Pessoa

For someone who spent a fair amount of time working in banking I must admit I find bankers a foreign lot nowadays. They are lunatics. And they are seriously anti-social. Well I exaggerate only a little.

Combine them with neo-classical economists and the mix is combustible. In fact it is enough to cost the world incredible amounts of wealth destroyed in a frenzy of innovative financial hoodwinking.

“They used economics as if it were a proven piece of technology rather than a self-justifying tautological train wreck of an intellectual tradition.”

But I get ahead of myself.

One of my favorite authors is Fernando Pessoa. This is from his work, ‘The Book of Disquiet’:

“Having seen how lucidly and logically certain madmen justify their lunatic ideas to themselves and to others, I can never again be sure of the lucidness of my lucidity.”

How apposite.

The problem many people have with cutting through all the craziness of the past few years is that they are confronted by extraordinarily bright, articulate, and confident advocates of exactly the ideas that sank the economy. It takes a certain amount of courage to call those advocates ignorant.

They are, to use mirror Pessoa, both lucid and logical.

But that doesn’t make them right.

The economists who peddle the skullduggery known as neo-classical economics are certified nitwits. But they occupy the high ground of an academic tradition stretching back a couple of centuries.

That is not to argue that there are no breaks in the chain of thinking in economics: there most certainly are. In fact the current standard bearers owe very little to the great thinkers of the subject’s early years. Those folks: Smith, Ricardo, Malthus, Marx, and Mill all thought in terms of groups or classes of like-minded and economically similar people. Landowners, workers, and so on were viewed collectively. Economics was, to these ‘classical’ economists the subject that explained interactions between groups and how the creation of wealth occurred as a result of those interactions.

But starting in about 1870 economics skewed off in another direction entirely. It became obsessed with individuals, and even more so, with equilibrium.

This ‘revolution’ in the subject was the work of Jevons, Walras, and Menger who all, independently, zeroed in on the notion that economics was the study of the way in which individuals maximized their respective ‘utilities’ within the context of something called a market.

Thus was born the magic market myth.

Or rather it was re-born. Adam Smith had provided these revolutionaries with the key insight that somehow the collective and highly subjective pursuit of personal greed could be transformed into a socially acceptable overall solution. This transformation was the work of Smith’s famous ‘invisible hand’.

To the likes of Jevons, Walras , and Menger it was clear that the invisible hand was none other than the market. And what performed the magic within the market was the price mechanism: supply and demand coming together at a level of prices that enabled everything produced to be sold.

Analytically a consequence of this conception of an economy was that a ‘market’ occupied hallowed ground. It was a neutral force. There were no motives or social goals within a market: it was simply a device for allocating scarce things according to the various abilities and preferences of the ‘agents’ who comprised it. But because a market had no bias within it – it was simply a mechanism – interference in order to influence its allocative outcomes was necessarily inefficient. In other words it is always better to leave the market well alone – that way no biases creep in and prevent an ‘optimal’ allocation. How convenient if you’re one of the powers that be!

Since that time subsequent economists have worked diligently – lucidly and logically – to take the subject into ever more extreme direction in order to preserve, they would say explore, the properties of the ‘market’.

In a series of Nobel winning advances economics has been shoved into a bizarre and other-worldly place where it no longer resembles anything remotely like an economy. Resonant of Ptolemeic astronomy there have been a constant series of additions to the bedrock, each designed to ensure the hegemony of the ‘market’. Each time critics attacked the subject’s increasing other-worldliness the defenders of ‘markets’ counter attacked by adding another critical component: ending with a marvelous contraption called General Equilibrium Theory with its embellishments like Efficient Market Hypothesis and Rational Expectations.

So the economics of today has very little to do with practical things, but is rather a set of self-supporting ideas – all extremely lucid and logical – designed to protect the inner core from attack.

Some of it is patently absurd. Notwithstanding either its lucidity or its logicality, both of which are indisputable Rational Expectation theory is plain nuts.

For those of you who have no idea of what it is: shame on you. Because according to the theory you are expert economists. Rational expectations claims that economic agents behave in ways that mimic economic theory: they act precisely the way that economists need them too in order to preserve the sanctity of market efficiency and neutrality. And guess which economic theory they mimic? No not Marxist theory – that would be a tad inconvenient – and not even Ricardian theory. No: we all act according to neo-classical theory. Hey presto! The astonishing, if not exactly surprising, outcome of this dollop of intellectual snake-oil is that … roll the drums … neo-classical theory explains our behavior. That’s right. Because are all neo-classicists at heart we are all neo-classicists at heart. Thus neo-classicism is right.

Hand out the Nobel prizes please.

So. You are all asking: what has this got to do with ‘lunatic bankers’?

Well as I was standing in the rain waiting for my son yesterday I read through a chapter of John Kenneth Galbraith’s wonderful essay about financial euphoria. It is a very short and extremely easy read so please all read it. He gives a couple of reasons why bankers never learn from their manifold mistakes – they are the cause of a ton of depressions, recessions, and sundry economic disasters throughout history, a fact that needs explanation. Allow me to quote his second reason:

“The second reason that the speculative mood and mania are exempt from blame is theological. In accepted free-enterprise attitudes and doctrine, the market is a neutral and accurate reflection of external influences; it is not supposed to be subject to an inherent and internal dynamic of error. So there is a need to find some cause for the crash, however farfetched, that is external to the market itself. Or some abuse of the market that has inhibited its normal performance.”

And therein lies our current problem.

Not only are bankers frightfully forgetful: they routinely ignore the lessons of only a few years back so as to be able to blunder on speculating and ‘innovating’ in order to blow up the next bubble, but we find it impossible to situate them at the center of the blame because we cannot bring ourselves to question the mechanics of the market. It remains inviolate. Sacrosanct. Safe within the extreme lucidity and logic of the tortured web of economics.

After all, is not Wall Street the very epicenter of the world’s most efficient market? Are not the prices there the apex of efficiency? Do they not reflect all known information [plus some if you’re Robert Lucas, but that’s another story]?

If this is so – as it is according to theory, how can bankers be lunatics? Surely they are not at fault for the current imbroglio? How can that be?

It is because bankers actually believe the rubbish inherent within economic orthodoxy that they are lunatics.

A short time in any good library would have produced copious volumes by the likes of Keynes, Kalecki, and Minsky warning against the notion that a market is always stable. Especially a financial market.

Instead they developed extraordinarily complex models of the market based upon the lucid logic of the economic Ptolemy du jour. They used economics as if it were a proven piece of technology rather than a self-justifying tautological train wreck of an intellectual tradition. Albeit both lucid and logical.

Instead of questioning, as experience should have suggested they ought, whether the earth is the center of the universe, they blundered on just because the text book said so.

Aah, but I’m just having fun with them.

We really ought to pity them as they go back to forgetting how they just ruined our lives; and as they start collecting those massive bonuses based upon their unique and unbelievably lucid and logical skill set.

After all who knows how a market works better than a lunatic banker?

An exploitive lunatic banker, that’s who.

To end on a more serious note:

Galbraith hits the nail on the head: our national obsession with the sanctity of ‘markets’ is based upon faith, not on science. It is an ideology not a hypothesis that has withstood attack. Far from it. All the testing of history suggests that markets are delicate, fallible, and prone to disaster. They need to be treated with extreme caution. Capitalism is a supreme wealth creating device, but like atomic power it needs excessive restraint to prevent a toxic overflow.

Societies that run themselves on ideology alone always end up on the rocks: to wit the Soviet Union. Our current debate about health care suggests there are many here who would prefer to be on the rocks than find a cure to a problem that resides outside their faith.

Further: bankers are already distorting the operation of the free market. The practice of ‘high speed trading’ offers no social benefit, but produces tons of profit for the likes of Goldman Sachs and anyone else with a super-computer.

Lastly: not one CEO that I know is a free market advocate in truth. They all believe profoundly in the efficacy of the central planning vehicle known as the ‘business firm’. Else they wouldn’t be CEO’s. Central planning is the very object that the neo-classicists sought to destroy. Whoops. I also find it excessively amusing to hear them defend the position that the market ‘works’ and therefore they make a profit. Read the book: there is no profit in a neo-classical world. Competition drives it all out. That’s why we love competition: the benefits of innovation flow to consumers, not to bankers who pay themselves bonuses for ‘inventing’ ways to game the market.

Lucid. Logical. And lunatic.

That’s Wall Street for you.