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Illogical Economics – Guest post by Hawkeye

There are many paradoxes in economics. To an outsider it is full of contradictions and inconsistencies. Not least of which is its utter failure to predict the current financial crisis. If the great and the good didn’t spot this crisis coming then perhaps they don’t qualify to be called the great and the good. Economics requires an intellectual framework – a model of the world – that accurately reflects reality. Clearly the world can’t be accused of failing to reflect economic models, so economics must be the one on the hook.

When trying to fathom the causes and consequences of this crisis back in 2008, I was openly exploring various avenues of explanation, many of which lay outside mainstream economics. There was the Austrian Economics approach and the Marxist view of Capitalism in crisis, to mention but two. Each of these avenues seemed to contain elements of plausibility, but most of them failed to provide a holistic narrative of the crisis, and why it was happening at this point in time.

That changed when I set aside a few hours one evening in late 2008 and watched Chris Martenson’s “Crash Course” (http://www.peakprosperity.com/crashcourse). As anyone who has watched it will acknowledge, it’s not an academic treatment, but it does provide a framework based on common sense that situates the current crisis as a series of unsustainable trends: the enormous build up of debts as claims on wealth which can’t all be honoured, and our reliance on energy and material resources which are suffering from diminishing returns.

This instantly made sense, as the concepts of limiting factors and dynamical growth patterns are quite common in the natural sciences. So time to revisit the social science of mainstream economics and see what they had to say on these subjects. Firstly, the role of money is assumed away, as merely a veil over barter, so nothing to see here folks. And secondly, we don’t need to worry about energy as this is merely a small fraction of GDP, and besides humans have infinite ingenuity and resourcefulness. There are no limiting factors declares economics, and no awkward dynamics to model. Problem solved, right? Well, only if we are happy to accept a further set of anomalies:

1) Given that we have a society of money worshipping individuals, why do we have an economic framework that omits the role of money?

2) Given such a highly materialistic society, why do we presume a purely psychic basis of wealth?

Oh, and of course that slight issue we mentioned earlier about a theory that can’t predict crises, predominantly because nothing is unsustainable in its eyes!

So what does economics study, then, if not money or material resources? And could the omission of these two vital aspects possibly be related to it’s failure to predict the crisis?

The intellectual edifice of economics stood resolute, confident that its models of the world, without an actual representation of money or material resources, could accurately explain how we had obtained such abundance of money and resources. Nevermind these bothersome paradoxes and anomalies, they declare, their theories alone held the key to future prosperity.

It would take another few months of exploratory background reading until I came across the works of Frederick Soddy. What struck me was that a Nobel chemist writing in the 1920s had also drawn attention to these paradoxes, and had offered accompanying solutions. Here was a more weighty treatment of the subject than Mr Martenson, using logical propositions carefully assembled one upon the other. For me, the veracity of Soddy’s argument was there for all to see, yet his views were considered highly unorthodox at the time, and for the most part still are.  But why is that?

Money as debt

The first pillar of Soddy’s argument surrounds the very nature of money. Everyone uses money, yet few people truly understand what it actually represents. The extent of monetary relations back in Soddy’s day is probably a lot less frequent than now, as many transactions and means of subsistence probably lay outside of market transactions. However, Soddy gave a cogent explanation of money:

“We thus come to look upon money – quite irrespective of whether it is specie or paper – as a token certifying that the owner of it is a creditor of the general community and entitled to be repaid in wealth on demand.” Wealth, Virtual Wealth and Debt (1926) p134

Money is more than just a more advanced substitute for barter, declared Soddy. In barter, all transactions cancel each other out, but with money, there must at all times be someone left holding tokens, rather than real goods or services. Money is therefore a form of negative inventory. As negative objects are not physically possible, we must be dealing with a fabricated construct. A holder of money forgoes actual ownership, instead deferring his purchasing power. It will then require a further social arrangement for this token to get converted back into real goods. Up until it is handed over, it is not a real asset at all, but wider society’s liability. As Soddy quipped:

“Money is the nothing you get in return for something, before you can get anything”.

Therefore, it is not a harmless veil over barter. It is a token of indebtedness, and a claim over the real inventory of goods and services in society. Standard economic models on the other hand declare that the money system is completely neutral. In their worldview society’s mutual indebtedness cancels itself out. If that is the case in their economic models, then why can’t the debts be cancelled out in practice? Mainstream economists refuse to contemplate this very obvious logical contradiction. To them, the money system is absolutely essential for a functioning economy (i.e. it must be preserved at all costs) yet at the same time is unneccessary to model!

No standard macroeconomic model takes into account the burgeoning balance sheets of individuals, banks, companies or Governments. They are obsessed with liquidity, for sure, but have no interest in the liquid!

Soddy, however, was also perceptive enough to understand that the source of most circulating money was through private bank credit creation. He was highly critical of this unearned priviledge, as in his eyes a bank undertook no genuine forfeiture when creating a loan [1]. In reality the debts are simply an accounting entry. But far from harmless, they help to enforce a power relation within society, and Soddy was well aware of this situation citing a 19th barrister and expert on the subject of credit:

“The merchants who trade in debts – namely bankers – are now the rulers and regulators of commerce; they almost control the fortunes of states.” H.D.MacLeod quotation in Wealth ……. p77

Confusion between debt and wealth

Equally importantly, Soddy went on to warn of the dangers of prolifigate debt expansion:

“You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt, against the natural law of the spontaneous decrement of wealth” Cartesian Economics (1922)

To Soddy the problem lay in the misunderstanding between debts and genuine wealth; one can be endlessly accumulated (social arrangements permitting!), the other cannot. Which leads us onto the second pillar of Soddy’s economic treatise; the acknowledgement of a real and practical basis to the concept of wealth:

“The essence of wealth is not power over men, but power over nature” Wealth ….. p100

As was discussed above, money and debts are a reflection of power over others, but this doesn’t automatically make it the same as wealth in an absolute sense.  To mainstream economics, the money system is the measurement basis of wealth, so the more money we have circulating (controlling for price level, of course), the more wealthy we are. However, Soddy declared it a highly unsatisfactory measure of wealth, because the relative power over other members of society can change up or down, regardless of the real goods and services in supply. Not only is the measuring stick highly elastic, but we mustn’t confuse the stick with that which is being measured. Soddy uses the following example to highlight the confusion:

“A ham merchant working on what he is pleased to call a 10 per cent basis of profit, may buy ten hams for the same sum as he sells nine. He may be pleased to think he has made a profit of one ham, but he certainly has not made a ham.” Cartesian Economics

Genuine wealth, Soddy argued, is that which provides us with a high standard of living. It is an ability to do real physical work, over and above that which we can achieve with our hands. And the source of this is any form of “embodied useful energy”. It is no coincidence that the rapid increase in living standards that commenced about 250 years ago was accompanied by a plethora of mechanical innovations, the majority of which require energy inputs to function. Economists and lay people alike admire the spark of human invention, but conveniently overlook the actual fuel that powers them.

Soddy was appalled at the overtly supernatural basis of wealth employed by neoclassical economists. This can be traced back to the influence of Jeremy Bentham and his concept of utility. But the notion of utility is a purely subjective phenomenon that occurs in the minds of people, not in the real world. Economists chose to define wealth by wants and desires alone, as measured by the market price. If this were true, then wealth would only be constrained by human willpower, as the mere act of creating desire can generate wealth. This may sound appealing to us, that we humans have enormous internal powers of creation, but Soddy rightly declared this to be logically absurd, counter to experience and in contravention of the laws of physics [2]:

“Real wealth rots and rusts, whilst debts multiply by the laws of compound interest”.

Chrematistics

What baffled Soddy most was why, with the advent of scientific progress, debts were actually growing, and wealth was not more widely distributed:

 “Has progress provided for the redemption of debts, or the multiplication of it?” Wealth….. p101

This was symptomatic of some very obvious flaws in economics. Soddy rightly argued that the study of economics had been reduced to little more than the subject of trading, hence he frequently described it as Chrematistics (see http://en.wikipedia.org/wiki/Chrematistics), rather than flatter it with the term economics. This was because neoclassical economists had avoided and obfuscated the main responsibilities of economics, which was to explain the origins of absolute wealth, and to debate its fair distribution. Topics which once were the focus of classical economics (or political economy as it was known back then), but which were waylaid, even before his time. Soddy was quick to point out that holders of monetary claims only have purchasing power to acquire real assets as a result of social conventions. Real wealth cannot be stored in the same way that money can, so there is no guarantee of these claims being honoured.

To Soddy, real wealth has to obey the laws of physics whereas money and debts are merely important social constructs. Paradoxically, neoclassical economics seems to inhabit a parallel universe where wealth can be created at will, money is irrelevant, yet debts are a tangible reality!

On both the origins of wealth and the nature of money, his perceptiveness is timeless and still stands as a severe critique of neoclassical economics [3]. I don’t claim that Soddy pioneered all these views, as many of his theories were clearly influenced by early economists such as the Physiocrat movement and the social criticism of John Ruskin (especially “Unto this last”). There are also echoes of American economists Henry George and Thorstein Veblen too. But he did synthesise a lot of critiques into one coherent framework. His impact on the mainstream has been minimal though, with only obscure pockets of heterodox economic schools following his line of thinking. So what went wrong?

Playing the man

Unfortunately for Soddy his foray into economic matters appeared to have prompted some vitriolic responses, with his obituary describing him as a crank and a heretic. It was rare for any coherent or plausible critique to be levelled at Soddy’s arguments:

“It was indeed a revelation to the author, accustomed to think of the battle for liberty of thought in scientific matters as having been fought and won centuries ago at the time of Galileo and the Inquisition, to find that in economics, as distinct from physics, it has not yet been won at all… If economics were really a science, it would not need to protect itself from criticism by a conspiracy of silence. A responsible criticism would in any scientific subject be met with instant response, and not by the ostrich policy of burying the head in the sand in the hope that that will thereby choke the ears and throw dust in the eyes of the pursuer also.” Wealth…..p292

Instead he suffered a similar fate to that of Nicholas Georgescu-Roegen, an establishment economist in the 1950s and 1960s who appears to have been excommunicated from the neoclassical priesthood in the 1970s for adopting similar theories of economic production grounded in physical reality. In both cases the response from the establishment was either to be ignored, or subjected to personal insults. But tellingly, never a direct attempt to critique his theory through logic or evidence.

This is a cheats method of debating, known in polite circles as Ad Hominem rhetoric, or in more down to earth language as “playing the man, not the ball”. This was nothing short of intellectual cowardice and downright bullying. Hardly the conduct of a mature scientific profession. It has been almost five years since a much clearer and plausible explanation of this crisis has been opened up to my eyes, yet it still feels like a constant battle to get these ideas accepted in academia, the media and the wider public. When I first saw the Crash Course series, it made a lot of common sense and was logically consistent and coherent. I could understand why the mainstream may not have heard of Chris Martenson, given his relative obscurity. But why was this same message, delivered some 90 years ago by a respected Chemist (the closest Britain has probably had to an Einstein) ignored and ridiculed?

The ultimate heresy

Perhaps Soddy’s ultimate heresy was to challenge the inherent power hierarchy of society. He argued that society should control money, not be controlled by it, and that humans should respect nature’s gifts and not overly exploit or squander them.  Those were the absurd paradoxes of economics that Soddy did his utmost to try and correct. He cautioned us about our arrogance and explained that our energy dowry, ultimately from sunshine, was the root of our wealth. Finally he dedicated his later life towards promoting a basis for money that didn’t render people as blindly subservient to it.  As Ruskin had warned beforehand, to the effect “Now, as he was sinking, had he the gold? Or had the gold him?”.

Soddy’s message delivers some uncomfortable truths about who we are (we are subservient to nature, not omnipotent), and what we can aspire to (we can’t build an economy on get rich quick schemes, so forget about flipping that house, winning the National Lottery, or trying your luck on TV Talent shows). He had clearly pointed out the absurdity of everyone trying to live off the interest from savings. Certainly one group could achieve this, but it would be foolish to think that a whole society can expand its purchasing power in aggregate by the same method. Perhaps most of us are hardwired to believe in the fairytale of perpetual profit and infinite growth. Not only were Soddy’s views deeply unpalatable to the existing power structure of society, but they probably cut against the grain of human instinct, too.

The cult of economics

Economics purports to be an objective and purely neutral science. Yet it clearly fails on both counts. It certainly is not an inclusive subject (outsiders are regularly shunned), nor is it a true science in that it rarely provides testable hypotheses. Even more disconcertingly it actually operates as a Trojan Horse for justifying morally reprehensible decisions and outcomes (e.g. the privatisation of public assets, austerity policies that disproportionately affect the poor, tolerating rising income inequality, etc.). It is in fact an illogical and deeply immoral cult acting as a propaganda machine for certain (already) wealthy interests. The fact that it preys on our inbuilt desires and weaknesses to sneak these insidious theories past us, suggests an even greater deviance. We have trusted them with managing vitally important aspects of our society, and they have wholeheartedly abused that trust.

As Soddy poetically decried:

 “We had kings of nations and captains of industry. The captains and the kings depart, leaving us emperors of debt, rulers and regulators of commerce, controllers of the fortunes of States, for whom the one world is too small, and the whole universe capable of assuaging only for a moment an infinite thirst.” Wealth….. p100

Sadly, the ability of this earth to satisfy that infinite thirst is diminishing. Which leaves us with the final paradox of economics. It could know better; and it should know better. The story of Frederick Soddy’s foray into the realm of economics highlights how the central canon has been repeatedly warned of its flaws. But not by chance or incompetence did it ignore these criticisms. The reason it keeps its head in the sand is because the current dogmatic worldview serves specific individuals’ interests. Economics has a lot of dirty secrets, and one by one they are coming home to roost.

————

[1] This topic was taken up in the post Money Makes Our Heads Go Round (http://www.golemxiv.co.uk/2012/11/money-makes-our-heads-go-round-guest-post-by-hawkeye/) which gives a detailed exposition of this stance, and it’s slow but steady acceptance within certain areas of academia and regulatory practice.

[2] The post Slippery Grip of Growth (http://www.golemxiv.co.uk/2013/03/the-slippery-grip-of-growth-guest-post-by-hawkeye/) provides an extensive overview of why the neoclassical basis of growth is flawed. Limitations are constrained by physical resources, no matter how much human ingenuity we have, if there is nothing that can be exploited at an energetic profit, then we’re not going to continue our recent (200 year) good fortune.

[3] For more detail on the economic writings of Soddy, there are some very good articles. This NY Times Op-Ed by Eric Zency was one of my first tastes of Soddy’s economics:

http://www.nytimes.com/2009/04/12/opinion/12zencey.html

This piece by Herman Daly is quite detailed:

http://billtotten.blogspot.co.uk/2009/07/economic-thought-of-frederick-soddy.htm

And his inaugural lectures on economics, entitled “Cartesian Economics” are transcribed (although with Typos) in this link:

http://habitat.aq.upm.es/boletin/n37/afsod.en.html

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59 Responses to Illogical Economics – Guest post by Hawkeye

  1. Golem XIV August 8, 2013 at 10:47 am #

    Thanks Hawkeye,

    Every piece you write seems to me better than the one before.

    Soddy’s bulldog!

    • Hawkeye August 8, 2013 at 3:01 pm #

      And a big thank you from me to David and a few others for their invaluable feedback on my draft versions of this piece!

      • Penny Bloater August 9, 2013 at 9:21 pm #

        May I say that this post makes many insightful and intelligent points about access to resources, the dynamic nature of economic growth and their relationship to money/wealth.

        I am generally new to Soddy’s ideas, but didn’t he once point out (in an argument that is also implicit in Graeber’s Debt: The First 5000 Years) that in practice hardly any economic models based on privately controlled fractional reserve banking and credit creation last beyond 50 years?

        • Hawkeye August 14, 2013 at 1:10 pm #

          Hi Penny

          Thanks for the feedback. I’m not aware of Soddy making this direct prediction about a 50 year limit, but then I haven’t read all his writings. He certainly believed that the principle of compound interest is not sustainable over the long term. The dowry of abundant fossil fuels and technical innovation has helped the 20th Century to sustain the impression of infinite progress. However diminishing returns of energy quality inputs, and the consequent impact of waste outputs (pollution) are putting severe stresses on the infinite growth project.

          You might also enjoy this article by John Bellamy Foster:

          http://monthlyreview.org/2009/11/01/the-paradox-of-wealth-capitalism-and-ecological-destruction

  2. StevieFinn August 8, 2013 at 2:29 pm #

    Great stuff Hawkeye

    You have revealed common sense in an elegant simple manner, unlike the current acolytes that spin their theory while hiding behind an obscure invented language designed to give them the appearance of possessing wisdom beyond the scope of us lesser mortals.

    Like a preisthood they present their theology in a manner that reflects their self interest by ignoring anything that might contradict their version of reality. This to me shows that like in a religion they cherry pick the truth in order to suit their own ends & therefore their dogma is a reflection of their desires & character – Mainly based on a fundamental greed.

    It puts me in mind of how the Catholic church long resisted efforts to have the bible translated to local languages, preferring to leave the priests with the power to browbeat their congregations with their own particular vision, also reflecting their own preferred use of power.

  3. Martin August 8, 2013 at 3:52 pm #

    As pointed out on Naked Capitalism some time ago, most economists select theories that attract the most personal benefit, not those that are correct.

    If expounding a theory means you get showered with credibility, status and money then that theory tends to be expounded. Funnily enough, such theories tend to favour those with power and money…

  4. desmond August 8, 2013 at 4:53 pm #

    thanks a lot Hawkeye.. our economics is not so much astronomy as astrology. How good it is to see Soddys efforts to base it on reality…

  5. Spyros M August 8, 2013 at 8:21 pm #

    I’m sure you’d find interesting as hell the masterly treatise of david graeber, Debt, the First 5000 Years

    http://libgen.info/view.php?id=770511

  6. bill40 August 8, 2013 at 8:30 pm #

    Good post Hawkeye, I have a lot of time for Soddy, who quite correctly, pointed out the lack of money in the neo classical literature but did not point out another omission that is the basis for Friedmanite neo liberal policies today. There are no banks.

    That’s right, there are no banks or money and even the latest attempts to define debt and money are ludicrous. Bill Mitchell recently had to devote an entire blog post to demolish the Graundiads’ attempt to define debt. All attempts are doomed to fail until you accept that debt came before money not the other way round. Money is just a record of debt in the form of a token.

    Whenever a mainstream media source attempts to define government debt you know that one idiot will quote (usually badly) Mr Micawber and another proclaim “you can’t repay debt with debt”. there seems to be a desperation to see the state as monopoly currency issuer as a household which is a currency user. Economics simply does work like that, the two are opposites so inverse rules apply. sadly you don’t get far trying to explain this.

    Modern economics covertly relies on the one thing that can grow expotentially and which can never run out. It is available up to the sum of infinity minus one penny, I speak of course of fiat currency. large sums are available to those who can best exploit natural resources but the majority must be kept relatively poor because we don’t want that nasty inflation.

    The argument of our times and those past is how best to utilise such a wonderful invention.

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  7. Daniel August 9, 2013 at 8:00 am #

    I guess Frederick Soddy came up against George Orwells quotation, ‘ In times of tyranny, to tell the truth is a revolutionary act’.
    The Money power do not want the truth of their debt based money creation to reach the masses. To this end they have corrupted and co-opted the greater majority of the economics profession to their cause, and used them to obfuscate and distract from the reality. If you do not toe the Party line,you do not advance in the Halls of Learning or Governance. or feed from the trough of the elite.

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  8. Jon August 9, 2013 at 8:46 am #

    Chris Martenson woke me up back in 2008 also – excellent Hawkeye! Sadly, 5 years later, there is still not enough people listening – because that is what it will take for real change for the better to happen. That, or the suffering of billions.

  9. Joe Taylor August 9, 2013 at 4:40 pm #

    That’s a really good post Hawkeye, thanks a million and I tweeted it pronto.

    I haven’t read Soddy but I’ve read a bit of Henry George’s stuff.

    I couldn’t come to terms with why economists get everything so wrong until I read ‘Economyths’ by David Orrell.
    (selected quotes here for anyone interested http://bit.ly/XVliwE)

    Then I understood the problem, economics is based on false assumptions.

    Imagine the chaos if cartographers assumed the Earth was flat.

    I particularly like that well know saying, “anyone who believes exponential growth can go on for ever in a finite world is either a madman or an economist.”

    Now whenever I hear an argument of any kind from an economist I simply dismiss it as being worthless.

    • Hawkeye August 9, 2013 at 9:10 pm #

      Hi Joe

      Thanks for tweeting the post and.the links to David Orrell. That’s something to add to my reading list.

      I note that you reference Jevons, and his book Coal Question seems to have got close to unlocking some of the mysteries of economic growth and associated limits:

      http://en.wikipedia.org/wiki/The_Coal_Question

      But even he swayed back into the Utilitarian orbit. I’d say that it was the Bentham influence on the later C19th Neoclassical economists that did the most damage. Bentham created the archetypal “anthropocentric” doctrine of economics which filtered through the Mills into Marshall et al.

      Bentham was also instrumental in removing anti-Usury legislation too. I’d like to say “stuff Bentham!”, but it seems he already beat me to that:

      http://en.wikipedia.org/wiki/Jeremy_Bentham#Death_and_the_Auto-Icon

  10. BillyRaeJimBob August 9, 2013 at 7:14 pm #

    “… whilst debts multiply by the laws of compound interest …”

    In one sense the system works I suppose. Exploding debt eventually gets neutered by rampant inflation, and if not by that, by simple default.

    At this time we are in the exponential greed phase, and unfortunately the money worshippers have hypnotised the media and the legislature, as they would, I suppose.
    Lots of us are sure the whole building will collapse (I read a Jenga analogy which seemed aposite -everyone tries to pull out their bit of profit, knowing at some point it has to come crashing down -and all the sooner because of their actions- but please not just yet) soon, very soon. We cannot believe that the courts are not acting on behalf of the people.

    Luckily for us, the western gourmands are not buying too much real estate or property where they might lock in value. They are far happier with ‘more profitable’ derivative products such as these new residential rental bonds, and the con that is the stock market. Why they have even tried to crush Gold, the true safe haven.
    So they will lose everything but hope for a bailout.

    What I have not yet got my head round, is who would you trust with the money supply in the aftermath?

    • stone August 12, 2013 at 11:19 am #

      BillyRae,
      “In one sense the system works I suppose. Exploding debt eventually gets neutered by rampant inflation, and if not by that, by simple default.”

      I don’t think we can rely on exploding debt being neutered by inflation. Debt servicing diminishes available funds that would otherwise be used to fund real stuff (such as inventing machines etc). Debt servicing drains demand for goods and services and so can be deflationary (the people receiving the interest are less likely to spend the money than the debtors would if they hadn’t needed to hand it over).

      Inequality due to to debt can cause the whole economy to be permanently dragged down to a depressed level compared to where it otherwise would be. We have only very briefly made full use of all willing ingenuity, labour and machines and that was during the tragic WWII period. The rest of the time we simply leave many people
      and machines on the sidelines.
      http://directeconomicdemocracy.wordpress.com/2013/03/29/rich-people-could-benefit-if-everyone-else-were-also-rich/

  11. Buck Turgidson August 9, 2013 at 7:14 pm #

    Excellent post Hawkeye!

    Of course our current economic theory works just fine for those who designed it.(banksters)

    Trying to change the current system would be like overhauling an aircraft jet engine in flight, and good luck on trying to land the current system with the intent of overhauling it. Wait for the crash then rebuilt it.

  12. Phil (Mcr) August 9, 2013 at 11:55 pm #

    MI5 = incompetent nobheads?

    http://www.bbc.co.uk/blogs/adamcurtis/posts/BUGGER

  13. John G August 10, 2013 at 9:07 pm #

    Great piece Hawkeye. Thanks. I’ll have to read up on Soddy now. I’ve been struggling to stay interested in Thorstein Veblen anyways.

  14. allcoppedout August 11, 2013 at 2:58 am #

    I read Soddy so long ago I conflated his name to Frank trying to google him up again. Venturing back in recent years I don’t like his third person polemic style, though I’m pretty much swayed as Hawkeye on content. He wrote on education too, declaring most of what we get hapless. I couldn’t agree more, though I remember (somewhere) whilst he didn’t approve Hitler’s government, he was concerned democracy was not organising schooling or industrialisation as well as Germany.

    The subject of much of this blog gets academic review here – http://wer.worldeconomicsassociation.org/index

    My broad take on economics is that it doesn’t work except as part of a wider control fraud which starts in allowing private banking to issue money much as Soddy describes. There are famous between the wars warnings from industrialists on the same. Many academics have written on dominant ideologies with a view we might ‘notice’ our own neo-liberalism and critical theory has elucidated a lot of it. A big problem in university economics teaching is having to try so hard to get students up to mathematical speed (at relatively low levels) and into some kind of systems thinking – they haven’t been well-skilled at school. This makes us over-simplify to a core that does not include critique. I suspect many colleagues don’t know any for that matter. To some degree we don’t stray into much more than balancing books and basics on competition (supply and demand, barriers to entry, substitution, comparative advantage) – and a lot of the time we have to teach how to manipulate spreadsheets.

    I first taught in this area in the mid 80s and was lucky enough to work in a left-wing environment in which much discussion took place on big banking and transnationals, including offshore looting, tax evasion and attacks on wages. Our themes then were ‘surplus capital’ and the ‘Ponzi’ economics of asset stripping, lack of organic growth and bubble-blowing. What was obviously happening as a move from a pluralist to unitary perspective – the managerialists were winning our everywhere, changing IR to HRM and shifting all but model-mathematical economics to social study. Business studies became a hodge-podge of subjects made facile (e.g. organisational behaviour moving from sociology to stuff based on American pop-psychology).

    Soddy said somewhere that a couple of honest adding machines would be better than anything the banksters offer. The key non-science factor in economics is that there is no real peer review only a facade of one.

  15. shaun o'hara August 11, 2013 at 2:34 pm #

    an economist is someone who will, if you lose your mobile, estimate the number

  16. Just me August 11, 2013 at 7:28 pm #

    “King World News interviews PCR on rigged financial markets — August 11, 2013”

    http://www.paulcraigroberts.org/2013/08/11/king-world-news-interviews-pcr-on-rigged-financial-markets-august-11-2013/

  17. Just me August 12, 2013 at 4:30 pm #

    “EU banks closed 5,500 branches in 2012”

    http://euobserver.com/economic/121084

  18. allcoppedout August 13, 2013 at 12:51 am #

    Soddy based a lot of his analysis on energy as the power of the sun. There had been concern for 100 years that we were on an exponential curve and would run out of coal. Obviously, we found other fossil fuels and continue to do so, plus we have some clue about renewables and fusion is always, round the corner. The additional concern now is man-made global warming and other potential catastrophes.
    What we never manage in economics is a scientific world-view. The critical theorists tend to have seen science as a kind of half-learning, with technology as ideology. It is tempting to clump science and technology as it has developed together with the capitalism that makes us want to spit. Much technology is used to purposes that scare us. The ‘bomb’, surveillance, meta-data, more and more energy use and products that consume energy. There’s an upside of course and most with science training are liberal and left-leaning.
    Science as it translates into the public domain is nearly all trivial, with Blue Peter presenters dumbing down to the facile. There is little doubt we could organise ourselves in a more scientific manner and that we are scared of the thought of scientific organisation. In business studies ‘scientific management’ (Frederick Taylor) is no such thing and throughout the ‘progress’ through human relations schools, strategy and systems theory only lip service is paid to quality of work life and genuine social responsibility.

    When it comes to economics we have very little idea of the task to do and how it might be shared, let alone done in an ecological manner. If we want to give our worst workers or those disabled from work good standards of living we can’t because they become a burden on our competitiveness. Now we are reluctant to pay a decent return to all workers for the same reason. The barriers to this are written-off in glib statements about global competition. Science would start with this material and try to make sense of it. Powerful stochastic tools are used instead to predict risk in markets, which they don’t.

  19. Just me August 13, 2013 at 12:24 pm #

    “Mums ‘selling sex to feed their children as benefit cuts hit Hull’s poorest'”

    http://www.hulldailymail.co.uk/Mums-selling-sex-feed-children-benefit-cuts-hit/story-19650230-detail/story.html

  20. Robin Smith August 13, 2013 at 1:01 pm #

    There are no paradoxes in economics. Just people in a deep state of psychological denial. An affirmative mind set extinguishes any paradoxes.

    The recession was predicted by many people. They just did not support your doctrine in denial of them. The next one will occur in 2026, 18 years after the last one. Just as did the last one before this. For the same reasons.

    Here is an idea of what caused every single recession since Babylon and most unemployment or low wages more exactly:

    http://www.meltfund.com/2013/08/trickle-up-economics.html

    Economics most certainly does not need any more intellect. That has been used largely to obscure reality more than to reveal it. There is a lot of intellect going on around here. I’m sorry this is not a snipe. Its pointing out observation that we should only use the intellect once we have stopped denying the answers we do not like to hear. That action is called wisdom. Its a problem for the psyche.

    The nature of money is misunderstood by everyone. Especially the experts. Money is not wealth. Everyone, present company included denies this though and goes on to cover that up with more intellectual denial. Here is a good exposition of the nature of money. You will deny it though.

    http://www.politicaleconomy.org/speV_1.htm

    • Just me August 13, 2013 at 8:21 pm #

      I don’t for one second think that the capitalists who rule us are idiots or fools, far from it, I think they are some of the most clever, highly intelligent people on the planet, but, along side that, they are also devoid of anykind of humanity, morals or scruples, being a megalomaniac is indentured into their very being. Many socialists and (inspite of what they say) almost all capitalists don’t believe that God exists, for them to say they do is just a tool to gain adventage with those who truly do. To socialists it makes no differance, we should all live our lives in a loving, caring and thoughtful way to all our brothers and sisters, we are all one big family, to capitalists it means, there is no God, therefore there is no sin, we shall act and do as we please and never have regrets at what we do. Indeed, capitalists cultivate their children into their way of thinking, it goes on through their generations, they send them to very expensive schools to out think those who would oppose them.

      All that is happening is not happening by accident, it can’t be, the writing was on the wall many, many years ago, nothing was done to stop it, why!. There is something else going on. I think we are only just entering into the nightmare of what is to come. Whatever happens, I think it was all VERY well planned out to happen along time ago, still, we will have to wait and see if I am right or wrong, one way or another we won’t have long to wait.

      Its all to do with the preparation for the running out of global resources, some say there is one hundred years left, some say fifty years left, I tend to think it is nearer the fifty years, could be a lot less ?. Under the “capitalist system” that means big trouble for a “capitalist system”, people will turn to a more left system, it will indeed be a major shift to the left. The powers that be know this, they are not under ANY circumstances going to allow that to happen, that is not in their interest.
      They are at this moment in time creating an environment of mayhem as an excuse to impose a system that will stop that from happening, science and technology have given them the power to accomplish this, it will slide evermore to a much more brutal form of authoritarian rule.

      • Just me August 14, 2013 at 3:31 am #

        “Humanity Is Drowning In Washington’s Criminality — Paul Craig Roberts”

        http://www.paulcraigroberts.org/2013/08/13/humanity-is-drowning-in-washingtons-criminality-paul-craig-roberts/

      • stone August 14, 2013 at 6:58 am #

        My impression is that macroeconomic malign effects (such as mass unemployment or flows of capital from the developing world where money is needed to asset bubbles in rich countries) are largely inadvertent tragedies rather than dastardly plots playing out. They are simply the collective consequence of a huge number of perfectly decent individuals attempting to look after their own money. It is analogous to those tragic incidents of people getting crushed to death in crowds (such as in Hillsborough etc). The crowd surges and crushes people but no one individual in the crowd has acted reprehensibly.
        We do have a responsibility though to stand back, see what is happening, and ensure that our economy is framed in such a way that doing right by money leads to doing what would be right if money were not the consideration; – just as we have a responsibility to ensure proper crowd control. In both cases it is no excuse to just throw up our hands and say these things happen.

        • Hawkeye August 14, 2013 at 12:57 pm #

          I have often pondered whether the failure of economics to adopt proper scientific inquiry is owing to incompetence or deliberate subversion.

          As has been outlined by the comment from Martin above:

          “If expounding a theory means you get showered with credibility, status and money then that theory tends to be expounded. Funnily enough, such theories tend to favour those with power and money…”

          As my post, and also this piece by John Bellamy Foster outlines, many “heretics” who have tried to point out the key flaw of confusing debt for wealth, have been deliberately ignored and shunned:

          “This fatal flaw of received economics can be traced back to its conceptual foundations. The rise of neoclassical economics in the late nineteenth and early twentieth centuries is commonly associated with the rejection of the labor theory of value of classical political economy and its replacement by notions of marginal utility/productivity. What is seldom recognized, however, is that another critical perspective was abandoned at the same time: the distinction between wealth and value (use value and exchange value). With this was lost the possibility of a broader ecological and social conception of wealth. These blinders of orthodox economics, shutting out the larger natural and human world, were challenged by figures inhabiting what John Maynard Keynes called the “underworlds” of economics. This included critics such as James Maitland (Earl of Lauderdale), Karl Marx, Henry George, Thorstein Veblen, and Frederick Soddy.”

          http://monthlyreview.org/2009/11/01/the-paradox-of-wealth-capitalism-and-ecological-destruction

  21. allcoppedout August 14, 2013 at 12:26 am #

    We don’t really need to know the private motivations of the rich – even in law intent is judged on actions. Intellectuals are as prone to stupidity as the next guy and we can be very dumb scholastics. Banking’s compound interest runs out of kilter with real economic growth – hence debt jubilees throughout history.

  22. steviefinn August 14, 2013 at 8:03 am #

    In keeping with the logic or lunacy of the current economic priesthood it appears that Summers is now favourite for the big job:

    https://fbcdn-sphotos-c-a.akamaihd.net/hphotos-ak-ash4/484075_10151731206053971_1070855933_n.jpg

  23. bill40 August 14, 2013 at 1:23 pm #

    O/T but very much in keeping with a general theme here, John Lanchester tries to give voice to the sheer scope of banking fraud. He manages to do it without sounding like a tin foil hat wearer too which is a skill not to be underestimated.

    http://www.lrb.co.uk/v35/n13/john-lanchester/are-we-having-fun-yet

    Are we having fun yet? Cracking read.

  24. Ancaeus August 19, 2013 at 6:33 am #

    This post begins with a falsehood. “Not least of which is its [economics’] utter failure to predict the current financial crisis.” Economics is not an embodied monolith about which such a sentence could even be meaningful. However, lots of economists did predict the current economic crisis, well in advance, and with plenty of detail. What’s more those same economists have continued to make predictions about the course of the economy, and the effectiveness of various policy prescriptions. Those predictions have proven to be accurate in every detail. Unfortunately, these are not the economists who are making economic policy in the U.S. and other major nations.

    Well, after reading something as idiotic as the above quoted sentence, I could legitmately expect that a post such as this would get better, since it has only one direction it can go. However, life is short. So I stopped reading at that point.

    • Hawkeye August 19, 2013 at 9:26 am #

      Ancaeus

      Apologies if the poor opening put you off. Perhaps I should have been clearer by saying that mainstream (Neoclassical) economics failed to predict the crisis.

      People like Greenspan were applauding the “Great Moderation”, and the IMF as recently as 2007 was saying that everything was fine in the world.

      I agree that many outside of the Neoclassical mainstream did indeed predict these problems, and Dirk Bezemer’s article “No-one saw this coming” is a good summary:

      http://mpra.ub.uni-muenchen.de/15892/1/

      He makes the point that “Accounting” based economic models rather than “Equilibrium” based ones fared better.

      Please don’t let that put you off reading it, as the rest of the article is very good, although of course being the author I’m biased !

  25. patma2003 August 19, 2013 at 12:08 pm #

    “You need an engineer to have a bridge… you do not need an economist to have an economy”
    ~ Prof. Steve Keen, LSE Apr 2012

    Hawkeye, great work. Not sure if by design, but your blog post here fits in very well with the style of the blog as a whole.

    To be honest, I felt a little sick halfway through it…upon the realisation that it appears one of the primary reasons we are still here and no progress has been made is via the dark tool of Effortless Superiority. There is no open dialogue for change, and therefore the study of economics is not open to, yet should be subject to Schumpeter’s notion of Creative Destruction. This argument should be ever changing, open to evolution. We are humans. This is nature. And as such, system should reflect the broad flexibility that is found in both.

    No. They just stand above us, glance perhaps… then give the cold shoulder to any valid argument. It is effortless superiority, and one of the grandest forms of fear we can know.

    The simple fact that a muppet like Krugman can look everyone squarely in the eye and say for some time that banks do not play an integral role in the make up of the economic theory of the day displays this effortless superiority. Only now, 5 years since the shit his the fan is he now (maybe) coming around.

    Loved the use of Soddy too Hawkeye. And that is just down to my love for parallels being drawn through history. Soddy, and alternate voices like him that should be integral parts of discussion, largely lost, consigned to a back catalogue that are only good for a quirky anecdote in order to balance an argument – not someone to be used at length to heavily illustrate points as you have here… valid points that are again being made by the credible ‘outcasts’ of today.

    As long as central banks have a closed, undemocratic circuit upon the control they weild, I fear for the change we need. The economic theory that dominates is one based in a finite reality, and the damage we do in ripping our planet apart reflects a need to satisfy a finite theory. When, in actual fact, all the energy we need is outside our front door, each day. A new renaissance is upon a our fingertip. Economic theory and technological progress should be working in tandem to make free energy a reality, not making tired old dogs live longer.

    Fossil fuel will perhaps be looked back upon in time, as an important part of of human history. Helping us move forward and create rough, skeletal systems for future human life. History should show fossil fuels were only meant to be a stepping stone towards something greater.

    Unfortunately, they are beginning to define our species. and it is fucked economic theory that allows for this. Viva creative destruction.

    Good job mate. Hope you get another run, was deserving of it. =D

    Anyways, my twitter handle is @rene_sonce If anyone wants to follow, please your welcome. And, would love to follow any posters and commenters on this blog too.

  26. johnm33 August 25, 2013 at 9:53 pm #

    Great post Hawkeye, not entirely off topic
    http://www.gregpalast.com/larry-summers-and-the-secret-end-game-memo/

  27. Gary September 6, 2013 at 8:55 pm #

    Money is a commodity that is traded for other commodities, just like any other commodity in a barter economy, but it has one special feature, it is the most liquid of all commodities ie. Money is the commodity most in demand by everyone.

    Debt is a claim on commodities at some date in the future, more usually debt is a future claim on the commodity of money, money arising from cashflow from production that will come in the future. Debt brings forward demand for money that has not yet been realised by the productive economy. The problem is when the debt gets so large that the prodcutive economy cannot ever realise the cashflows that will service that debt. Then you have a problem. Money is not the problem, debt is the problem.

    Money is not debt (except in this bastardized fractional reserve system). Gold is not debt, gold is money and would be the ruling currency if this were a free market.

    This is Austrian Economics , and that makes perfect sense to me.

    • BobRocket October 7, 2013 at 8:39 pm #

      Hi Gary,
      good to see you back, sorry for the delay in replying.

      ‘Money is not debt’

      Sorry but I can’t agree with that (but your argument re. debt itself is sound)

      Money is a token representation of unfulfilled Universal Demand.

      I hand over tangible assets to you in exchange for money in the belief that others that hold the tangible assets I demand will do likewise.

      Gold is not money simply because gold has a use value (trinkets/industrial), gold is a commidity like a potato (and can be traded directly) money cannot.

      You would not trade 50 £20 notes for 1000 £1 coins

      You would trade 1oz gold for a 5 year old low mileage saloon

      At some point in the future, someone will hand over that same money to you in exchange for the tangible thing that you produce and the debt is paid, all monies created in the transaction chain are cancelled and everybody is back to square one.

      The fly in the ointment is that someone coined the phrase ‘Time is money’

      Is 5LBs of spuds today worth 3LBs of carrots in a weeks time ?

      Do the Austrians explain how to value an asset ?
      And what do they value said asset in ?

  28. Just me September 19, 2013 at 3:19 pm #

    “Dutch King Willem-Alexander declares the end of the welfare state”

    “Youngest monarch in Europe says people must take responsibility for their own future and create their own social and financial safety nets”

    http://www.independent.co.uk/news/world/europe/dutch-king-willemalexander-declares-the-end-of-the-welfare-state-8822421.html

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