The two mentalities that brought us into the current crisis

2011-12-18

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The foundations for the current crisis that we are all experiencing, some to a greater, some to a lesser extend, were placed decades ago, in the late 1970’s – early 80’s. It was the manner in which our societies (mostly the “western”) built their economic model that prepared the ground for the great crash of 2008 that is still underway and will certainly continue to intoxicate our world leading to further deterioration and disintegration. Two were the mentalities that underpinned the false policies that were carried out all these years. On one hand it was the willingness of politicians to always to present to their voters “solutions” to their problems, often making promises they could never meet; on the other a flawed mode of economic thinking, one that falsely mathematicizes human beings and human society, became the perfect tool in the hands of those politicians, legitimizing all sorts of distortions in the system.

**Economic Mentality**

The economic mentality that prevailed at the time was an interventionist one. Most economists believed that they had made significant progress in their field, leaving way behind those philosophers and thinkers that established the science centuries ago. They believed that the development of economic theory, coupled with the refinement and great improvement of economic models would lead to an era where human beings would be able to perfectly control the economy, by using the accumulated wisdom they now thought they had to make perfectly measured interventions in the economy to fix whatever deficiencies existed. This mentality started with John Maynard Keynes, a brilliant British economist who was seeking ways to get his country out of the Great Depression in the 1930’s. He came up with the idea – and the corresponding economic models – that the state could intervene to stimulate the economy, producing the aggregate demand that was missing, to effectively bring about growth, killing off the crisis. The same approach was followed by the New Dealers in the United States, headed by American President Franklin D. Roosevelt, who actively set measures to control the economy with the aim of leading the country out of the great economic crisis that had hit humanity at the time.

These interventionist policies were based on a false interpretation of the causes of the Great Depression. They believed that it was the free market system that almost destroyed itself. It was because of unbridled speculation, of people becoming ever-more greedy, of entrepreneurs conspiring with one another in order to make even more profit and all sorts of similar metaphysical arguments along these lines. Both their interpretation of the causes of that crisis and the interventionist policies they implemented, were contested by numerous scholars who first proved that the Great Depression was a result of catastrophic Fed (the US central bank) failures that allowed for the creation of the stock market bubble in the first place and the collapse of the money supply in the second; and second that the “stimulus” Keynes advocated and the New Dealers implemented did nothing at all to get the countries out of the mire, but contrary prolonged the damaging effects up until WWII (see this one-hour long speech in video format_ _by Professor Robert P. Murphy, titled “Contrasting views of the Great Depression“).

Yet despite the scientific proof against these policies, Keynesianism survived and has ever since evolved (together with other emanations of interventionism) keeping in tact its core principle, i.e. that economic science can be deployed to make “surgical” interventions in the economy to fix the system, making it more robust and preventing it from “again” falling victim of its own “self-destructive” propensities. This is in fact the kind of narrative we were hearing for all the years prior to the current crisis. That thanks to the progress that has been made in the field of economics, thanks to the works of people who calculated with “precision” the effects of government intervention in the economy, thanks to the now wise policies exercised by central banks, humanity would never have to suffer again from an economic crisis similar to the Great Depression. After all the current chairman of the Fed, Mr. Ben Bernanke was calling the era prior to 2008 the period of “Great Moderation”, in which all the “defects” of the free enterprise system would be addressed in a wise and positive manner by regulators.

All this has proven to be non-sense, for two reasons. The first is that economics is a social science, not a positive science. This means that it is about human beings and the human society, who are by all means unpredictable, despite the fact that we can always identify expected behaviors. The second reason is that it is impossible to mathematicize humans and their society, by using sophisticated mathematical models, supercomputers, laboratory rats etc. for that reduces them to mere drones, which is a serious misunderstanding of reality. Humans will always react differently when the rules keep changing and this is why it is impossible to predict their aggregate reactions with mathematical accuracy.

The economy is not an engine that you can push this button, pull that lever or drive that screw and you get the desired results. This theory that policy-makers can “stimulate” the economy by calculating the multiplying effects of their spending is utterly false from the outset. The economic advisors to US President Obama told him that with the sort of stimulus they were preparing at the early stages of the current crisis that for every dollar spent by the government, the economy would produce a specific amount of money, namely 1.67 dollars. This in retrospect was proven completely detached from reality, but instead of accepting that their mentality is flawed, the defenders of such interventionist policies claimed that the stimulus was not that big after all “because the recession was deeper than expected”.

To recap on this section. The economic mentality that has driven our world into this despicable mire that we call the Great Recession is seriously flawed for it miscomprehends the role of economics in science and society; it overestimates the real-world applicability of economic models, while simultaneously degrading human beings to mere drones; it unintentionally justifies populist policies of frivolous spending or the “cozy” relationship between politicians and plutocrats. For things to change in this world, economists must first admit that they know too little and not try to implement their narrow models in the real world, effectively causing more harm than good, despite their sincere intentions.

**Political mentality**

Politicians are people who engage in a competition with on another to attract votes, ultimately to cling on power. Since politics is where all the varying interests of the society are blended together to produce what is eventually an organized polity, a politician has to face two very specific dilemmas when entering the political arena.

The first is to choose a particular group of people, by adhering to a certain ideology (whether that ideology is broad or narrow, makes little difference – the aim is identical), since it is important to have a particular political identity that is interconnected to a definite political history, most probably a political party mechanism; so as to address someone. Politicians who do not address some particular group (in broad terms) are in fact not speaking to anyone, so they will either remain in power thanks to other reasons not related to what they actually say, or they will simply lose their position.

The second dilemma is that they need to balance their speech between unrealistic proposals and concrete facts. Those who use facts much more than unrealistic rhetoric are more respected by those who know a bit more about the system, but are definitely not reaching out a broader audience. Whereas those who promise all sorts of things end up being the most popular in the good days and the most hated in the bad days – that is their choice.

So we are in a system where the majority makes decisions. We also know that the promise of a better life is much more favorable than the harsh reality which says that things might not improve. Considering that politicians are in constant competition with one another over who will get the vote, it is safe to expect that a significant number of politicians will put a greater emphasis on what they think they can do to improve the standards of their voters and society at large. This leads us into a situation whereby the temptation to use demagogy instead of reason is very strong and it is unfortunately what we almost always see around us. A real world example for us here in Europe was the election of George Papandreou as the Prime Minister of Greece a few months before the country came to the need of a bailout, on the promise that “money exists”. He used a complete lie, as it was a common secret that Greece was bankrupt, just for the sake of rising to power. And there are infinite such examples all over the world that need not be documented within this article.

The gist is that politicians will prefer easy street policies, than a path that comes along with tough decisions that are most often considered politically unacceptable. But for this to be perpetuated there needs to be a way of justifying the otherwise “unjustifiable” promises of politicians that can offer to people gold out of thin air. That is found in the interventionist economic mentality discussed above. Using the theories of mainstream economic thought that the government can do this, that, and the other to improve the economy/society, politicians legitimize even the most unrealistic of claims, offering “free lunches” here and there. These have taken the form of many policies that are propagated to help the needy or generally to make things better even though they end up doing more harm than good (see A key feature of capitalism is Failure – Not stability).

The reason politicians espoused the interventionist economic theories is very precise and specific. Someone who is in power needs to send a clear message that he/she is in full control so as to produce the necessary confidence citizens need. A politician, when faced with an economic downturn, or a crisis needs to reaffirm the control he/she has by “doing something” or else it is (falsely) thought that the system will continue to collapse forever until we return back to the stone age. Hence intervention is the course of action just for the sake of showing to the world that the “ship” has a “captain”.

**Conclusion**

All the above are merely the constituents of a very specific mindset that permeated policy-makers the last decades. The purpose here was not to identify one by one the sources of the current problems, but to paint the broader picture. Many other parameters need to be taken into account for a coherent interpretation of the current crisis to be consistent with reality. In addition numerous other secondary issues need to be taken into account to appreciate the everyday dynamics in the society/economy; while also the peculiarities of every particular case need to be identified.

Having said that, the core of the debate remains unaltered. Any particular policy, the idiosyncrasy of an individual politicians, the actual ramifications of certain courses of actions, are all established on the two mentalities mentioned above. The first that economics can be used in the real world to make highly accurate interventions in the system for the sake of addressing whatever flaws may exist n the free market. The second is that politicians are from the outset the sort of people that will be tempted to use any means to reach their ends, which is ever more power, even if that implies a series of vacuous policies and full-scale propaganda to pass them as just, correct and necessary.

Out of all the above each can draw a different conclusion. My own is that for as long as things are as they are it is not prudent to give excessive power to few hands. Instead diversify it as much as possible. This means among many others we need to abolish the ideas that ask for an over-concentration of authority in few hands, either that is at a national level, as is the case in every state where social planners are called into action, or at a supranational level, such as the EU currently were most want to concentrate powers in the center, ostensibly to make things better, even thought they will greatly succeed in the opposite.
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(Image Credit: Students for Liberty)