Classical Economics lunacy

http://www.positivemoney.org/2012/12/new-documentary-economic-science-and-the-debt-crisis/

This video has mainly Swedish dialogue and (retro-added) English subtitles, occasionally the reverse, and yet more occasionally dilogue in a third language with in vision Swedish subtitles superimposed with retro-added English subtitles. This can make it hard work if you don't know Swedish, and occasionally the English subtitles are obsured by the video content.

A main point I took away from this is that classical economic models do not include the banks and debt, and this is why economists mainly failed to see the latest financial crisis coming. You can take delight in watching various Nobel prize winning economists splutter and stammer when this point is put to them - unsurprising as (and the film points this out via other commentators) they have built careers and reputations over many years using the flawed model. One at least cogent retort is that banks and debt can be ignored becuse "for every loan there is a lender" (I think I quote correctly) , but this conveniently ignores the fact that debt carries interest, so debts are always greater than loans.

The film concludes that reducing the size of the financial sector in an economy - resetting it  - is the way forward, but this srikes me as either doing less of the wrong thing, or doing the wrong thing righhter, or just again in the hope that this time it will be OK.

The film stops short of really showing up the contradictions / fallacies in our GDP growth paradigm. It features a Spanish family who narrowly avoid eviction for mortgae arrears, and a vast unoccupiable housing development started before the bubble burst. The references to the 'value' of homes were in the common usage of the price they could be sold for, ignoring the fact of an underlying value of the home as an amenity. [Nature /  physics teaches us that there is entropy. So, untouched, a buiding will eventually crumble: its innate value is falling from the moment the builders leave the site - it is depreciating in real terms. Yet we are so indoctrinated by market orthodoxy that we tend to equate price and value.]

Popular economics

I don't really expect to see any particularly cogent comment on the letters pages of Metro, but today's crop of letters about the euro crisis are particularly meretricious. The first is a poorly extended shipping metaphor. "Greece is an anchor pulling down the eurozone ship. If you cut the anchor free the ship will not sink." What? Maintaining the shipping metaphor, the writer compares the eurozone to The Titanic. The eurozone's iceberg is "debt created by greed'".

So the Titanic (eurozone) has struck its iceberg (debt/greed) but it will not sink if its anchor (Greece) is cut free (presumably removed from or allowed to leave the euro. I don't actually think the Titanic's anchor was a significant factor in its sinking. It was the ingress of water through the hole made by the iceberg.

Next up - "The reason the whole of Europe is in financial distress is because throughout the continent the public sector is far too large. ... because of hundreds of thousands of EU-introduced laws and regulations." Remember the assumption that more private sector jobs is good, but more public sector jobs is bad. More phone shops, £1 shops, fried chicken shops, coffee shops? Yay!

Let's get to the nub of this. The vast majority of money is created by private banks and lent out at interest. The interest cannot all be paid back, because the money to pay it back does not exist. Therefore people / organisations / countries have to go bust.

That writer continues "Mr Brown [the previous UK Prime Minister and before that finance minister] reckons it's up to us to get us out of the mess he drove us into." I'm not here to defend Gordon Brown, but we can't lay the entire national debt at his feet. And even if he did drive us into this mess all by himself, he can't get us out of it.

Next: "I would have thought that the former Chancellor [Gordon Brown] would have been well advised to keep his mouth shut on the subject of debt.". This is practically straight out of a common comedy line: 'Oh, just ome other thing. Shut up!'

Finally: "What a cheek for Gordon Brown to say that Europe can't save itself. This from a man who acted like he saved the world a few years ago." Setting aside the non seqitur (GB did a, therefore he cannot say B), we have to examine whether what GB said is correct or not. If it's true, why shouldn't he say it?

None of this carping from the sidelines shows any understanding of the actual causes of Europe's or the world's problems, nor (unsurprisingly) does it provide even the slightest suggestion of any solution or ameloration.

OK, one write says there's too much EU legislation, but you can't just weigh legislation and neither can you arbitrarily decide how much is too much. Is the writer suggesting we randomly remove legislation until the "financial distress" stops? Presumably not and therefore we have to look at each piece of legislation. The writer does not cite any example, making his comment just rhetoric.

Picking up the Titanic theme, I would say that what is happening is rearranging the deck chairs on the Titanic, that is pointlesly solving or ameliorating a problem that will become irrelevant in the event of the impending disaster. Moving money from one fund to another does not solve the problem that all the money that exists is owed to banks, and then some.

Micawber

As many will know, Dickens' character Mr Micawber has a maxim about his income being greater than his expenditure. This is of course impossible at a global level where the only thing that is possible overall is that income equals expenditure.

For the vast majority of people, expenditure is greater than income, because money is created as debt. Many people of course have to sell their labour for money to pay back this debt.

The constant struggle to minimise outlay and maximise income that most people face is so destructive, even of the better off who fare well compared to those who face starvation day by day.

In an RBE the emphasis would be on maximum efficiency, not taking resources off each other. If an RBE doesn't work there's nothing to stop us reverting to our current system, so it's difficult to accept the assertion that it won't work. Those that believe it won't work ought perhaps be willing for this to be shown experimentally.

You what?

In the current "The Week" magazine, there's an item on the chaos that's breaking out in the Eurozone, and it mentions this about Italy:

"Italy's finances are basically sound: it has a high level of debt ... but that debt is largely funded from within Italy and is well managed by the country's respected finance ministry."


I admit I am no economist or financier, but let's look at this. What does a debt being "funded" mean? Surely whoever "funded" a debt lent the money? So Italy has lent money to itself? The people of Italy have lent money to their own government? How is the government going to pay them back?

And what does a debt being "managed" mean? Does it mean it is being paid back? If not, what?