Wednesday, September 17, 2008

Out of Control?

We have lost control," said Hale, quoting Bernanke. "We cannot stabilize the dollar. We cannot control commodity prices." Chicago Tribune

What's the difference between a Sorcerer and a Scientist?

A Sorcerer wants you to believe his will is the cause of his miracles. A Scientist wants you to know that his miracles are part of the natural order of things.

If Fed Chairman Ben Bernanke ever thought he or the Fed or any other institution had "control" over the dollar or commodity prices he wasn't, in my view, much of an economist. The currency of institutions is credibility, not control, although when the credibility bank account is full credibility can seem like control. Credibility is earned by being right, and lost by being wrong.

I was somewhat surprised by my emotional response to today's economic developments. Today was V-Day as in vindication, but all I felt was a rising sense of dread as Gold kept soaring. Like Cassandra, I felt no joy.

As William James argued, "the truth happens to an idea." The terms apocalypse and revelation refer to the mental state when the truth happens to an idea counter to one's sense. It can (and I write from experience) be a profoundly disturbing experience which may or may not, depending upon one's willingness to adopt new modes of thinking, prove enlightening in the end.

Thus, when I consider those in the halls of power (and elsewhere) for whom today was revelatory or apocalyptic, I feel a sense of dread. To see real world events as "out of control" is to confuse one's sense of how things should be with how things really are.

As Joseph Schumpeter wrote: It is of the utmost importance to realize this : given the actual facts which it was then possible for either businessmen or economists to ob-serve, those diagnoses—or even the prognosis that, with the existing structure of debt, those facts plus a drastic fall in price level would cause major trouble but that nothing else would—were not simply wrong. What nobody saw, though some people may have felt it, was that those fundamental data from which diagnoses and prognoses were made, were themselves in a state of flux and that they would be swamped by the torrents of a process of readjustment corresponding in magnitude to the extent of the industrial revolution of the preceding 30 years. People, for the most part, stood their ground firmly. But that ground itself was about to give way.

Hopefully, today's events won't lead to a loss of credibility, and rise in confusion, but rather a Kuhnian shift. Those who had been forecasting such a turn of events based on historical research, like Ron Paul, inter alios, aren't Sorcerers but Scientists. The only thing that changed today was some people's sense of what was possible and what was not. I take comfort in seeing that there are some "laws" of economics that must be obeyed.