Category Archives: Economies and economics

General discussions of economies and economics, non-technical.

How banks destabilise the economy – and take your money

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[Extract from The Nature of the Beast]

Almost every institution involved in the financial system is, in the jargon, highly leveraged.  This is as true of old-fashioned banks with fractional reserves and mainstream banks with capital adequacy requirements as it is of shadow banks. What does “highly leveraged” mean?  It means you are betting a small amount of your own money plus a lot of other peoples’ money on a large return.  If the return is positive, you make a handsome profit.  However if the return is negative you lose not only your stake but potentially everything you own.

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Adam Smith would have hated market fundamentalism

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[Extract from The Nature of the Beast]

Most people don’t deal much with abstract ideas and theories, yet ideas exert a powerful influence on societies and history. Societies and civilisations have come to grief because they held ill-adapted ideas. What idea was it, for example, that led the Easter Islanders to obsessively build huge stone effigies even as the ecosystem of their island was collapsing around them? Richard Dawkins, in The Selfish Gene (1976) invented the term meme for key ideas. Memes are to cultural evolution as genes are to biological evolution. A very powerful meme abroad in the world today is that free markets are the best way to organise economies. Where did this meme come from? Is it serving us?

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The Nature of the Beast: eBook now available

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The Nature of the Beast: how economists mistook wild horses for a rocking chair.

Mainstream free-market economics fundamentally mis-identifies the nature of market economies.  Its record is of retarded growth followed by disaster.  It counts costs as positives instead of negatives.  It is blind to how the present banking system destabilises the economy.  It is relentlessly materialistic and adversarial.  It ignores most of what we know about real people and the real world.

The result is pseudo-scientific gobbledygook, and the unstable, inequitable, undemocratic, destructive and unsustainable mess known as the global economy.

The Nature of the Beast draws out the real nature of market economies using modern knowledge of systems, human behaviour, ecology, biology and physics.  It points the way to stable, prosperous, democratic market economies that can support people, societies and the living world into the indefinite future.

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How Free-Market Fundamentalists are Hopelessly Wrong, III: money, debt and blindness

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Part I presented the evidence that economies in the free-market era delivered only mediocre performance before crashing in the disastrous Global Financial Crisis.  Part II showed how the standard theory of free markets bears no useful resemblance to real economies, and its application amounts to pseudo-science.

Returning to the GFC now, there is a particular reason free-market economists claim the GFC was unforeseeable:  debt and money play no role in their standard equilibrium economic models.  They claim one person’s debt is another person’s asset, and so aggregate “demand” is not affected by debt.  This would be true in a barter economy, or if the banking system was based entirely on savings, for only in those cases would the extra purchasing power of the borrower be balanced by the reduced purchasing power of the depositor.

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How Free-Market Fundamentalists are Hopelessly Wrong, II: the theory

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In Part I we saw that readily available evidence shows clearly that economic performance in the free-market era that began around 1980 was already poor, even before the disaster of the Global Financial Crisis.  Here we look at the theory that underlies the free-market rhetoric, the so-called neoclassical theory.

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How Free-Market Fundamentalists are Hopelessly Wrong, I: the evidence

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Australia’s commentariat is thickly populated with right-wing guardians of the doctrine of free markets.  Many of them have been groomed by right-wing think tanks in a long-term campaign to drag our perceptions to the right.  Chris Berg and Sinclair Davidson, of the Institute of Public Affairs, are regulars on the ABC’s The Drum Opinion.  The campaign has been highly successful, as the free market mantra has taken over both sides of politics and dominates economic discussion.

However it is very easy to demonstrate the doctrine is hopelessly wrong.  The evidence is clear that free markets have retarded growth.  The theory underlying the doctrine is plainly and absurdly unrealistic.  The Global Financial Crisis was caused by financial markets building up mountains of debt, yet debt and money are absent from mainstream economic models and, apparently, from economists’ thinking.  Hence their blindness to the GFC’s approach, its cause and its remedy.

These problems will be covered in a three-part series.  First, the evidence.

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The Tao of economics

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[See this article at philosophers.posterous, adapted from the first chapter of The Nature of the Beast]

… Taoism arose from the close observation of nature and people.  It distills a higher wisdom than either of the crude world views that dominated the twentieth century.  We can aspire to create economies that transcend the crude and unhealthy economic systems that arose from those twentieth century world views, and that provide for and nurture a healthy balance in the lives of people and societies. …

The Nature of the Beast manuscript available on request

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A complete manuscript of The Nature of the Beast is available for comment.  It is under a password, so as not to upset potential publishers, and so I can keep track of who is looking at it.  I would love to have feedback of any kind.

Use the Books and Downloads menu above, or go here.

A sample, the first 16 pages, can be downloaded without password.

Challenges to Orthodoxy (normal service resuming)

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I will now resume posting after a break.

I was travelling in August-September.  Since my return I have focussed on finishing the long-intended short book on economics, The Nature of the Beast.  My work earlier in the year was interrupted by some science left over from my retirement last year, by moving house, and by travel.  I have now finished a draft with which I am pretty happy.  I will be updating the pages relating to The Beast, and posting a few extracts.

In meantime the need for a concise, clear demolition of the dominant economic paradigm and a presentation of modern, sensible alternatives has only grown.  The Occupy Wall Street movement is the most encouraging development in a long time, perhaps, we can hope, marking the end of the striking passivity that took hold after the sixties rebellions died away.

Recently some economics students at Harvard have walked out of Greg Mankiw’s economics course, echoing the criticisms of Parisian economics students a decade earlier, when they called for “post-autistic economics“.  Steve Keen’s comments on some points of debate are illuminating.  Other useful comments can be seen at Real World Economics Review Blog, and a commentary on Mankiw’s textbook is also starting there.

How to crash an economy – some monetary parables

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[Another sample from The Nature of the Beast, from Chapter 11:  Economic Fire.  Another downloadable instalment will be available after Easter.]

Almost every institution involved in the financial system is, in the jargon, highly leveraged.  This is as true of old-fashioned banks with fractional reserves and mainstream banks with capital adequacy requirements as it is of shadow banks.  What does “highly leveraged” mean?  It means that you are betting a small amount on a large return.  If the return is positive, you make a handsome profit.  However if the return is negative you lose not only your stake but potentially everything you own.

Continue reading →