The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant; for (the) boom has necessarily been a period of strong emotional excitement, and an excited man passes from one form of excitement to another more rapidly than he passes to quiescence.

Arthur Cecil Pigou  (1877-1959)

Jim Grant has been quoting this everywhere in recent months.

So how is it that a defunct economist who died 50 years ago can so sweetly capture the sour mood which pervades post-crisis thinking?

Friend, mentor and yet fierce intellectual critic of Keynes, Pigou knew all about the wildly dynamic and yet intrinsically deflationary late 19th century global economy, when growth was interrupted with alarming regularity by banking panics.

Interrupted but not derailed.

The period from the revolutions of 1848 to around 1910 saw the biggest leap forward in global prosperity experienced up until then.

It’s been one of our main themes for years that today’s world economy functions very like the free trading, financially integrated, fiercely competitive and often brutal classical era, complete with its almost clockwork like repetitions of supply led booms, bubbles and busts.

Despite more sophisticated technology and the much bigger role of government, the only things missing from the story up until now were a full scale banking panic and the gold standard.

Now we’ve had a full scale banking panic, and gold is being seen as hedge against the fragility of all fiat currencies: not quite a formal gold standard but a definite alternative to “In God We Trust”.

But perhaps Pigou’s insight tells us that all this may be more survivable than we think; that if we want to understand what has really happened we should look to the classical era, not the 1930s; and that our own long low inflation boom might just match that 60 year run.

Now that’s something worth playing for.

Jonathan Wilmot, chief global strategist at Credit Suisse Investment Bank, is blogging at FT Alphaville for the day.

Please read this Credit Suisse small print

This entry was posted by Jonathan Wilmot on Tuesday, December 1st, 2009 at 9:00 and is filed under Capital markets, People. Tagged with Jim Grant, Keynes, Pigou. Edit this entry.