Bad weather ahead

This was initially meant as a response to the point that came up in comments to my previous post – but then I thought it would be worth giving the topic a more prominent airing, as it relates to many opinions that I have voiced here in the past, and will probably be voicing in the future. In his comment, a friend of mine referred to an interview with Ken Moelis in Financial Times. There is one particular place in the beginning of interview where Moelis says “I don’t believe the economy is fixable, just like the weather. We don’t send anybody out to fix the weather. We put on a raincoat.”

We live in times where our needs have come to include such things as italian sports cars, luxury condos with a sea view and adjacent golf course, paintings by modernist masters and a three piece suite on hire purchase in a range of fucking fabrics. By the same token, our economy has grown incredibly complex and is covering not only the exchange but also the production and provision of goods and services, allocation of capital and other resources, and is dictating the operation of areas like education and culture. The weather metaphor is certainly useful in depicting the level of complexity of our current economical establishment – as there is a huge number of different forces and influences shaping both our meteorological and economic environments.

However, I think it is important not to lose track of the fact that economy, at its’ core, is a system of reciprocity: we do stuff for other people and they do other things for us. Economy is meant to facilitate that kind of a reciprocal exchange, to provide with an infrastructure and proper incentives. This infrastructure and incentives are not a given – they are designed, reproduced, legitimised and maintained the way they are only because we have collectively, either implicitly or explicitly, agreed so. This is a fundamental difference between economy and the weather (where it rains or shines quite independently of what we mutually agree) – and meaning that not only we can, but also that we should change them, once the system currently in use fails to serve the broader objectives of the society, rather than just “look for the raincoat”.

There is of course a wide array of opinions what precisely should those “broader objectives” be and what exactly constitutes a fair reciprocal exchange – and this is all fine. However, it is important not to confuse means for ends and start thinking, that economy is something transcendent, that there exists an ideal, pure form of it (which usually tends to mean “free market” in its unfettered best). There quite simply is no such thing – market is a human invention and not a discovery. Of course, some systems of reciprocal exchange work better than others and of course, we can’t agree on anything that comes into our collective mind and simply wish it to working. There are rules in economy that are almost as stringent as laws of physics but, unlike in physics, the reality that laws of economics deal with is 100% man made. As far as we do realise this it is very hard to justify the point of view that as we do happen to have a certain kind of an economic system it should follow that we simply have to accept the outcomes the way we have to accept the rain or cold.

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14 thoughts on “Bad weather ahead

  1. Heheh, I thought that the part of “This is an angry and unforgiving economy… Thou hath brought the economy’s vengeance upon us!” sounded really familiar.. now where I might have heard something like that.. 🙂

  2. I liked it when Cartman said “Just tell us where the cave is”.

  3. And here’s another analysis of the situation by another non-specialist, this time Martin Wolf of FT – http://www.youtube.com/watch?v=-pjFvKb5ot8

    Perhaps not surprisingly – to me he does make a lot of sense, and he has a very short and clear explanation why stimulus is not such a bad idea after all. Though indeed, Kyle paying for everybody’s debts would be even nicer.

  4. I wonder what will Mr Wolf say when Britain is downgraded by S&P.

    F***ing bond traders ftw!.

  5. Yet again I didn’t quite get the intricacies of the point you were trying to make 😦

  6. Well, yes, but in this interview Wolf was not saying that international capital flows do not matter, quite to the contrary.. so my perplexity at your comment was due to not being able to understand which part of his opinions should he have to change should Britain get downgraded by S&P.

  7. I don’t know if that’s enthusiasm.. when I’m sick I don’t feel “enthusiastic” about taking antibiotics, and by the same token I too think that massive government sponsored stimulus projects are less than an ideal way to spend tax money in an ideal world. And sure, for the most of the time you’d get well without taking the drugs, it’s just that you’d probably feel a lot worse for a while.

    Wolf’s point about stimulus was that if we consider the situation where everyone is tightening and the demand is falling away across the board a problem then who else could offset it than the government? Of course, you may not consider it a problem, or consider it a lesser problem that getting downgraded by S&P and having to pay more in order to be able to borrow in the future. However, in terms of talking about the potential things to come – the scale of what we have come through so far is still dwarfed by the Great Depression, and I suppose this is something that many people are very much afraid of.

    Comparison of world industrial input: http://www.voxeu.org/files/image/depression_fig1.gif, or you can read the whole comparison at http://www.voxeu.org/index.php?q=node/3421

  8. I’ll write more on this later, but rebuttals of my (indirect) claims that the fiscal stimulus multiplier is at best 1-epsilon with “oh but it only works in a insulated model/ideal world” only sound sophisticated and noble, as they underly the desire of political types to “do something”. Ricardian equivalence is not quackery, it is a real, well argued theory, that has a lot of relevance to what we see now, but which may (or it may not) apply to the current situation.

    Btw, if GD is what we are looking at, maybe we should start WWIII, because in reality WWII ended GD. Let’s start a war, let’s start a nuclear war!

  9. On war – I guess that this outlook, however remote and crazy it sounds right now, is indeed another of those things that scares many people.

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