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.

Science cannot prove that a theory is true. Is this true?

I would like to discuss the notion, developed by Karl Popper, that science can only disprove a theory. I remember reading somewhere that if a theory is proven wrong, then the complementary theory is actually being proven right, which would then contradict the claim that no theory whatsoever can be proven right.

Let's take an example, the climate, not only because the conference on climate change in Copenhague in on this week, but also because it is the system that I am the most familiar with. Say, a theory states that El-Niño is caused by wind bursts in the western Pacific. As long as observations show that wind bursts do occur before the start of El-Niño, you are only observing the facts that the timing of the events might be related but you are not proving that the wind bursts do cause El-Niño. Each can independently be caused by something else. However, if one year, there is no wind burst but an El-Niño, then you are proving that El-Niño is not caused, at least not all the time, by wind bursts. In this case, we have proven that the theory "wind bursts do not always cause El-Niño" is true.

The difference between the two theories is that the first one is a predicting theory which is supposed to work all the time, while the second is not; in other words, the first one is useful, not the second. To prove a predicting theory, you need to prove that the causation works all the time but because the world is infinite and open to the future, you can never prove it absolutely. The more the theory succeeds the tests, the more likely it is, but that is it, no certainty. However, to prove a non-predicting theory, only one example suffices, which we have done above. And so here is the crux of the argument: Formal definitions of theory do include that a theory should be able to perform predictions. So the second "theory" above is actually not a theory. And so yes, indeed, science cannot prove that a theory is true but it can prove other things!