As each day passes, I become more and more convinced that I do not understand economics. That does not scare me nearly as much as the increasing feeling that neither does anyone else. So now I am writing a diary after seeing still one more pundit tell us what needs to be done. George Soros writes A Plan for Economic Recovery I like Soros for his analysis of what went wrong. I wonder about his remedy. So if I am not an economist why should I write a diary about economics? Well, actually, this diary is only about economics as one of those things I study called "complex systems". At this point let me warn you that no two people use those words the same way so we are into semantic trouble from the start. There is something nice about writing about these things while other people have the responsibility for actually trying to do something. The republicans come to mind when I write that. They messed things up so bad and yet they sit on the sidelines hoping to make some sort of undefined political gain from hoping for a disaster they started to get far, far worse. So if you are at all interested in Soros' plan, look below the break.
Before we get into Soros, let me remind us about a few things we should all agree on. This situation we are in has been characterized by different people in radically different ways. One hypothesis is that we are watching the same old economic system we have watched all along go through "another" crisis. What ever that is supposed to mean. Even if you believe in cyclic phases in the system, when the systems it is embedded in and linked to in so many ways has become uniquely different, this can not be just another cycle.
The second hypothesis is more difficult to deal with. One of the central problems in all out thinking is a very deeply rooted one. Since the time of Descartes we have relied heavily on the "machine metaphor" first in science and then in all fields of study as we forced them to deal with their subject matter as science did its own. This is a topic for many books and has indeed been written about at least that much.
The science of "complex systems" that I study is a direct reaction to this historical frame for our thinking. We (at least some of us in complexity science) have carefully and systematically tested the idea that all of the natural world is machine-like and that the problems it presents have mechanical solutions. What we discover is that the world of such machines is a surrogate world we use to think about the complex real world because that real world is too difficult at times.
Now back to economics. What I am reasonably sure of here is that we have let the situation I just described spill over that far. What this means is that we have certain ideas about economic systems that reflect an unconscious belief that they have some machine-like qualities and we tend to approach them that way.
I can understand that you probably have a strong negative reaction to that idea, especially if you are one who thinks along Cartesian Reductionist lines. I ask you to consider the very self=referential nature of that situation could be a demonstration of the complexity you would be so quick to dismiss. Let us take a look at Soros' prescription for the economy and see whether or not it has some of the baggage I am describing.
We are facing the prospect of global deflation and depression, similar to but potentially worse than the 1930s. That said, I believe the situation could be turned around by adopting a bold and comprehensive program. Unfortunately, Treasury Secretary Geithner did not present a convincing case. I outline the basic elements of such a program in my forthcoming Book, The Crash of 2008 and What it Means. I am providing an excerpt here in the hopes that it will stimulate discussion and help generate the necessary political will for bold action.
Given my introduction to all this, the first question that comes to my mind is whether or not this "bold action" is a drastic repair job on the economic mechanism or is it something different in kind? You see, one thing that distinguishes complex systems from mechanisms is our inability to reverse engineer them. We see this best in the case of the living organism. A very good understanding of physiology is no help in designing one from scratch, for example. The fabrication problem defies mechanistic analysis. Is the economy more like an organism than we are ready to believe? Soros goes on like this:
The bursting of bubbles causes credit contraction, forced liquidation of assets, deflation, and wealth destruction that may reach catastrophic proportions. In a deflationary environment, the weight of accumulated debt can sink the banking system and push the economy into depression. That is what needs to be prevented at all costs.
All well and good. how do we prevent it? Soros seems to be sensing our inability to just prevent it. Here's a snapshot of how we fix things, sort of:
To prevent the economy from sliding into a depression, President Obama must embark on a radical and comprehensive policy package that has five major components:
- A fiscal stimulus package
- A thorough overhaul of the mortgage system
- Recapitalization of the banking system
- An innovative energy policy
- Reform of the international financial system
Let me warn you that it is grossly unfair to Soros to judge his solution from the snippet I give you here. My point is merely to ask how much of what he has offered comes from a way of thinking that some of us see as inadequate for a complex system. Here is the closest I can come to seeing an answer to my question:
It can be done by creating money to offset the contraction of credit, recapitalizing the banking system, and writing off or down the accumulated debt in an orderly manner. For best results, the three processes should be combined. This requires radical and unorthodox policy measures. If these measures were successful and credit started to expand, deflationary pressures would be replaced by the specter of inflation, and the authorities would have to drain the excess money supply from the economy almost as fast as they pumped it in. Of the two operations, the second is likely to prove both technically and politically even more difficult than the first, but the alternative--global depression and world disorder--is unacceptable. There is no way to escape from a far-from-equilibrium situation--global deflation and depression--except by first inducing its opposite and then reducing it.
What this sounds like to me is that we learned that this system has certain responses to certain stimuli in the past. We therefore are justified in using those stimuli to elicit those responses now. Are we? Can we predict system response now based on the past? Unfortunately the arguments I see going on all seem to assume so. I have a strong feeling that we are in a new domain here and the combination of the global economy, global ecology, global energy needs and lack of any real global system of government make for a highly unpredictable situation here.
This has been a tough diary to write because these ideas need so much more elaboration. I hope I have given you a glimpse of the problem I am having understanding what is going on.