Archive for the ‘Economics’ Category

The ultimate cause of the economic crisis: ignorance

A pithy story about a great thinker:

A lady once asked [Samuel Johnson] how he came to define ‘pastern’, the knee of a horse: instead of making an elaborate defence, as might be expected, he at once answered, “Ignorance, Madam, pure ignorance.”

When it comes to the worldwide economic crisis, we are not so wise as Johnson. We cannot admit, simply, that we never knew how to manage our evolving economic structure in the first place, that we were ignorant of what we were doing. We compound the ignorance by accusing the financiers or the Republicans or even the Democrats of knowingly doing the wrong thing, when in fact they were doing the wrong thing without knowing it was so.

Do the financiers deserve our anger and our reproach? Yes, inasmuch as they were doing the wrong thing and asserting their knowledge without having any. Do the Republicans deserve the same? Yes, for the identical reason. The Democrats are by no means off the hook, however, since they, too, rode the wave of the late 1990s in more or less satisfied complacency.

Let me restate my point: We were ignorant of how to run the economy, and we compound the ignorance if we place blame incorrectly. For example, it’s poppycock to say that it’s G.W. Bush’s and the Republicans’ fault because they were lax and reckless in the area of financial regulation. They were lax and reckless. They may have been more lax and reckless than were Clinton et al. But can we claim with any certainty that a particular set of regulations could have prevented this whole mess? No, we cannot. (Obviously, we can imagine some extreme kind of regulatory regime that had been able to prevent all these ills; but can’t claim that such a regime had simultaneously preserved all of the desirable aspects of the economy.)

We human beings are very good at putting an erudite spin on whatever we are doing. Back in the 1780s, chemists were writing very smart, very scholarly texts about the role of phlogiston and calx. They were not totally on the wrong track, but they were far from correct. Slowly, eventually, people who supported a correct theory of oxidation arrived, participated in the battle of ideas as the minority, and eventually won because they were correct.

Likewise, until recently, you could find all manner of books and blogs and television programs and whatnot about why the economy was exactly as it should be. At any given time, of course, there are doomsayers of both the credible and crackpot variety warning us about an impending economic collapse, but their ideas and claims in recent years had no influence. Now, however, that things have incontrovertibly gone to merde, the media instructs, explains, and edifies concerning the causes and characters as though it were all the most intelligible and obvious thing.

The ex post facto chatter is just a magnified version of what may be seen in real time on Google or Yahoo or CNBC or any other news source concerning the movement of the stock market: the moment the market rises or falls a palpable amount, bang! They have the cause explained–right there for you! “Investors bargain hunting as doldrums recede.” “Dow dips on semi-unfavorable consumer confidence numbers.” Sometimes they even know what the market will do before it does it: “SNP set to inch upward after Fed chairman feeds frenzy.” And so on.

The media is only reflecting our discomfort with ignorance. We want to know and, if we don’t, we’ll pretend we do. Meanwhile, we pump carbon dioxide into the atmosphere and–whoops!–we find that we’ve royally screwed with the planet’s temperature. We create all manner of technology, celebrate it and our increasingly connected and peaceful world with World’s Fairs–then, within a span of twenty years, we fight two World Wars. We genetically modify crops and–who knows what will happen? We radically alter the structure of the economy in such and such a way and–we know what happened. But why?

It’s not satisfying to recognize ignorance as the ultimate cause of our plight, but it’s the correct first step, one I do not see being taken in the media. Along with the explaining and blaming without sufficient knowledge may be found the misconception that the roots of the problem are shallow and recently grown. In other words, our method of managing the economy was hunky-dory when Clinton was president, but then Bush was in charge and… nonsense! Again, we don’t know exactly when we went wrong, or how.

George Bernard Shaw, in his introduction to the play Heartbreak House, which deals with WWI, talks at length about that war’s causes. One passage made a big impression on me:

Nature’s Long Credits

Nature’s way of dealing with unhealthy conditions is unfortunately not one that compels us to conduct a solvent hygiene on a cash basis. She demoralizes us with long credits and reckless overdrafts, and then pulls us up cruelly with catastrophic bankruptcies. Take, for example, common domestic sanitation. A whole city generation may neglect it utterly and scandalously, if not with absolute impunity, yet without any evil consequences that anyone thinks of tracing to it. In a hospital two generations of medical students may tolerate dirt and carelessness, and then go out into general practice to spread the doctrine that fresh air is a fad, and sanitation an imposture set up to make profits for plumbers. Then suddenly Nature takes her revenge. She strikes at the city with a pestilence and at the hospital with an epidemic of hospital gangrene, slaughtering right and left until the innocent young have paid for the guilty old, and the account is balanced. And then she goes to sleep again and gives another period of credit, with the same result.

This is what has just happened in our political hygiene. Political science has been as recklessly neglected by Governments and electorates during my lifetime as sanitary science was in the days of Charles the Second.

I find it interesting that Shaw uses a financial metaphor to make his point! In any case, we are currently ignorant of correct “economic hygiene,” and we furthermore do not know when and where and how we went awry. Correct hygiene must now begin with our admission that we do not know the cause of the disease or how to cure it. Certainly, there are some sensible practices that we can and must put into practice immediately, but, until our science of economics improves, we will continue to proceed on a trial and error basis, celebrating the booms and enduring the inevitable busts.

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