Kenneth J. Arrow a Nobel Prize winner in conversation with Judyta Papp
Is there a way to avoid the repetition of the scenario we witnessed in Greece, where the debt had reached its record level and the threat of bankrupcy had never been so real?
The first responsibility is that of the government who has to 'live' honestly - within its means! The expenditures should be more or less in line with the revenues. There is nothing wrong with deficits that are small compared with the productivity of the economy. Secondly, the government has to be truthful. In the Greek case, the true size of the deficit was concealed. To achieve this financial clarity, there should probably be a governmental entity not responsible to the central government which would have the right and power to examine all the financial dealings of the government and would be obliged to publish an analysis of the current financial situation. There also has to be some entity which would be able to make sure that taxes are really collected. The reports of these entities have to be available to the investing public and, in particular, to the buyers of government bonds.
Does the euro have a chance to survive as a monetary union? What would be the consequences of its collapse?
I think there is a good chance that the euro will survive this particular crisis. But confidence in it will be shaken, and another crisis in a few years might prove fatal to the euro. The collapse of the euro will not seriously affect the world economy and, after an adjustment period, will not pose a threat to the European economy. Indeed, there will be some significant problems for economies to adjust to a new situation. Besides we will have once again a world with more currencies. The dollar will remain the reserve currency and its importance will be enhanced.
What is the current attitude of the markets towards decisions of the credit rating agencies? The European markets did not crumple after the loss of France's AAA credit rating despite the initial fear. It seems that the more often such decisions are taken, the smaller is their impact.
The credit rating agencies have lost a good deal of credibility with their failure to anticipate the collapse of the market in mortgage-backed securities. The downgrading of the United States bonds by one of them had no perceptible effect on the American bond market.
How do you assess the chances of the Prime Minister Mario Monti to pull the Italian economy round?
Arrow: I am not an expert in Italian, or in any European, politics. It does seem to me though that Prime Minister Monti will put Italian governmental policy on a better basis.
Has the crisis proven some economic truths to be false?
The idea that capital markets can serve to discipline excesses in either government or private securities markets has been thoroughly refuted by the experience of the crisis.
The current mechanism for rescuing the indebted European countries (through bailout) was criticized for its shortsightedness. How can it be improved?
In a well functioning system, there is no reason for the European Central Bank or other Eurozone authorities to need foresight. If the debts of the different countries are publicly known and if it is clear that there will be no bailouts, the purchasers of the bonds will demand higher interest rates or simply refuse to buy the bonds. I have no confidence that any central authority will be able to forecast well. Furthermore, their forecasts will be subject to political manipulation.
To what extent are financial crises provoked by the greed of banks and their customers?
We expect banks to try to be as profitable as possible. What is troubling is not their greed but the dishonesty of their representatives. A bank usually not only invests on its own account but also advises its customers. It is necessary to assure that their advice is honest, not dictated by the desire to make money from their customers.
What do you think about the idea of creating a kind of guardian organisation which would be able to warn in advance against all kinds of politico-economic threats?
Any such agency will be the target of political and economic manipulation. If the 'guardian' might issue a report pointing out problems in a country's debt, we can be sure that both the country and those dealing in its debt will put pressure on the 'guardian.'
Does the crisis justify behaviors which would be reprehensible under other circumstances and does it require taking some difficult decisions?
It is certainly necessary to take tough decisions that will be unpopular among those who were beneficiaries before. I am not sure we should take a blind eye to some bad behaviors. It may be better to punish fully in order to create a warning for the future.
Would a transnational European government be an appropriate protecion against future financial crises?
I see no prospect for a strong transnational European government.
The role of the world's economic and political centre has been taken over by the East. What should Europe do, if it wants to regain its old economic position?
The 'East' is a long way from the world's center. China and India have been growing at very high rates, but the per capita income levels are less than half of such relatively backward economies as those of Brazil or Mexico. As China and India become richer, many of the problems of advanced countries will emerge. With higher wages, China will become much less competitive. We must recall how Japan seemed to grow into a dominant economy.
Could we venture to say that John Paul II's persona united whole Europe?
John Paul II certainly was an inspiration to Poland and the other eastern European countries under Soviet domination. The events of 1989, in which a whole oppressive conquering empire folded away with no violence, constitute one of the greatest and most humane transformations in history, and John Paul II played a major role in them.
What aspects of the Pope John Paul II's teachings could be of use for politicians?
Look at the encyclical, 'Centissimo Anno.' One must combine a social commitment to the relief of poverty and the spread of honesty and publicity with a realistic evaluation of the economy.
What kind of difficulties will Europe have to face now and in the future?
Arrow: In the short run, it should address itself to stimulating the economy to get out of the current unemployment crisis. In the longer run, a need for a more genuine federal government may appear, in which unanimity is no longer required for decisions. Among other matters, the European Parliament must become a genuine decision center, not the debating ornament it is now.
How should Europe react as for the 'Arab Spring'?
It has done very well in this direction. Neither Europe nor the United States can't direct the change of regimes in the Arab world, but it can give aid, military and economic, in a restrained way.
Are the investors going to turn away from money, at least for some time? Is the stock market going to benefit from the crisis?
'Money' in the modern financial world no longer has the special significance it used to have. Bonds and other credit obligations are virtually the same as money. Hence, we are more interested in a shift between bonds and stocks. Stocks have a limited desirability until there is a restoration of prosperity.
Does the price of gold remain in a proper relation to other goods? Is the situation with its rates a speculation?
The price of gold is no longer of any serious economic interest.
Will the sanctions imposed on Iran have an impact on the economies of European countries?
Arrow: It is certainly possible that sanctions on Iran will have repercussions on the price of oil and therefore on the economies of the United States and Europe. However, it is certainly in the interest of the Arab countries to minimize this effect by increasing their oil outputs. I think therefore that the costs of imposing sanctions will not be great. I should add that a nuclear-armed Iran is a far more serious threat to Europe than an increase in the price of oil.
Do you think that the current, unjust, world order will be overthrown by such economic and political crises?
I am afraid the immediate effect is just the opposite. The austerity measures in Europe and the United States alike affect the safety net of the poor, while the rich will gain from any rebound in the economy.
Kenneth J. Arrow - an American economist best known for his doctoral dissertation which became the basis for the later work 'Social Choice and Individual Values.' In it he proved his famous impossibility theorem. In 1972, he won the Nobel Prize in economy for his input in the general equilibrium theory and the prosperity theory. Arrow spent most of his professional life lecturing economy at Stanford University and Harvard University.
February 12, 2012