Tag Archives: economics

Nature and Roles of Money and Banks

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[This article is based on extracts from The Nature of the Beast: how economists mistook wild horses for a rocking chair eBook.  Guest-Posted on Steve Keen’s Debtwatch site 1 June.]

Any discussion of the nature and role of money in modern economies typically brings out a plethora of confusing or conflicting theories, claims and counter-claims about what money is, what role it plays, what dysfunctions it might be responsible for and how they might be fixed.  One common set of claims is that money is a unit if account, a medium of exchange and a store of value.  I argue the first property is a trivial one and the last is only true if the money is wholly or in part a real commodity, like a pig or some tobacco.

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How Economies Relate to Wild Nature

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[Extractfrom The Nature of the Beast, Chapter 4]

Prior to the twentieth century, science had built up a picture of the universe as a giant clockwork.  Starting with an investigation of mechanics by Galileo, a series of “laws” had been inferred, and these laws were extremely successful in describing the physical world.  It seemed that the world had been reduced to causes and effects that were precisely known, and therefore it would tick inexorably along according to those laws.  This view was very discomforting to philosophers and theologians, among others, because it seemed to eliminate free will, and to imply that our fates were all sealed at the beginning of time.  The neoclassical theory of free markets is firmly of the clockwork universe kind.

However science underwent three revolutions during the twentieth century, revolutions that profoundly changed scientists’ views of the universe.

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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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Bad theory, Bad Practice – Bad Ethics

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[ The three earlier posts “How free-market fundamentalists are hopelessly wrong” are extracted from a paper that is now published by the World Economics Association in an on-line conference on Economics in Society, the Ethical Dimension.  The full text of the paper follows, covering more deficiencies of the mainstream and some new modelling illustrating a more useful approach.   A pdf can be downloaded here (300 kb) ]

A profession that claims to understand economies, and that has gained power over the greater part of our societies, has big responsibilities.  The fundamental responsibility is to ensure its perception of economies gives some useful guidance to the behaviour of real economies.  Here mainstream economics fails utterly, and has been failing for a long time.  Worse, it actively resists alternative views that might overcome its failings.  Ethics do not come much worse than that.

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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 Durban Roadmap to Extreme Climate Danger

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[Published on ABC’s The Drum Opinion 13 Dec]

Climate negotiators in Durban have agreed to a “roadmap” that would leave the world at high risk of severe or catastrophic global warming.  They have belatedly agreed to discuss adopting outdated targets that would not come into force until 2020, far too late by current climate criteria.

Recent studies require greenhouse gas emissions to be reduced much faster than previously proposed, to give us even a moderate chance of keeping warming below two degrees Celsius (2°C).  Meanwhile the climate science now says the threshold of “dangerous” warming is only 1°C.

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