Tuesday, 30 September 2008

Irrational economics

I lived on the edge of the city (as in the square mile where the banking is done in London) for several years, and I can understand the peculiar fascination I feel towards the current meltdown as being heavily influenced by the general unpleasantness of having to share space and transport with so many merchant bankers.

I feel a little disappointed that I haven't finished The Survival Paradox quicker, because one of the themes running through it is the unreasonableness of the modern obsession with 'rational' economics.

Firstly, there is a difference between 'rational' and 'reasonable'. There is a wonderful 'rational' solution to the 'Fox, Chicken, Grain' puzzle, in which a farmer has to use a small boat, in which he can only transport himself and one of his cargo (fox, chicken or grain) at a time, to cross a river. Leaving the fox with the chicken, or the chicken with the grain will result in disaster. The rational solution is satisfying to work out, but the reasonable question remains: why is a farmer carrying a live fox around with him?

The number of important decisions made daily on the basis that they are rational is something that genuinely concerns me. Particularly when at its core, western rational economics has an apparently bonkers principle: compound interest.

Older civilisations recognised that compound interest wasn't viable, because while value was still linked to concrete stuff (be it gold, sheep or grain) a debt or investment subject to compound interest would one day require you to pay back more 'stuff' than there was on the earth. Which would be silly.

When we magically unlinked value from the concrete world and created the paper based currency we know as money today it was intended to be a 'promise' which could be exchanged for real gold when the time came. But even 300 years ago, over confident banks released more paper money than they could back up with gold in their vaults, assuming that the flow of gold would be so continuous that as long as their hands moved quicker than the investors' eyes then all would be well. Then there was a war and the gold supply dried up and some of the paper money became worthless.

Fearing that this might happen again, instead of passing legislation that prevented banks from issuing more paper than they had gold, in 1833 a law was passed 'guaranteeing' the value of the paper currency, so that people would continue to have confidence in it, even in times of low gold supply. (It was only passed in England and Wales, there is still no legal guarantee of bank notes in Scotland).

So - here we have a prime example of what I have been calling 'The Alpha Trap' in action. Alphas have privilege. The status of an alpha is a result of the status quo - whether that is a set of collective beliefs which holds them to be special (king, queen, priest, soothsayer) or a common understanding of today's survival problems which frames them as an appropriate solution (politicians, CEOs, football managers). So, what is the number one priority of an alpha? 

Maintaining the status quo - because this is what affords them their privilege.

The Alpha Trap is particularly rife in rational economics. 'Rational' Economics is a game which relies upon most of the participants having a rough understanding of the 'rules', while a few alphas gain advantage by having a more in-depth understanding and a closer position to the levers. House prices are linked to interest rates because we believe them to be, and so on. The people who repeatedly reinforce the rules are of course those alphas who personally benefit from being able to expertly play the system. If we decided the rules were nonsense then those alphas would quickly find themselves unable to maintain their privilege.

Wouldn't that be kind of fun?

I have to admit that I am reacting to each further news bulletin promising impending doom with a little bit of glee. And also sadness, because I've read that one tenth of American families are more than 3 months in arrears with their mortgages, and I've no doubt that those people are experiencing stress and pain. What interests me though is how a government can dress up a rescue package as being for the benefit of those people when it is so clearly geared to the advantage of the financial sector. If you want to prevent families having their homes repossessed, pass a law preventing repossessions.

For global politics I can see the current crisis as wonderful and positive. Do I sound insane? 

The reason for my optimism is that capitalist westerners are caught in a set of thinking where we confuse having more 'stuff' for being better people. To solve the impending Climate Change crisis we're going to have to cooperate with other societies who don't have as much 'stuff' as we do, and frankly we collectively look down upon those people because they don't have iPods. If we don't shift our attitudes rapidly then we'll see millions, even billions of people in the undeveloped world die through human-generated natural disaster during the next few decades.

So, I'm looking at the markets falling, and the banks collapsing, and the government experts backed into a corner where they finally admit that 'rational' economics isn't actually a proper science, despite all the numbers and graphs and formulas, and is really just a widely held set of beliefs ... possibly even superstitions ... and I'm excited. Because normal people are losing their faith in the status quo of rational economics, and starting to ask the question "what next?"

20 comments:

Misssy M said...

I'm glad the rescue package hasn't been approved. The banks have to sort out their own mess, just as I would have to if they repossessed my house.

Their basic business operations aren't going to get the overhaul they need if they are based on being bailed out by the government.

I really don't know anything about economics, but what worries me more than my own ignorance is the fact that even so called financial experts on American news programmes are unable to explain what has really happened in terms we can all understand. And that brings us back to the fact, that it must all be just smoke and mirrors.

Watching President Bush trying to talk about it in interviews is shameful and terrifying in equal measure.

drak said...

I don't hold quite the same optimism.

The 'Prime Alpha's in this case don't just hold the reins in economic terms, they also control the military and judicial wings of our society (as the power over one has allowed influence and then power over the others).

If capitalism crumbles to nothing (to the grave-tempered delight of Lenin, Marx and others) the 'model' of capitalism will not. As you say, it is what keeps the powerful powerful. Which leaves a whole bunch of people suddenly faced with a real loss of control, a massive disenfranchised 'subject' population and no promise of shiny goodies to keep said populace in its place.
To maintain control (which is the natural urge) they will have to look to their military and judicial powerbases. Look to Nigeria or North Korea for a model of how long a military/political powerbase can subjugate a population. Look to Iraq to see what an economy-driven foreign policy would be. Look to Georgia to see what is deemed 'acceptable' by the majority of our world leaders.

There is no 'need' for the present untenable model of constant growth to be dropped, as long as it can be reinforced by force.

And if the developed nations ALL find themselves in the position of 1920s Germany (with a collapsing economy, economic migrants with no economy to support them and amssively rising unemployment) what does that suggest for the near future?

Sorry if this seems a bit bleak, but I have a fundamental distrust of humanity in the abstract. Individuals are generally 'good'(an abstraction I could defend, but which would take a lot more writing!), but most willingly subjugate to the 'rational' and the status quo. And as you so lucidly put it these are not necessarily pro-survival!

Kahless said...

I too watch with fascination and part glee. Because I am caught amongst it professionally and I am getting to put some theory into practice. Work is busy. And exciting. And the worse it gets the more secure my job is ironically. As much as any job is safe.

Yet when I step back and think of the human impact then I feel sad.

The collapse of the banking system will not help the world. Yes humans are greedy and power hungry. If they cant exploit one system then they will exploit another.

Collapse of the banking system has deep ramifications. It isnt just about the rich kids in the sector getting richer.

I have been debating about doing a simplish guide for people to explain some of the dynamics at play.

Thank-you for your post. Very thought provoking.

Glory von Hathor said...

Hmm. Okay. I'm sold.

Swap you your forthcoming book for some eggs, some really nice string, a batch of flapjack and a really endearing picture of my kitten.

Stray said...

Misssy M - I've been lucky to mostly manage to switch over in the nick of time and not actually hear the bumbling Bush attempt to explain what he believes is going on. Terrifying.

Drak - darling. I think we fundamentally agree in many ways but on a deep psychological level I am an unsquishable optimist and you're a bit of a melancholic sod.

I think the difference between us and the developing world examples is that we still have enough to lose to keep us invested in the outcome.

Fingers crossed!

Kahless - your work situation sounds fascinating! I think you're right that unscrupulous people simply find another way to exploit the world, but what I do think is that people are most open to new ideas when the current set of 'truths' are suddenly shown to be fallible.

It's a bit like therapy ... of which I know you know plenty. You sort of need to break down the existing structure to allow change to happen. It's painful, and there's no guarantee which form the change will take, but there is at least a period in which we can reflect on what we might want the future to look like now that we know that it can't look like yesterday.

gvh - sold! We can always find a use for string, Badger practically lives on eggs and flapjack is my favourite. The kitten picture will fit in well as I seem to have lost the ability to photograph human beings since getting my dog.

Your blog rocks by the way. Ms M and I were proper spitting our tea out reading it. Genius. You're on our list.

Hullaballoo said...

What next you ask. Belly dancing for everyone, I say.

I have dedicated a post to you over at mine, dear Stray.

Hulla
xx

B said...

Thanks for this. I hadn't thought about it all in quite these terms, and while I don't 100% agree with everything you say, I do agree with a lot of it - probably most. And it's good to have the rest of my opinions challenged :)

Jon M said...

Seems like sense to me. We were wondering what would happen if the banks collapsed etc...would our house fall down? Who would come and repossess it if everyone was in the same boat? Does anyone want to swap a couple of cabbages for some eggs? Sorry I wandered off message there! I like bartering!

Political Umpire said...

Very interesting post Stray, and funnily enough the same conclusion I came to when writing about the crisis but for entirely different reasons. The problem as I see it is that the city created pyramid schemes: ever increasing borrowing that only worked as long as people ever increased their borrowing. When, as was a mathematical certainty, it all came to an end, I say let the chips lie where they fall. If that means everyone gets a lesson in value as well as price, then so much the better.

Bill Stankus said...

So many people, so many problems ... so little time.

anticant said...

Pyramid selling is the classic financial snake oil and as old as the hills. In the 1960s a shark called Bernie Cornfeld scooped up $2.5 billion and a personal fortune of $100 million by selling worthless bits of paper. His house of cards collapsed in 1970. See Google, and a book about him called "Do You Sincerely Want to be Rich?"

It's all happened before, but we never learn until it's too late.

That's So Pants said...

Hi Stray

If the proceeds of the last House of Pants weren't sitting in a bank waiting to finance the next HOP, I might feel more jovial. I do agree with you though that a change to our thinking must follow and it frankly can't come soon enough. I don't want to have any more conversations with people about what they have just bought, intend to buy or would buy if only they could get their credit limit extended.

xxx

Pants

anticant said...

Don't worry, Pants - they'll soon be telling you what they are unable to sell to fund their rocketing fuel bills.

As the optimist said, "at anyrate we can all go out and beg". To which the pessimist replied ""who from?"

Casdok said...

Interesting post. Yes what next?

McBöbø said...

Ahem … it is the MIDDLE of October, you know!

Kahless said...

Back when you wrote this I certainly didnt think a country would become bankrupt. Now Iceland has. Which country is next?

anticant said...

The USA already is bankrupt, but doesn't admit it.

Kahless said...

True Anticant.
And the UK has had to borrow heavily from China and India

DOT said...

Bit late to the party but I finally made it.

I have a post on the issue though I arrived at different conclusions. I tend to agree with Drak's comments about the status quo being reinforced with force if things get totally out of control. The precedent was established when the troops were sent in during the General Strike of the 20s.

My post is here:
http://westpierwords.blogspot.com/2008/10/poverty.html

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