Reading ECONned By Richard Smith. A Guest Post in Jesse’s Café Américain by the copy editor of blogger Yves Smith’s new book ECONned Yves explains how the spell we are still under was cast upon us.
The Financial Crisis of 2007-2009 (no-one’s settled on a name yet; we are still too close to the action, and that end date might still need some discreet pushes to the right) has naturally set off a book publishing frenzy. With the first wave of instant histories now spent (the startlingly fast-out-of-the-blocks chronicle “Bailout Nation”, the elephantine “Too Big To Fail” etc, etc), we are now getting a second wave of books, whose authors have had time to dig deeper and reflect more on how we got into this mess. Yves Smith’s offering is the first integrated account of the root causes of the financial crisis, and a compelling one.
For Smith, it turns out to be a matter of bad economic theory, self-serving ideology, and, under cover, plain old rapacity. The author gives us a brisk historical sweep through what sounds like deeply unpromising, but, as it turns out, surprisingly engaging terrain: post- war economic theory, the evolution of the financial services industry and its regulation since the 1970s, modern financial instruments, and the Crisis itself. It’s been a long time a-comin’, this Crisis. It all culminates in a whodunit account of the mechanisms that brought the crisis to its acute phase; an account that respects the complexities, yet grips like a vice. But first of all, it’s about the way a single phrase, “free markets”, was turned into a justification for profoundly destructive behaviour.
Yves Smith (got it yet?) points out that there was always more to Adam Smith’s account of the free market than its modern reduction allows:
Smith also pointed out that self-interested actions frequently led to injustice or even ruin. He fiercely criticized both how employers colluded with each other to keep wages low, as well as the “savage injustice” that European mercantilist interests had “commit[ted] with impunity” in colonies in Asia and the Americas.
Yves shows us that little has changed since Adam’s day (last chance!). Running through the book, we will find ever more glaring contrasts between the official slogans: “invisible hand”, “free market” and so on, and what is really going on: scams, rip-offs, increasingly brazen looting. This is sanctioned, in an unwelcome display of bipartisanship, by intellectually bankrupt and venal politicians of all hues.
The entire post is about eight screens of text, including the following:
Next we are into the meat of the economic theory (Chapters 2-4). Smith briskly takes a sledgehammer to any number of plaster saints cluttering up the edifice of modern economics:“assumptions that are patently ridiculous: that individuals are rational and utility-maximizing (which has become such a slippery notion as to be meaningless), that buyers and sellers have perfect information, that there are no transaction costs, that capital flows freely”
And then…papers with cooked figures, economists oblivious to speculative factors driving oil prices, travesty versions of Keynes’s ideas that airbrush out its most characteristic features in the name of mathematical tractability.
And then…any number of grand-sounding theoretical constructs: the Arrow-Debreu theorem, the Dynamic Stochastic General Equilibrium model, the Black-Scholes option model, Value at Risk, CAPM, the Gaussian copula, that only work under blatantly unrealistic assumptions that go by high falutin’ names – equilibrium, ergodicity, and so on.
The outcome of this pseudo-scientific botching is an imposing corpus of pretentious quackery that somehow elevates unregulated “free markets” into the sole mechanism for distribution of the spoils of economic activity. We are supposed to believe that by some alchemical process, maximum indulgence of human greed results in maximum prosperity for all. That’s unfair to alchemy: compared with the threadbare scientific underpinnings of this economic dogma, alchemy is a model of rigor.
Too bad Yves came two centuries after her Adam! 🙂