Commonly held beliefs that don't seem to be working

The world is in deep financial and economic trouble. Even Alan Greenspan (in this New York Times article) now admits he didn't understand that the Friedmanian and libertarian vision of free markets, unfettered by government regulation, would work to solve all problems was flawed. He was surprised. Perhaps it is time to take a hard look at some of these beliefs that have guided our actions and decisions for so long because things are just not working the way they are supposed to.

In fact none of the neo-classical economists can provide convincing evidence for what is causing the current melt-down. They each have their favorite 'cause' and kicking boy. It was the housing bubble; it was the price of oil; it was Wall Street greed. Well that last one at least catches part of the reality. Greed is certainly at the top of many lists. But the real problem here is that neo-classical and market fundamentalist economics simply has the wrong model of how the world works. The accepted model evolved from a beginning not unlike most real sciences (natural sciences, that is) by observing behaviors of systems and positing hypotheses about causes. Where it went wrong is in its physics-envy motivation to advance theories but without a controlled experimental methodology. Thus hypotheses could only be tested by statistical analysis of gathered data from observing systems work. The problem with this approach, as compared with empirical natural science, is that you can't apply hard tests to determine variable relationships and derive causal relations. And as a result, some of the early hypothesis got mentally converted to law-like status, e.g. supply and demand, without any experimental confirmation. Another egregious assumed law was that of rational agency theory. In this case economic agents are assumed to be rational decision-makers who are guided by maximum utility to make the right choices. It certainly made the models easier to work!

It turns out that many parts of neo-classical economics are just plain wrong. For instance, "Daniel Kahneman received the Nobel Prize for the work he did in collaboration with Amos Tversky [showing that systematic biases prevent humans from being truly rational] , who would have no doubt shared in the prize had he been alive" (from Wikipedia article). And while the 'law' of supply and demand, predicting price movement, appears to be a reasonable description of general effects, all other things being equal, there have proven to be far too many variables that interact with poorly rational agents to affect price. It can't explain what happens, for example, to the price of oil.

So many things in economics have turned out to be beliefs rather than real laws. Many times they have been wishful thinking rather than verified phenomena. We need to consider some of these commonly held beliefs and question their validity in an attempt to find real explanations for what is going on.

Let's start with a common belief held by economists, politicians, and the general public — most everybody — that growth is always and forever a good thing. Even Paul Krugman, the latest Nobel Memorial winner believes it. You probably do too. But let's consider the boundary conditions.

We live on a finite world. Economic growth, which is defined as a percentage increase, year over year, of Gross Domestic Product (or gross world product for the whole planet), implies that mankind's footprint on the Ecos is increasing each year. We achieve this by taking more of natural resources, converting them to human-desired capital, and belching out waste products for nature to absorb. Here is an absolute fact that should be easy for everyone to understand. You cannot grow infinitely in a finite world. It is physically impossible (not to mention the psychological stress of crowding).

Growth includes growth of profit, growth of sales, growth of markets, and, to make the latter possible, growth of the population. Growth creates more jobs so that the growing population has something productive to do and an income so as to buy the growing number of goodies and fa(s)t foods. What's not to like about growth? As long as we are growing at a 'reasonable' rate all is right with the world. Right?

So much for rational agent theory. No one in their right mind can believe that growth, even at a 3 - 5% rate per year could go on forever. At a five percent growth rate, whatever is growing doubles every 14.21 years! Given a finite volume in which to grow, how long will it take to fill the volume completely? It is patently absurd for anyone to believe that growth in and of itself is a goal of economic activity.

Growth was a reasonable goal, say, 20,000 years ago when humans were few in numbers and lacked capital assets to make life easier and safer. The urge to grow in numbers, and in capital, is not un-natural at all under those circumstances. But once the world is 'full' of people and sufficient capital to make life comfortable the need to grow is gone and our activities should enter a form of steady-state. Natural growth curves are 'S' shaped, starting out slowly curving upward, gaining momentum upward, but after a while losing momentum and turning flat at the top. They will vary, for example population growth curves will have variations depending on the species and conditions. Such growth curves are admittedly ideal. More often one finds curves that start out as described but due to catastrophic negative effects result in a crash back to low levels. Such curves obtain in population dynamics where a lag time in a major negative feedback loop, such as population expansion of a major predator, allows a population to overshoot, but quickly brings it down.

Growth of GDP is a joke. First off, GDP is a miserable measure of well-being (c.f. this criticism). GDP includes such services as rebuilding after a tornado, completely missing the point that we are repairing damage to the system — how is the damage a positive thing? Herman Daly has pointed out that fallacies associated with GDP as a measure of income. Secondly, any meaningful growth, measured in dollar denominations, has to be adjusted for inflation. And the official government methods of calculating inflation, e.g. the Consumer Price Index (CPI) have been fudged and changed in ways that under-report inflation and over-state GDP. It isn't even clear that the economy has been growing at all for all these years (R. Reagan, G. Bush senior, Clinton, and G. Bush Jr. administrations). One wonders when most households require two earners (or one earner working two or more jobs) just to make ends meet.

What about growth of job creation? More jobs mean less unemployment, right? But look at the jobs that have been created, and starting even before globalization allowed shipping manufacturing jobs overseas. The biggest 'growth' in jobs has been in the 'service' sector. And this is a euphemism for grocery clerks and restaurant workers. Yes a few jobs in the glorious banking and finance services business were created; we now realize they were high paying jobs for people who created an illusion! But those few jobs could not compare with the jobs in the grunt work sector of the sector. The real question isn't growth of jobs, but quality of jobs. How do jobs permit people to live comfortably and safely? They don't.

Yet every economist, every politician, and every citizen dutifully and in knee-jerk fashion focus on growth of the economy as the indicator of well being and health of the nation (world). All this is a good way to not focus on the two problems that really matter: population growth creating demand and the growing disparity between the haves and the have-nots, between the super rich and everyone else. I suspect the super rich want to keep us thinking about GDP growth so we won't notice that they are absconding with all the real wealth leaving the rest of us poorer every day.

We won't make any progress in solving our problems as long as we keep this insidious belief that growth is good. It isn't good any more. We've over-grown in every respect. The world population and the average per capita ecological footprint exceeds the carrying capacity of the planet now. If anything we have to shrink the population.

We also have to shrink the disparity between the rich and poor. But that will take questioning a number of other dearly held beliefs and finding them wrong. For example, the rich have a right to be so rich because they are the ones who generate the capital (capitalism as practiced in the West). They take the risks and reap the rewards. They are the smart guys who figure out how to make profits. Why should we question this assumption? Well, Enron, Global Crossing, Bear-Stearns, Fanny Mae & Freddie Mac, Wall Street; shall I go on? We should question it because it is destroying our world.

Another belief we have to question is that human happiness comes from the ownership of stuff or the ability to command resources to pamper our desires. Everybody wants stuff. But stuff being produced is exactly what is generating CO₂ and warming our planet. It takes gobs of energy to produce stuff. And the only place we are getting that much energy is from coal and oil and natural gas — the fossil fuels we burn. No other energy source comes close to providing what our fossil fuel infrastructure provides in terms of the power needed to drive our economy as it is currently constituted. Self-centered, and self-important people who want to have stuff and more stuff rightly perceive that if we truly want to reduce our CO₂ emissions we will have to stop — yes stop — our production of mere stuff. We should be using our fossil fuels to build up a carbonless energy infrastructure (while at the same time reducing our population to one that could be sustained by the lower power alternative energy sources). We should not be building more iPods and cell phones (throwing away the old models as they are not up-to-date enough). We should be willing to sacrifice a whole lot of amenities in order to save capital for our children and their children.

We should, but I seriously doubt we will. Beliefs are hard things to throw away, even when the evidence says we should. The vast majority of people are, sad to say, not very wise. And as long as the majority of humans are Homo caladus and not Homo eusapiens, we are pretty much doomed to keep on believing in bad ideas.

I will continue to question the beliefs in our system, as I have in the past. Capitalism, democracy, and a host of other dearly-held beliefs don't seem to be working for us. What is wrong? But I don't want to abandon the effort to think about what could be; what humanity's strategic plan should be. Knowing what is wrong with the way we believe now is going some distance to understanding how we should do things differently, and what a closer version of truth is. We need to understand our situation if we are to find a way forward.

Comments

[Sudeep Bhaumick]

you might find this blog interesting, its written by one of my professors from college days, he is not very internet savvy so am helping him out by posting them, not a lot written...

http://traditionalwisdom.wordpress.com/

preferably, start from the start...

[Sudeep Bhaumick]

actually George i think people don't want to see the truth...

how hard is it to figure out that GDP don't make sense, all that one has to do is to look around. the world is more polluted, there is more unrest than ever, there are more people on earth facing more shortages than ever. a growing GDP has no meaning...

in India the government figures for Inflation have been falling for a couple of weeks now. so one friend of mine comes over and tells mi, look the inflation is reducing and the prices of oil are lower, things are getting better. i asked him if he could tell mi the price of one daily use item that had gone down and he did not have an answer.

a wise man once told mi... "you can wake up a person who is sleeping but you cannot wake up someone who is faking it."

keep up the good work though, am sure there are some out there who must be listening... also, i would like to thank you for sharing all these thoughts and for being an inspiration...

my new blog...
http://ignoblethoughts.blogspot.com

[George Mobus]

Thank you Sudeep. I will definitely take a look at TraditionalWisdom. We need to be reflecting on all sources of wisdom these days. Pity there are so few sources!

I read your last blog and see you are following the same trail. Keep up the good work.

George

[Sukhbir Dadwal]

Another great post Dr Mobus. Thank you sharing your wisdom.

I have a question. Keeping in mind, I did read your posts regarding human nature and the hurdles we face.

But I find it hard to believe that with so much of our economy, well being and security riding on fossil fuels our government can be so arrogant as it has been in the past.

I moved to this country in 1994 and I have seen the evidence of peak oil and greenhouse gases growing. I have seen people (at least the young ones - in small numbers) working towards a cleaner world. It has been a growing trend since I've been here anyways.

If I were to guess, I would say this trend will grow and eventually.. hopefully, it will percolate into our government system.

There is even evidence of governments taking action (i.e. Kyoto Protocol) and I even see some sort of evidence in US politics (i.e. Pickens Plan or Obama's proposal towards energy independence). But perhaps I'm over optimistic.

So my question is, in your opinion, do you see at least the possibility of world governments working towards a world which is not so dependent on fossil fuels or will our lack of wisdom eventually lead our demise?

I think I know what you are gonna say, and I just want to let you know ahead of time: I hope you are wrong too! :)

[RBM]

I haven't been reading you long enough, here, so went to Google:
Homo eusapiens - first
Homo caladus - second

'to think about what could be'
Yes, I have come to name it - Room for Improvement.

RBM
SEE'Ya

[wildideas]

we need to be more like canada. y'know, more intellectual. there should be high taxes imposed on big broadcasters like fox and nbc for their entertainment inclinations e.g. "american idol" and "project runway". heftier taxes should be imposed for okaying truly insipid programming such as "battle of the bods" .. these taxes should be earmarked to fund national projects -projects that miss the radar of fun-obssessed teens and their legal-but-immature adult brethren. y'know, the folks who watch "battle of the bods" and "mtv cribs"

[wildideas]

look at what people spend money on - obama sneakers