The grand cause of the economic crisis

The grand cause of the economic crisis, according to French economist Pierre Larrouturou (Le Monde, Jan. 13, 2010) and Raghuram Rajan (University of Chicago, cited in The New Yorker, Jan. 11, 2010), is that since the end of the 70s, salary income has increased slower than the cost of living, triggering an increase in the use of credit:

"Rajan argues that the initial causes of the breakdown were stagant wages and rising inequality. With the purchasing power of many middle-class households lagging behind the cost of living, there was an urgent demand for credit. The financial industry, with encouragement from the government, responded by supplying home-equity loans, subprime mortgages, and auto loans. (Notwithstanding the government's involvement, this is ultimately a traditional Chicago argument: in response to changing economic circumstances, the free market provided financial products that people wanted.) The side effects of unrestrained credit growth turned out to be devastating--a possibility that most economists had failed to consider."

John Cassidy, The New Yorker, Jan. 11, 2010.

John Cassidy makes here an important point within the parenthesis: the government, as any individual, is part of the market and reacts, as rationally as it can, to the course of the economy. More than that; the government did not prevent the course of the free market and even facilitated it by allowing easier access to credit. Simply single-handling the government as the source of the problem seems then to fall short of the whole story.

But what caused the start of the imbalance between cost of living and income at the end of the 70s and disrupted the Keynesianism equilibrium of the post-War years? Neither of the two articles explain this. Was it the oil crisis? The rise of Reaganism? A combination of both?

To be human is to know our own limits and the limits of our environment

"That human limitlessness is a fantasy means, obviously, that its life expectancy is limited. There is now a growing perception, and not just among a few experts, that we are entering a time of inescapable limits. We are not likely to be granted another world to plunder in compensation for our pillage of this one. Nor are we likely to believe much longer in our ability to outsmart, by means of science and technology, our economic stupidity. The hope that we can cure the ills of industrialism by the homeopathy of more technology seems at last to be losing status. We are, in short, coming under pressure to understand ourselves as limited creatures in a limited world.

This constraint, however, is not the condemnation it may seem. On the contrary, it returns us to our real condition and to our human heritage, from which our self-definition as limitless animals has for too long cut us off. Every cultural and religious tradition that I know about, while fully acknowledging our animal nature, defines us specifically as humans—that is, as animals (if the word still applies) capable of living not only within natural limits but also within cultural limits, self-imposed. As earthly creatures, we live, because we must, within natural limits, which we may describe by such names as “earth” or “ecosystem” or “watershed” or “place.” But as humans, we may elect to respond to this necessary placement by the self-restraints implied in neighborliness, stewardship, thrift, temperance, generosity, care, kindness, friendship, loyalty, and love.

[...]

On the contrary, our human and earthly limits, properly understood, are not confinements but rather inducements to formal elaboration and elegance, to fullness of relationship and meaning. Perhaps our most serious cultural loss in recent centuries is the knowledge that some things, though limited, are inexhaustible. For example, an ecosystem, even that of a working forest or farm, so long as it remains ecologically intact, is inexhaustible. A small place, as I know from my own experience, can provide opportunities of work and learning, and a fund of beauty, solace, and pleasure—in addition to its difficulties—that cannot be exhausted in a lifetime or in generations.

[...]

We know by now that a natural ecosystem survives by the same sort of formal intricacy, ever-changing, inexhaustible, and no doubt finally unknowable. We know further that if we want to make our economic landscapes sustainably and abundantly productive, we must do so by maintaining in them a living formal complexity something like that of natural ecosystems. We can do this only by raising to the highest level our mastery of the arts of agriculture, animal husbandry, forestry, and, ultimately, the art of living."

Wendell Berry, Faustian economics, Harper, cited in The Best American Essays 2009.

The "invisible hand" needs a hand

Alan Greenspan, one of the chief advocate of laissez-faire capitalism over the past decade, has formally accepted the idea that nationalization of banks might be needed to help to overcome the present financial and economic crisis. Not that I think nationalized industries are competing better. I just appreciate and respect when one recognizes the limits and weaknesses of its own system and trends to a more balanced view of the world.

A flaw in the model

Excerpt from the Government Oversight Committee (chaired by Rep. Waxman) interviewing Alan Greenspan, former chairman of the US central bank on October 23, 2008 about the financial crisis:

REP. HENRY WAXMAN: The question I have for you is, you had an ideology, you had a belief that free, competitive — and this is your statement — “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We’ve tried regulation. None meaningfully worked.” That was your quote. You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price. Do you feel that your ideology pushed you to make decisions that you wish you had not made?

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. [...] I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms.

Thus if the banks themselves, the pinnacle of capitalism, fail to follow their own self-interest, what about the rest of the society. Where was that cherish "invisible hand"? invisible.

watch the PBS report.

see also this post from "A sociologist's commonplace book" blog.

Climate or financial crisis?

When it's time to save the greedy
and irresponsible friends of the powerful,
There is no shortage of words and emotions
to describe the future.
Long-term financial destruction of the market.
Lost of jobs.
Collapse of the economy.
And We, the sensible, do understand.
But when We, the sensible,
ask them to do something about the climate,
They look down at us,
Tell us we are blind,
Tell us we are pessimistic,
Tell us we want to destroy the economy.

That is what we call a double standard.

A pragmatic, positive and integrated use of the ideas of nonlinear science and complex systems

Manuel De Landa closes his book, A thousand years of nonlinear history, with a reflection on the pragmatic use of the ideas borrowed from nonlinear science and the science of complex systems. The two main forces that De Landa has been recognized throughout his book are homogenization and heterogenization. The first force assures a pyramidal or stratified construction with a hierarchy and a strong commandment, the second a flat or destratified organization or meshwork with no central control.

De Landa recognizes that linear science, adapted to describe hierarchic and stratified systems, have dominated the western thought for the last three centuries and thus limited our view of the world. On the other hand, the actual homogenization of the world, in terms of economies or ecology and occuring over many scales, have rendered the world more linear:

"[A]s our industrial, medical and educational systems became routinized, as they grew and began to profit from economies of scale, linear equations accumulated in physical sciences and equilibrium theories flourished in the social sciences. In a sense, even though the world is inherently nonlinear and far from equilibrium , its homogenization meant that those areas that have been made uniform began behaving objectively as linear equilibrium structures, with predictable and controllable properties." Manuel De Landa, A thousand years of nonlinear history, Conclusion and speculations.

Still, the nonlinear contribution is important and indeed necessary to avoid the world and Earth to become a dead, predictable and uncreative body. So what should we do? First, De Landa cautions not to adopt the extremist view of destroying the homogeneous part of the system. As Deleuze and Guattari wrote:

"If you free [the system] with too violent an action, if you blow apart the strata without taking precautions, then instead of drawing the plane you will be killed, plunged into a black hole, or even dragged into catastrophe. Staying stratified -organized, signified, subjected-, is not the worst that can happen; the worst that can happen is if you throw the strata into demented or suicidal collapse, which brings them back down on us heavier than ever." Deleuze and Guattari, A thousand plateaus, pp 160-161, cited in A thousand years of nonlinear history, Conclusion and speculations.

What a balanced and moderate view from post-modernists such as Deleuze and Guattari that are supposed to be, according to what I heard about them, more nihilist that positivist! It reminds me of Camus who wrote in, L'homme rebel, that revolutions were not necessary. Revolutions are actually counter-productive. They may do more harm than good and only by changing the world small steps at a time, can we achieve the ideal dreamed. De Landa, Deleuze and Guattari expand that idea acknowledging the complexity and nonlinearity of the system:

"This is how it should be done: lodge yourself on a stratum, experiment with the opportunities it offers, find an advantageous place on it, find potential movements of deterritorialization, possible lines of flight, experience them, produce flow conjunctions here and there, try out continuum of intensities segment by segment, have a small plot of new land at all times." Deleuze and Guattari, A thousand plateaus, pp 160-161, cited in A thousand years of nonlinear history, Conclusion and speculations.

De Landa explains that

[a]ll these precautions are necessary in a world that does not possess a ladder of progress, or a drive toward increased perfection, or a promised land, or even a socialist pot of gold at the end of the rainbow. Moreover, these warnings derive from a recognition that our world is governed not only by nonlinear dynamics, which makes detailed prediction and control impossible, but also by nonlinear combinatorics, which implies that the number of possible mixtures of meshwork and hierarchy, of command and market, of centralization and decentralization, are immense and that we simply cannot predict the emergent properties of these myriad combinations will be." in A thousand years of nonlinear history, Conclusion and speculations.

De Landa pursues:

"Thus the call for a more experimental attitude toward reality and for an increased awareness of the potential for self-organization inherent in even the humblest forms of matter-energy." in A thousand years of nonlinear history, Conclusion and speculations.

He finishes by emphasizing that this approach does not necessarily mean a hopeless and boring view of life. Far from it:

"It is important, however, not to confuse the need for caution in our exploration of the nonlinear possibilities of (economic, linguistic, biological) reality, and the concomitant abandonment of utopian euphoria, with despair, resentment and nihilism. There is, indeed, a new kind of hope implicit in these new views. After all, many of the most beautiful and inspiring things on our planet may have been created through [partial] destratification. A good example of this may be the emergence of birdsongs: the mouth became destratified when it ceased to be a strictly alimentary organ, caught up in the day-to-day eating of flesh, and began to generate other flows (memes) and structures (songs) where the meshwork element dominated the hierarchical. The emergence of organic life itself, while not representing a more perfect stage of development than rocks, did involve a greater capacity to generate self-consistent aggregates, a surplus of consistency. The human hand may also have involved a destratification, a complete detachment from locomotive functions and a new coupling with the external environment, itself further destratified when the hand began converting pieces of it (rocks, bones, branches) into tools. Thus, despite all the cautionary tales about simplistic calls for anarchic liberation, there is in these theories a positive, even joyful conception of reality. And while these views do indeed invoke the «death of man», it is only the death of «man» of the old «manifest destinies», not the death of humanity and its potential for destratification." in A thousand years of nonlinear history, Conclusion and speculations.

"The good old days"

Do you remember the "good old days" when, while trying to promote a bit of decency in the use of natural resources and some respect of Mother Nature, we were accused of dangerously playing with the health of the economy? Do you remember those days?

Well, what an irony. The economy is bad and nobody has done yet anything for the environment. What happened? Oh, yes. Oil (and the gridiness of speculators and bankers trying to get easy money on the back of mortgage-seeking people). Oil. That Grande Dame we were supposed to protect, without which the entire economy would fail. Thanks Madame. And thanks the economist and right-wing experts for this ultra vision of yours. What a prediction. Why did you not tell us that Oil itself will destroy the economies of the World? Why did you not see that?

If people would not die of hunger because of that, I actually would be happy to see such high price of Oil. It is now expensive to move your car or to travel and we now all need to adjust ourself to this situation... or to invest in green technologies that are a win-win-win situation: 1) independence, 2) cheap and 3) less polluting. Where am I wrong?