pretensions. Economics is revealed to have no more clothes than other social science. One cannot imagine the Queen in, say, nine months’ time, asking a leading political scientist: “Why did no one tell me that Labour was going to win the election?” She would understand that this was not a prediction that any political scientist could make with conviction, however much time he had spent studying present and past opinion polls.

Nevertheless, the Queen’s question was wrong, because it accepted at face value the predictive claim of economics – a feature that has distinguished it from all other social sciences. Karl Popper produced a famous argument against the possibility of prediction in human affairs: one cannot anticipate a new invention because, if one could, one would already have invented it. However, this objection can be overcome if one assumes a stable and repetitive universe in which rational actors make efficient use of the information available to them. In this environment, uncertainty disappears to be replaced by calculable risk. Shocks and mistakes may occur but these will cancel each other out, so that, on average, people get what they expect.

An important implication of this view is that shares are always correctly priced. This is the basis of the so-called efficient market hypothesis that has dominated financial economics. It led bankers into blind faith in their mathematical forecasting models. It led governments and regulators to discount the possibility that financial markets could implode. It led to what Alan Greenspan called (after he had stepped down as chairman of the US Federal Reserve) “the underpricing of risk worldwide”.

It has also led to the discrediting of mainstream macroeconomics. The efficient market hypothesis is simply an application of the recently triumphant New Classical school, which preaches that a decentralised market system is always at full employment. In their obsession with getting government out of economic life, Chicago economists claimed that any consistent set of policies will be learnt and anticipated by a population, and will therefore be ineffective. Since people – apparently including the 10 per cent or so unemployed – are already in their preferred position because of their correct anticipations and instantaneous adjustment to change, “stimulus” policies are bound to fail and even make things worse. Recessions, in this view, are “optimal”.

Most of those unversed in New Classical economics assume that John Maynard Keynes exploded these fallacies 70 years ago. Their re-emergence is not just the result of the failure of Keynesian macroeconomic policy to anticipate or deal with “stagflation” in the 1970s. It reflects a persistent bias in economics towards an idealised account of human behaviour; what Joseph Schumpeter called the “Ricardian Vice” of excessive abstraction. It is only by imagining a mechanical world of interacting robots that economics has gained its status as a hard, predictive science. But how much do its mechanical constructions, with their roots in Newtonian physics, tell us about the springs of human behaviour?

One of the most interesting contributions to the debate was the argument that, after Keynes, economists should have aligned their discipline with other social sciences concerned with human behaviour. Keynes opened the way to political economy; but economists opted for a regressive research programme, disguised by sophisticated mathematics, that set it apart. The present crisis gives us an opportunity to try again.

The reconstruction of economics needs to start with the universities. First, degrees in the subject should be broadly based. They should take as their motto Keynes’s dictum that “economics is a moral and not a natural science”. They should contain not just the standard courses in elementary microeconomics and macroeconomics but economic and political history, the history of economic thought, moral and political philosophy, and sociology. Though some specialisation would be allowed in the final year, the mathematical component in the weighting of the degree should be sharply reduced. This is a return to the tradition of the Oxford Politics, Philosophy and Economics (PPE) degree and Cambridge Moral Sciences.

Beyond this, the postgraduate study of macroeconomics might with advantage be separated from that of microeconomics. Courses in microeconomics should concern themselves, as at present, with the building and testing of models based on a narrow set of assumptions. Their field of applicability lies in those areas where we have reliable views of the future. Macroeconomics, though, is an essential part of the art of government, and should always be taught in conjunction with subjects bearing on this.

The obvious aim of such a reconstruction is to protect macroeconomics from the encroachment of the methods and habits of the mathematician. Only through some such broadening can we hope to provide a proper education for those whose usefulness to society will lie as much in their philosophical and political literacy as in their mathematical efficiency.

Lord Skidelsky’s Keynes: The Return of the Master will be published by Allen Lane in September

Copyright The Financial Times Limited 2009