Wednesday, September 09, 2009

Revolution is in the Air, Again

Capitalism is an evil, and you cannot regulate evil. You have to eliminate it and replace it with something that is good for all people and that something is democracy. Michael Moore

The current international monetary system, with flexible exchange rates between the major currencies, the dollar as the main international reserve currency, and free international capital flows, has failed to achieve the smooth adjustment of payments imbalances. This is the conclusion reached by the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System (also known as the Stiglitz Commission) (UNPGA, 2009) UNCTaD

It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Paul Krugman

In July of 1789, King Louis XVI, during a discussion of the state of affairs in Paris, exclaimed, "This is a revolt." The duc de Liancourt, an ardent supporter of reforms replied, "No, majesty, it is a revolution."

And so it was.

And so it is.

Now, as then, the pressing need for significant reform is widely acknowledged in policy circles, but political inertia has exposed the rhetoric of change as just that- talk.

It isn't, this time, the Bastille which invokes the anger of the people, but Wall St.- a prison which holds, and destroys, not people, but futures. In place of the French lettres de cachet we have quarterly statements dashing retirement hopes, notices of foreclosure, or worse.

Sadly, just as King Louis XVI truly desired change, but was not capable of delivering it fast enough, President Obama seems equally desirous of change, and, apparently, equally incapable of delivering. To be fair to both men, I'm quite sure I couldn't deliver it either- fortunately I haven't been dealt that hand to play.

The most troubling parallel, to me, is the anger. If not closed already the window of opportunity for a graceful, reasonable solution is closing fast. Unemployment is already high and rising. Imagine how angry the people will be if (I suspect "when" is more apt) the US$ sinks and inflation jumps as winter begins to bite.

Of course, revolutions, revolts, coups and being conquered are regular, albeit often unpleasant, features of human history. Human societies can (and often do) get bogged down in a rut of comfortable habit where change, if it occurs, happens slowly. Revolutions are often the only means by which societies effect substantial change- nothing like burning the house down to inspire the need to build a better one. This cyclical view of history has been expressed in Ancient Times by Hindu Theologians and much more recently by American Historians William Strauss and Neil Howe, inter alios. In a sense, this view of decay followed by renewal lies at the heart of business cycle theory.

I too can sometimes get bogged down in a comfortable rut, waiting, it seems, for an inspiration to get the juices flowing.

The inspiration which roused me from my summer vacation rut- just in the nick of time as I need to don my "home schooling Dad" hat again- was Paul Krugman's How Did Economists Get It So Wrong?

While pondering his view I was distracted (I often surf while pondering) by reading of Michael Moore's new mantra, "Capitalism is Evil" from his film, Capitalism: A Love Story. "Semantics," the snide philosopher in me snickered, "will get you every time."

What, I wonder, does Mr. Moore mean by "Capitalism" and "Democracy", or Mr. Krugman by "Economics" and "Economists"?

Is Mr. Moore aware that "Democracy" was also the goal of the Bush-era NeoCons? I doubt the term refers to the same notion in these two disparate world-views.

If, as I suspect, Mr. Moore refers to the way things are now as "Capitalism", then "Democracy" likely refers to some idealized nirvana. Reality, of course, is rarely preferable to idealized dreams- a lesson painfully learned by all successful Revolutionary dreamers once their dream is put to the test. (This is not to argue that all revolutions lead to negative outcomes.)

If Mr. Moore means to argue that replacing money, markets, and private property with plebiscites or, more simplistically, "rule by the people", will make America a better place to live, I pray his argument falls on deaf ears. That is a movie whose ending has been well documented, but apparently, not shared with a wide enough audience.

Which brings me to Mr. Krugman's Economists Who Got It Wrong. In my view, (Mr. Krugman grinds a very different axe, and I'll get back to that in a second) if arguments like Mr. Moore's or the right wing's anti-government variants displayed at the "tea parties" gain traction in the enough minds- i.e. if the international revolution in the global financial architecture, noted by the UN, ignites the proverbial "fire in the minds of men" here at home- the economics profession deserves some of the blame. Surely inoculating a critical mass of the population against demagoguery and romantic notions of "prosperity for all" with some honest history should be high up on the duties of this profession.

Sadly, reminding people of the lessons of the past is a difficult thing to do...until after disaster strikes. Thus, the cycles repeat, which, at the least, allows some historian/economists a chance to forecast the repitition. Yet, the majority rarely listens to the prescient view.

As Mr. Krugman argues about this iteration: the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

I'm sympathetic to aspects of his view: particularly the seduction of elegant mathematical proofs (about which, see the italicized paragraph below) but I think he paints with too wide a brush, and significantly discounts the effects of shifting political winds and financial incentives. Many economists saw this coming, but were unwilling to risk their careers.

Digression on Seduction by Mathematics by two eminent Mathematicians:
As far as the laws of mathematics refer to reality, they are not certain, as far as they are certain, they do not refer to reality.-
Albert Einstein

Pure mathematics consists entirely of assertions to the effect that, if such and such a proposition is true of anything, then such and such another proposition is true of that thing. It is essential not to discuss whether the first proposition is really true, and not to mention what the anything is, of which it is supposed to be true ... If our hypothesis is about anything, and not about some one or more particular things, then our deductions constitute mathematics. Thus mathematics may be defined as the subject in which we never know what we are talking about, nor whether what we are saying is true.
- Bertrand Russell

My 2 cents: Math is only as useful as the qualitative definitions upon which it is based, are accurate.

There is, of course, nothing new in this, nor does economics have a monopoly on such behavior. King Louis XVI threw Beaumarchais in jail for his insightful, and prescient critique of the then status quo in The Marriage of Figaro and George Bush fired Paul O'Neill and Larry Lindsey over their dissenting views over, inter alia, the cost of the Iraq War. Speaking truth to power is never an easy task. It is, as they say, in the nature of the beast- the beast, in this case, being human institutions of power.

There are other beasts one can study, for instance, the advantages and defects of organizational forms used by man to produce the goods he desires, a.k.a. economics.

Curiously, until one realizes how specific is the axe Mr. Krugman wishes to grind in his polemic, one gets the sense that the only debate in economics is between Chicago School Monetarism and Keynesian Demand Management. Mr. Krugman disparages the former and promotes the latter as if Keynes was the Messiah of Economics. To wit, in Krugman's view, Keynesian economics remains the best framework we have for making sense of recessions and depressions.

My response to Mr. Krugman begins with a quote from Augustine of Hippo; beware the man of one book.

As a student of philosophy, I read (and would urge the reading thereof) many philosophers. The sense of Kant's Idealism comes into clearer focus when one has read Hume's skeptical perspective, and so on, and so on, until you arrive back at Plato and Aristotle (alternatively, one can start with the Greeks, which isn't a bad idea for an economist either- starting with Aristotle, for example). Alas, philosophy too has become a fragmented battlefield of sorts, with each clique praying to their own God- as, apparently, Mr. Krugman prays to Keynes.

I suspect it is just as easy to assume, after reading Keynes, that demand management can attenuate and perhaps even eliminate the business cycle as, according to Mr. Krugman, it was to believe that Chicago-School Monetarism could do the same. Indeed, Friedman's views emerged during just such a period when Keynesianism was hoped to bring about nirvana..

As noted above, however, I suspect the faith in eliminating the business cycle doesn't come from reading Friedman, Keynes or any other noted economist, but from the powers that be- and this too is in the nature of the beast. Mr. Krugman wishes people to be aware that recessions are an inevitable feature of human economic life. Another apparently inevitable feature of human life is that such awareness only manifests on a grand scale through experience. As George Bernard Shaw wrote, we learn from history that we learn nothing from history.

People, and the societies comprised thereof, have a life span. Knowledge of human bodily function can improve, for a time, output and sometimes, delay, but not avoid, the inevitable decay. Regeneration occurs in those who follow. Economists too operate under similar rules. I agree with Mr. Krugman's argument that there is virtue in accepting the reality of business cycles, just as there is virtue in accepting our own mortality and that of the society in which we live. I also agree with Mr. Shaw that this virtue is realized by few, when it matters- that the cycle of more general awareness followed by ignorance, regardless of the literature available, plays a role in the larger cycles.

I take solace that I, and a few I know, (and, no doubt many others unknown to me) are reaping the benefits of that awareness.


Hombre said...

Dude, for the time being I still pray at one altar (Mises/Rothbard). However, I'm only 28 and am grateful that your blog continues to provide me with further avenues of study to pursue. Thanks for the thoughtful post.

Dude said...

Pray at whatever altar works for you. If Mises unlocks the mystery for you, great. Just don't assume that the same key works in all locks, or, as in Krugman's case, try to force the same key on everyone.