Category: economics

When sheer stupidity becomes a governing principle

One of my favorite moments in human history was when Alan Greenspan, the legendary chairman of the Federal Reserve, had to admit in front of a congressional committee that he never really understood how the economy works (you can find the quote and the reference here). BTW, if you are under any illusion that mainstream economists learn from their mistakes, I encourage you to google the word bitcoin. Or read this article by Paul Krugman.

There is no wealth on a dead planet. Cartoon by the brilliant Patrick Chappatte.

Another person who apparently never understood anything is William T. Nordhaus, recipient of the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2018. The point is not that his conclusions about managing climate change were all wrong. The real outrage is that they were based on completely ridiculous assumptions, as pointed about by Professor Steve Keen in a paper appropriately titled “The appallingly bad neoclassical economics of climate change”.

Anyway, it turns out that the reason for why we almost lost the only habitable planet in the known universe is down to a most unfortunate accounting error by mainstream economists. Professor Keen recently gave a short interview with CNBC (‘War’ footing needed to correct economists’ miscalculations on climate change, says professor), which is well worth watching.

I will try to be more polite in my choice of words than professor Keen, but my conclusion is the same: Classical economic theory cannot be applied to climate change, because we are facing a situation where all societal structures could break down. If you believe that I am exaggerating, I encourage you to read “Some Questions of Moral Philosophy” by Hannah Arendt. Her starting point is a quote by Winston Churchill: “Scarcely anything, material or established, which I was brought up to believe was permanent and vital, has lasted. Everything I was sure, or was taught to be sure, was impossible, has happened.” She then points out that “We – at least the older ones among us – have witnessed the total collapse of all established moral standards in public and private life during the 1930s and 40s.” My father was already alive the last time society collapsed. There is no reason to be believe that this could not happen again. As a matter of fact, it is already happening in many parts of the world.

Only if we are prepared to accept the magnitude of the challenges facing us, will we have any chance of responding in an appropriate fashion. Basing our decisions on an already discredited theory does not seem very clever.

Furthermore, I believe that Global Climate Compensation is a realistic proposition for halting climate destruction, ensuring global stability, and alleviating poverty.

The Flaw in the Plan

One of my favorite moments after the financial crisis in 2008 was when Alan Greenspan, the legendary chairman of the Federal Reserve, had to admit that he did not understand how the economy works. Here is a part of a transcript from a congressional hearing on October 23, 2008:

ALAN GREENSPAN:

Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not.

And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.

REP. HENRY WAXMAN:

You found a flaw in the reality…

ALAN GREENSPAN:

Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

REP. HENRY WAXMAN:

In other words, you found that your view of the world, your ideology, was not right, it was not working?

ALAN GREENSPAN:

That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

THE FINANCIAL CRISIS AND THE ROLE OF FEDERAL REGULATORS, October 23, 2008. The full transcript is available here.

Oops! To misquote Mike Tyson slightly, everybody has a world view until he gets punched in the face. Unfortunately, with great power comes great responsibility, and mistakes made by generals, presidents, CEOs, or the chairmen of the FED have consequences.

It is dangerous when people base their thinking on a flawed understanding of the world. People who believe in UFOs, witches, or weird conspiracy theories should not be allowed to run things. Before the scientific revolution and the discovery of microbes, people used to believe in the spontaneous generation of life. The proof was simple: if you left a piece of meat out in the sun for a while, it would soon be crawling with maggots and worms.

Today, a majority of people, including a large fraction of the ruling class, seems to believe in the spontaneous generation of money. Generations of school children have been taught how to calculate compound interest, but nobody asked where the money was supposed to come from.

In a stunningly absurd “press conference”, which lasted for approximately 90 seconds, the soon to be ex-president of the USA revealed to the world the limits of his mental abilities.

The White House, November 24, 2020

Never mind the 270’000 dead from COVID-19, the fact that millions of Americans have lost their jobs due to the pandemic, and the melting polar caps. As long as the Ponzi-Scheme commonly referred to as the stock market continues to rise, everything is fine.

One of my first textbooks in physics contained an poignant warning: “Never mistake the model for reality!” The illustration was a person devouring the menu in a restaurant. Mainstream economics is a theory about a model. Unfortunately, reality seems to have moved on so that the model does not apply anymore.