Economists vs Weather Forecasters

Why did god make economists?

To make weather forecasters look good.

Imagine that I am a weather forecaster. I use a mathematical model to predict the weather. But weather is very complex and so I make some assumptions.

Firstly I notice that the total amount of rain is the same as the amount of water put into the atmosphere by evaporation and transpiration. The nett water flow is zero. So I assume that water does not play an active role my model. Similarly wind movements do not change the total amount of air, so I assume that overall it is not important.

In terms of climate I make an arbitrary decision that climate is just big weather. I ignore the way that changes of scale affect how systems behave. And I also assume that weather will tend towards equilibrium that the amount of water in the air, and air movements due to pressure changes will settle down and stay the same unless acted on by an external force (such as an asteroid striking the earth).

The model I produce is a reasonably complex series of algebraic equations that can be handled by a moderately powerful computer.

Would you trust my weather forecasts? Or would you think I was delusional? Would you not point that that when water accumulates it can have dramatic effects such as floods? Would you not point out that localised air movements from tornadoes to hurricanes are actually quite important features of weather? Would you not think that global climate is different from local weather since it covers longer time frames and is on an entirely different scale? And would you not point out that the idea of weather stabilizing at an equilibrium is patently ridiculous, that everyone knows that the weather is inherently unstable and very difficult to predict? Would you not point out that weather and climate modelling can only be done on the worlds most powerful supercomputers and is still far from 100% reliable? Would you not call me a fool?

And economists? Well they have mathematical models too. In these models they see that debt is also credit and cancels out, so it isn't included in their models. They assume that banks are merely passive mediums of money exchange. They assume that the macro-economy is simply a scaled up micro-economy, and that like a simple supply and demand relationship the economy is always seeking equilibrium. In these models consumers are assumed to have perfect knowledge for making decisions, including perfect knowledge of the consequences of their actions, and that masses of people behave no differently from this perfect individual.

It's all patently idiotic. One doesn't have to be an economist to understand that this approach simply cannot work. And it becomes more clear why this approach has not worked. The models will never work. The number of completely insupportable assumptions make it a certainty that they will only ever be right by accident.

Here's Steve Keen explaining it to a group of economists. And note that Unlearning Economics would probably find my analysis overly simplistic: How Not to Criticise Economics.

Now these people, directly or through back seat driving, have repeatedly driven the economy into a ditch. And yet they still clutch the wheel and claim to be doing, and refuse to let anyone else have a go. They seem sincere in their belief that they're continued mayhem is the best that anyone could do under the circumstances. And yet a few marginalised economist who are more willing to ask questions, have made accurate predictions of the present crisis. These people were prescient enough to see the crisis coming, and to write and publish books on the subject. The present crisis was foreseen, it was avoidable, and there is another way. But politicians still have their heads in the sand.
We have to tell our politicians that time is up for economists of the Neo-Classical bent. We need a better model. Better models are available. I have my preferences, but I think the first step is an acknowledgement of failure by the current lot, then a public debate about alternatives, where we can let people, like Steve Keen, like Ann Pettifor, like Joseph Stilitz, like Michael Hudson be heard. Then use democracy to make a choice and give it a generation to make a difference, and then have a review.

Just Banking Conference

Ann Pettifor... "we're going to have a cataclysm"

See also the Green New Deal.

Mary Mellor (Emeritus Prof of Sociology)... "what we need is de-growth... how much is enough?"

See also Bringing Economics Down to Earth.

Prof Steve Keen. "Neo-classical economists don't include banks or debt or money and that is why they didn't see the crisis caused by banks, debt & money coming."

Prof Richard Werner

How can we make banks social useful?

Two Wrongs Don't Make a Right

Bob Diamond, having been caught out, confessed all and hoped that by going first he would mitigate the punishment that would inevitably follow. He obviously did not understand the dynamics of the mob which greeted his outing as a wrong doer. He underestimated the pent up frustration that everyone in the UK feels when they are much worse off while fat cats report record profits. Nothing about this situation is fair.

I want to take a step back and consider a moral point. Our Judeo-Christian based morality broadly works by identifying the guilty party and punishing them by inflicting some harm or loss on them. For every crime there is a perpetrator and we expect demonstrable suffering to be visited on them. It is a long time since execution was a public spectacle in the UK, but nevertheless there seems to a genuine desire to visit harm on Bob Diamond as retribution for his crimes. It almost seems as though people see scourging and crucifying Diamond as a way to redeem bankers. Sound familiar?

There is a fact that has presented itself time and again to me. The implications are profound and troubling. It is this:

If in confessing their sins they are inviting harm or loss upon themselves, then no rational being would confess. 

A rational being avoids harm, sometimes going to great lengths to do so. When we set up a system of justice that visits harm upon people, then they will do everything possible to cover up mistakes and moral failings.

None of us is perfect, and none so saintly that we don’t break our own moral from time to time. Sometimes we quite consciously and deliberately do something moderately immoral (or perhaps illegal). I think this applies to more or less everyone. Saint Paul complains that he does the thing he would not do, and does not do what he would. (Romans 7:15).

But Judeo-Christian morality leaves us with an imperative to identify wrong doers and harm them in some way, or cause them loss. And we believe that this harm done to them cancels out the harm they did. In other words our moral and legal system is based on the idea that two wrongs make a right.

As I say this conclusion is both profound and troubling. Presented with the proposition that two wrongs make a right, most people would be capable of seeing the logical flaw. In order to punish in the way that we do we must sanction certain kinds of harm in the hope that fear of harm will be a deterrent. But fear of harm can be overcome by other motivations as our prison population shows. Furthermore this sanctioned harm requires us to suspend the virtues of empathy and altruism. Suspension of empathy is all that allows us to harm another being, because if empathy is engaged then we feel the other’s suffering. In order to extract retribution we have to become a bit less human.

There is also the vexed question of who is sanctioned to harm people, and how to they cope with the dehumanising effects of this power without becoming monsters. Armies down the ages have committed atrocities. Police forces have often misused their powers. Judges have been completely out of touch. And so on.

If we hold empathy and altruism to be good, then I would argue that they are always good; and conversely that if failures of empathy and altruism are evil then they are always evil. The whole notion of necessary evil is extremely fraught. Necessary evil all too easily becomes a smoke screen for any evil.

A nation baying for the blood of Bob Diamond does not encourage bankers to come forward and admit mistakes. Any rational wrong-doer is actively covering their tracks a little more thoroughly even as I write this. The idea that punishment can undo wrong doing or redeem wrong doers is just magical thinking. Two wrongs do not make a right. We can’t call for harm to be visited on another person and claim the moral high ground. This leaves us with a dilemma over what to do with these bankers.

Harming Diamond does not fix the situation. Setting up the conditions for this not to happen again needs to be our priority. Using this as an opportunity to call for systemic change makes more sense than focusing on one individual.

Government to Deregulate Physics

Responding to the announcement that physics working at CERN have discovered a new sub-atomic particle, yesterday David Cameron has announced the government's intention to deregulate Physics. "The Conservatives feel there are too many Laws, and that Physics is being held back by this regulatory burden. The Conservatives feel that the 2nd Law of Thermodynamics promotes wasteful spending of energy by systems and we will repeal it in the next Budget."

Asked about the other Laws of Thermodynamics, Cameron replied, "This government does not believe that any system should be allowed to get something for nothing, so we're in favour of the 1st law. We do have a committee looking into the 3rd law."

On Newton's Laws of Motion Mr Cameron said "We don't think this is an appropriate regulatory frame work and would prefer that the market be allowed to determine how objects move."

"The Large Hadron Collider was a very expensive project imposed on the UK by the European Union, and we feel that if the regulatory framework had been less complex that the search for the so-called God particle would be been less costly overall. Clearly under the last Labour government the Higgs Boson was not discovered and they should be ashamed of themselves."

Zombie Banks

Banks should prove to us that they are alive by going without QE or subsidies for even a day.

Bank's income is coming from govt subsidies. They have an infinite line of credit...

Private Debt Stays Behind Closed Doors

This is a graph from the Government's 2011 Budget Report. It shows their estimates of the scale of private sector debt - about six times the level of public debt. The top lighter band is the financial sector. Black is household which is about 80% mortgages, and dark-green is non-financial business.

Curiously neither the 2011 or the 2012 Government Budget have any measures for dealing with this problem. In the 2012 Budget there is barely any mention of private debt. I fact public debt is talked up as the problem. And recent days have seen government minsters blaming this on Labour. In particular the Government's  Budget is silent on the possibility of this massively over-indebted sector borrowing even more money for investment. I cannot recall any government minister mentioning private debt, and I cannot recall any journalist asking sustained questions about it. Some questions came up during Steve Keen's recent book promotion tour, but have died down again.

Many commentators are now saying that the Govt are using the chaos of the ongoing depression to shrink the state for ideological reasons. For example, in an interview with the Guardian, Dr Gabriel Scally formerly of the Department of Health says:

"At the end of the war this country was hugely indebted but within a couple of years had free healthcare and free education for everyone – what an achievement! This government is putting a huge price on education, especially young people seeking to go to university, and is in the process of dismantling the NHS." 

I think this is very likely to be the case. So not only is the government ignoring the primary cause of the depression, its austerity program is doing long term damage and preventing recovery, but they are dismantling or seriously weakening the social institutions that we need to help us get through this.

If you sat down to right a farce about a myopic and incompetent government, you could not do better than the real thing we have now. The UK will be a long time recovering, and we have not seen the worst of it yet.

Economic Revisionism

Recently the Guardian published an article by J. Bradford Delong (June 29, 2012) Explaining current US Treasury rates is beyond even the economic prophets which tries to rehabilitate mainstream economists. Sadly no comments were possible on the paper's website, but two non-orthodox economists have replied:

Bill Mitchell: Revisionism is rife and ignorance is being elevated to higher levels.

Steve Keen: What utter self-serving drivel, Brad Delong!

Both of these commentators point out in some detail, with extensive quotes and many links, that the people Delong suggests we trust with the economy have always been and still are clueless about what is going on. They are part of the problem not the solution.

Meanwhile the scandal over interest rate fixing is highlighting how corrupt banks and the finance sector have become under deregulation and a culture of greed.

Max Keiser on how the Markets are Rigged (2007)

This film is about how hedge funds were ripping off the system by manipulating markets in precisely the same kinds of ways as the 'pools' of 1929. Free markets are in fact rigged by brokers, banks, & CEOs.  And governments collude with them by removing legal impediments. This same behaviour caused the last Great Depression.

"This trading is the matrix for a future crisis" (remember this was said in 2007!)

In the USA "markets are not free, they are not fair".

PART I


PART II


Al Jazeera once again more insightful than Western media.

Changing the World. A Case Study.

The world changed in 1971. I suspect that few of us noticed, though we've all felt the effects.

In 1971 President Nixon unilaterally dismantled the Bretton Woods Agreement. This multi-lateral agreement on monetary policy was put in place to help the world recover financially from WWII. It spawned the IMF and the World Bank. In the same year the UK introduced the Competition and Credit Control Act. The main effect of these changes was deregulation, which allowed private sector debt to begin to accumulate.

From 1945 to 1971 was a period of economic stability, with no notable crises. The IMF tell us that since 1970 "there have been 147 bank crises, 218 currency crises and 66 country-financing crises". In 1971 the motto of Polonious was decisively thrown out. The world began to borrow to finance consumption and to gamble on asset prices. Debt fuelled consumption and speculation, especially the latter, pushed up prices causing inflation. Inflation required pay rises, and further price rises. Until it all collapsed in a recession. Then began to pile up again. Each cycle was a little worse because some of the debt carried over. In the Third World it rapidly lead to ruin and poverty for many. In South-East Asia ruin and poverty came in the late 1990's. Now the First World faces ruin.

The response to this was to further deregulate the economy, but particularly finance. This allowed for more debt, and more risky lending. Banks, who make money from debt, were happy to oblige. Sucessive governments around the world followed similar policies.

The finance sector generated huge amounts of income but concentrated it in the hands of a tiny minority. It generated even hugher amounts of debt. Today the UK is the most indebted country in the world. Recent estimates place our private sector debt at 507% of GDP, household debt (including mortgages) at 100%, and Government at just 81% of GDP.

The most recent crisis exposed corruption in the finance sector, and the massive scale of our indebtedness. Five years later we're still going down hill, with Europe teetering on the brink (of what?). Many first world banks are technically insolvent but somehow reporting record profits. Now we learn that some have been manipulating interest rates. They are propped by government borrowing amounting to a trillion pounds. Executive pay is increasing exponentially. Unemployment is high. So much for the "free market". Many intellectuals are pointing to distrubing parallels with Europe in 1931.

The same trend has excerbated environmental problems. Governments seem paralysed by fear of the business sector. The political will to address any of these problems does not exist at present.

How did this happen?

The most disquieting voices joining the chorus of criticism come from perfectly respectable elements of society: from the college campus, the pulpit, the media, the intellectual and literary journals, the arts and sciences, and from politicians. In most of these groups the movement against the system is participated in only by minorities. Yet, these often are the most articulate, the most vocal, the most prolific in their writing and speaking.

Lewis Powell Memo

The second major event of 1971 was the Lewis Powell Memorandum to the US Chamber of Commerce entitled "Attack on American Free Enterprise System". Powell characterised the situation as a war in which business interested were threatened by social change emphasising the values of cooperation and mutual aid (our values). The memo makes a series of detailed proposals for an aggressive response by conservative businessmen.

Businessmen should endow universities with chairs to teach conservative business practices, and financially support conservative institutes. Powell proposed that a number of very well resourced think-tanks be set up. These would help to create and promote a consistent, potent message. Deregulation was central to their agenda. They needed to train spokesmen in communicating the conservative message, and create booking agencies to help organise speakers. They also invested in media companies to ensure access. They did all this, and needless to say they funded conservative political parties. Nixon appointed Powell to the Supreme Court two months after the memo was published.

At the same time US conservatives began to politicise fundamentalist Christians who had been disengaged to that point, creating a whole new constituency of millions of ultra-conservative voters.

The results have been spectacular. Conservatives all over the world have benefitted from this coordinated strategy to hijack democracy in the USA, and fight a war against their own people. A steady stream of graduates with PhDs in what amounts to conservative ideology, finds jobs in universities and think-tanks to explore and publish their ideas and influence new generations of students and intellectuals particularly economists. There are close linked between Neo-Conservative though and Neo-Classical Economics. Through manipulation and control of the media a constant presence of the conservative message is maintained. Powell's memo is one of the most important documents of the 20th century, it is the founding charter of the Neo-Conservative religion.

As a result conservative ideas have been at the forefront of politics. Deregulation has wrecked the world's economy, and helped to wreck the environment. Conservatives set the agendas on which elections are fought (they are doing so again in the UK right now). Business policy became political policy; business values became social values.

Progressives tend to use the language of conservatives when critiquing conservative ideas, because they don't understand that even a negative mention helps to reinforce the idea. This is simply illustrated by saying "Don't think of an elephant". We cannot help but think of an elephant. The conservatives also manage to portray opposing views as against the common good, out of touch, or naive. Ironically self-interested conservatives gang together, and community spirited progressives are often deeply divided. Resistence has been ineffective.

Clearly the very great likelihood is that this will all continue with rather horrific consequences. This how American businessmen suceeded in changing the world, and

The question I'm asking myself is "OK, I've understood this, now what?"

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Submitted to the journal of the Buddhist Order I am a member of. July 2012

Bankers' Debt