The World of Economics Since 2008
With the welcome addition of billionaires to the chorus, nearly everyone agrees that we are on the verge of a new financial catastrophe. The question that is still open is when, not if. What is the state of preparedness of the economics profession?
The state of preparedness of the economics profession
Unless they are keeping it a secret, or the journals are not publishing it and the press is not reporting it, nothing has changed in academia since 2008. The world of economic theory is still where the renowned Nobel Prize Laureate and New York Times columnist, Paul Krugman, found it in 2014:
‘The economics profession has not, to say the least, covered itself in glory these past six years. Hardly any economists predicted the 2008 crisis — and the handful who did tended to be people who also predicted crises that didn’t happen. More significant, many and arguably most economists were claiming, right up to the moment of collapse, that nothing like this could even happen. Furthermore, once crisis struck economists seemed unable to agree on a response. They’d had 75 years since the Great Depression to figure out what to do if something similar happened again, but the profession was utterly divided when the moment of truth arrived.”
This is not an idiosyncratic position. More surprisingly perhaps, due to his voluminous investigations, and perhaps just because of them, Thomas Piketty has forcefully made the utter truth explicit:
“There is no such thing as an economic science.”
What is indeed the status of economic theory? Too many discussions of public affairs are driven by the assumption that grave economic decisions are taken on the basis of sound economic theory—certain, overpowering economic theory, as opposed to pure ideology. This is an assumption as widespread in secular as in religious corridors. It is a fundamental misconception.
A continuing state of crisis
The naked truth is that economic theory has been in a state of crisis ever since the publication of Adam Smith’s Wealth of Nations in 1776. What else do major upheavals in the history of economic theory since then signify? Why did we pass from classical economics to neo-classical economics to the marginalist revolution to the economics of Keynes to Keynesian economics to post-Keynesian economics to monetarism to neo-neo-classical economics to real business cycle theory to behaviorism—let alone Marxist economics or Austrian economics or Georgist economics or Kelsonian economics; indeed, let alone the splinter programs of research within each major school of economic thought?
These efforts are not accretions to basic scientific knowledge; they are revolutionary attempts to start the economic discourse anew ever and again. They are failed attempts to describe the mechanics of the economic process. Philip Pilkington has nailed this complex issue down:
“Mainstream economics moves forward not through logical development and integration, but through forgetting.”
The quotations so far confirm the validity of steady accusations of irrelevance launched at mainstream economic theory from within and from without the economics profession.
Intellectual irrelevance has not yet translated into political irrelevance. Quite the contrary. If so many economic doctrines come and go, it is because—in accordance with the winds of the moment—they tend to justify the status quo from the right or the left or even the center of the political spectrum. They invariably seem to rationalize the economic behavior and policies of the “powers that be.”
We are at a breaking point
But we have now reached a point in which the system is not working for the powers that be either. No one is benefiting from the workings of the system in which we are entrapped. Certainly, the system is not serving the poor; and it has undoubtedly caused a collapse of the middle classes. It is hard to conceive of the case, but we have reached a point at which the rich, perhaps, suffer most from the breakdown of the system—at least from a purely psychological and arithmetical point of view, the rich undoubtedly suffer most.
“Mainstream economics moves forward not through logical development and integration, but through forgetting.” [Philip Pilkington]
The rich deserve more attention than they have been given during the last couple of hundred years. As against the general scapegoating of the rich, there is the Biblical assertion that the creators of poverty are, not the rich, but the “wicked.” What a politically liberating verity.
From a practical point of view, here is a little parable to unpack. You go to bed with the assurance that your portfolio is worth $3.0 million—not too much money, by today’s standards. You wake up in the morning to discover that, because of shenanigans in a far away land, your portfolio is now worth $1.5 million. How will you feel?
And what if, as the rich frequently do, you had borrowed $1.5 million yesterday. That is the condition that pushes some rich through glass windows. Isn’t that true?
Wait. Do the poor, do members of the middle class, ever lose $1.5 million overnight? They—we—are blessed with not having that much “capital” to start with. We are not in such danger. Our harts tremble less at gyrations of the Stock Market.
There must be a better way to run the country. And, in fact, there is. But alternative ways to run the country cannot be discovered from within the strictures of mainstream economics. One must abandon that paradigm.
As we have seen above, mainstream economics has repeatedly been proved to be a faulty system by the very academic profession that tries to sustain it. Why wallow in error? Einstein put it straight: To expect different results from repeatedly taking the same steps is not rational; actually, he said, it is “insanity”.
The difficulty, of course, resides in choosing the alternative to mainstream economics. The difficulty is that there is a wealth of alternatives, some more serious than others; some better grounded in reality than others; some experientially proven to produce more positive results than others, even though necessarily piecemeal results, for not being thoroughly and consistently applied. And we are all biased toward our own personal preference.
Einstein put it straight: To expect different results from repeatedly taking the same steps is not rational; actually, he said, it is “insanity”
We confuse ourselves and, what is worse, we misdirect our representative politicians by sending them in a hundred different directions. We are clearly at an impasse. To say the least, the impasse is created by analysis paralysis.
How can we ever get out of the current spectrum of opinion?
The most dangerous opinions are these two, and unfortunately they occupy a large sphere of the center of the political spectrum of opinion: Most people are somehow satisfied with the status quo; with much overlap, most other people, while spending huge amounts of energy, seek tiny changes to the system. They do not yet see the wisdom of William Jennings Bryan, whose words resonate even more strongly today:
“When we have restored the money of the Constitution, all other necessary reforms will be possible, but until this is done there is no other reform that can be accomplished.”
Then, of course, there are the realists who believe it is a waste of time talking truth to power. The subset is composed of people who are afraid of talking truth to power.
A special niche is occupied by the small subset of fanatics who will not lift a finger to avoid the impending disaster because they believe that, amidst the eventual rubble, they stand a better chance to concentrate the people’s attention on their pre-selected solution.
Even granted by the relatively few that we must concentrate our efforts on the weaknesses of the monetary system, efforts are still splintered around this inner circle of ideas: some want “to end” the Federal Reserve System (the Fed), the central bank of the United Sates; many others—intentionally or not—want to subvert its might by creating competitive, local currencies. Two such currencies close to this writer’s home are BerckShares and rCredits. There are about 6000 local currencies in the world, at last count. Many want to add one more currency, the one on which they have spent months if not years of effort.
Those who want to “end the Fed” ought to consider what do they want to replace the Fed with. Many of them say: “The Gold Standard.” The Gold Standard by itself does not necessarily deny the necessity for a central bank. The major reservations against the gold standard are two: Gold has been and is constantly subject to abrupt changes in valuation; gold is scarce. We need stability in the monetary system; we need sufficiency in the monetary system.
If there are real resources available, if there are real needs to be met, why are resources not utilized? Why are real needs not met? The common explanation is “For lack of money.” Well, no. The real explanation is, “For lack of a well-functioning monetary system.” The money supply is capable of expanding to meet the availability of real resources. Indeed, in a well-functioning monetary system the money supply is always sufficient to meet the real resources of a country.
We need stability in the monetary system; we need sufficiency in the monetary system.
Those, on the opposite pole, who want to create a new local currency ought to consider whether any local group has the intellectual and financial resources to create, administer, and safeguard a better physical currency than the state’s currency. And yet, the growing call for the creation of local currencies must be encouraged, not only because of the incomparable ability of local currencies to teach the “nature” of money, but especially because—if and when the financial collapse of state currencies occurs—our lives will rely on barter and local currencies.
What is amiss with all current national monetary systems?
That said, we must be certain about what is amiss with all current national monetary systems. The answer lies, not in the administration of monetary policy, but in the inner conception of monetary policy. The two key questions concern the creation and distribution of the money supply.
This is an area in which two diametrically opposed conceptions prevail: one is the European conceptions in which money is assumed to be created and hence to be controlled by bankers; the other is the American conception which assumes that, since the value of money is created by the blood, sweat, and tears of all the people in a nation, the process of creation of money ought to be controlled by the people, and its distribution ought to benefit all the people.
... monetary policy advocated here by Concordian economics ... does not call for even one cent of redistribution of wealth.
New money created on the basis of national credit ought to benefit the common good. New money created by central bankers is not their money; it is our money. Within duly specified conditions, we as sovereign citizens—on a decentralized, democratic basis—have the right of access to national credit and the responsibility to repay the loan.
On this basis, the monetary policy advocated here by Concordian economics, and the fiscal policy advocated elsewhere, does not call for even one cent of redistribution of wealth.
In future articles we shall start at the beginning. The beginning of wisdom which seems to suggest the fastest possible implementation of two petitions that are currently circulating on the Internet. They are designed in accordance with the American conception of money—with its deep roots in the Mosaic conception of the Jubilee. They evolve from Concordian economics, whose essential elements have recently been published or republished, including at Global Economic Intersection. One petition especially is in full accordance with the best thought of John Maynard Keynes, the British economist of world-wide renown who tried in vain to have the idea of a public bank operating in the common interest of the nations implemented at Bretton Woods. We will discuss the petitions in a future article.
This is the first in a series of articles on monetary reform.
This article was developed from an article posted at Mother Pelican, September 2015.