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Illusionary Economics

Published on August 18, 2009 by in InSite Review

HOW MARKETS FAIL: The Logic of Economic Calamities by John Cassidy. Viking Canada, Toronto, 2009. Reviewed by William Sheridan.

According to economically-trained Economics Journalist John Cassidy, most of economic theory from Adam Smith to Milton Friedman has been utopian in its assumptions rather than realist.  Forces and processes were postulated that reduced real-life complexity to simplistic terms, and then extrapolated these “mental models” to produce a series of “analytic insights” and “policy implications.”  In the process, the extent of feedback, feedforward, combinations and permutations was largely ignored.

The result of this simple-mindedness was that the Price System was conceived as a “natural occurrence” with an equilibrium tendency.  Cassidy argues that much of this theorizing was “in good faith” – but there has always been a minority in economics who doubted such “pure motivation.”  By and large however, the majority of both economists and policy-makers joined the band-wagon effect that dominated market society since 1776.

As Cassidy sees it, this illusionary economics is based on a set of three distinct illusions:  (1) the illusion of harmony; (2) the illusion of stability; and (3) the illusion of predictability.  The policies based on these illusions have lead to every economic downturn that has plagued market economies since governments started using Smith and his successors to guide their actions.  Even Smith saw the necessity of regulating the “Financial Sector,” and subsequent experience has demonstrated the need for considerably more extensive regulation.

Sadly however, many policy-makers adopted the secular faith of laissez-faire, and have been trying to implement it whenever the opportunity to do so arises. Thalidomide babies were the result of an unregulated drug industry – cars that were “unsafe at any speed” were the result of an unregulated automobile industry – overfishing and complete stock depletion were the result of an unregulated seafood industry, etc., etc., etc.  And most dramatically, the bursting of all the “economic bubbles” (energy, technology, housing, etc.) were the direct results of these same illusions.

Do either the proponents or the practitioners of these illusions repent of their misdemeanors?  Not really!  They appear to only regret that these crises interrupted their profiteering, and that some of them were exposed as the perpetrators of such anti-social practices.

But a new brand of economics, realist economics, has been developed to replace this illusionary economics.  One of its most important tenants is to limit the amount of risk that those handling other people’s money are allowed incur.  Both the size of investment and the kinds of speculative processes that can be put at risk must be governed by the “precautionary principle” so as to avoid the consequences of catastrophic failure.  The “herd instinct” that encourages the “lemmings to the sea” habits of exaggerated leveraging and risk-taking, must be reigned in.  Let’s hope it works!

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  1. Thanks for your comment, Tom. as you keep reanidg you’ll find hat part of the vision is indeed a social dividend similar to what you describe. For most people, who don’t save money, it would be exactly as you describe. The question you raise is basically why money should be able to act as a store of value at all. I could answer on an economics level, but let’s keep it in the realm of the gift, because really what I want to help create is a world where money and economy is suffused with the spirit of the gift, and where, therefore, institutions like the Fed (or any other institution I’m not attached to having a Fed) are agents to facilitate the flow of gifts. OK, so in a small-scale community, those who are generous and contribute to the welfare of others are appreciated. They generate goodwill and gratitude that might be acted upon right away, or perhaps years later. Beyond the scale of a community of a few hundred, however, we need some way to represent the gratitude of society when the contributions of a given citizen are not visible to those who benefit from them. Money serves as a token of gratitude. Secondly, savings that you put in a bank can be seen from a gift perspective as well. The bank isn’t where you store money for yourself so that no one else can use it. A bank (in its sacred incarnation) is an institution that helps you find someone to use your money. You say, Here, bank, here is a million dollars I don’t need to use right now. Can you please find someone else who needs it or can put it to beautiful use/ That is what I call sacred investing finding a beautiful use for money. To create large-scale projects, we need to coordinate the efforts of thousands of people or even millions. Money is a means to do this. The pernicious thing about saving money today is the idea, I’ll let someone else use my money but only if they give me even more in return. A zero-interest loan is a gift of the use of money. An interest-bearing loan is the sale of the use of money. It’s a huge difference in thinking, and when money and banking embody gift thinking, those institutions will become nearly the opposite of what they are today. Charles

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