“In almost every act of our lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons […] who understand the mental processes and social patterns of the masses. It is they who pull the wires that control the public mind, who harness old social forces and contrive new ways to bind and guide the world.”
— Edward Bernays
Peter Boettke writes a sobering obituary for Paul Samuelson:
“John Hicks once wrote that the story of economics in the 1930s was the battle between Hayek and Keynes. I think Hicks is right, and that this battle continues to this day as witnessed in our current policy debates. But I think there is a deeper debate that goes at the very project of economics as a scientific discipline. And that battle is the one between Samuelson and Mises, and the fateful choice was the late 1940s. Rather than following Mises’s Human Action, the economics profession went the path of Samuelson’s Foundations. Formalism was interepreted as synonymous with logical rigor, and in the subsequent decade positivistic testing was interpreting as synonymous with empirical analysis. By the 1960s, formalism and positivism transformed the science of economics so that the Misesian understanding of “theory” and “history” was actually completely dismissed as a relic of a pre-scientific age.
Since then a large part of the great efforts by economists have been directed at recapturing insights that Mises-Hayek possessed already by mid-century — whether we are talking about cognitive limits of man, the role of property rights (and legal and political institutions in general and behavior related to them), and the microfoundations of all macroeconomic phenomena. New institutional Economics, New Classical Economics, New Economic History, Experimental and Behavioral Economics, etc. all deviate in significant ways from the scientific and policy project that Samuelson initiated in the late 1940s and which dominated economic thinking from that time until the 1980s. The Samuelsonian project had to be pecked away at for progress in economic understanding to take place. Yet the ‘scientific’ allure of the project still remains — unfortunately even among many of those who pecked away at the Samuelsonian project. The pretense of knowledge (see Hayek’s Nobel) and the claim to the mantle of science (see Rothbard’s paper of that title) have a much stronger grip on the minds of economists and intellectuals than what might be reasonably expected in the wake of repeated failures.
Samuelson argued that like all great scientists he was only concerned with the applause of his peers. And he received great praise in his lifetime and will be celebrated in the short-run in his death. But I have stated on more than one occasion that I believe Samuelson will be remembered in the same way as Sir William Petty is remembered, not as Adam Smith is remembered. His substantive contributions (as oppopsed to the form in which he stated arguments) are not immediately obvious to pinpoint. We must always remember that Samuelson was the great anti-Misesian of 20th century economics, and in my book that translates into a force for anti-economics despite all the scientific accolades, awards, honorary degrees, and reverence by his peers he was granted in his lifetime.”
John Mauldin in Frontline Thoughts on one off balance sheet vehicle that might get us out of this crisis faster than we think: psychic income, our dreams for our future…
“Every night we go to sleep on our psychic income, and every day we get up and try to figure out how to turn it into real income……The future is never easy for all but a few of us, at least not for long. But we figure it out. And that is why in 20 years we will be better off than we are today. Each of us, all over the world, by working out our own visions of psychic income, will make the real world a better place.”
My Comment:
In response to RobertinDC, my loyal reader, who politely calls this a “crock,” I should add the context of Mauldin´s note, which is technological change.
Mauldin argues that even if the market stays flat or depressed in real terms, even if unemployment increases and the standard of living falls, none of us can know for sure what the future holds. In ten years time, the world may very well be a better place.. in terms of possibilities… than it is today because of technological innovation.
Is this implausibly “feel good” stuff?
Well, yes.
Of course.
It takes no great courage or imagination to imagine plausible scenarios.
Imagination is the ability…the very creative and fundamentally life-giving ability..to imagine implausible..even unbelievable scenarios and then make them not only plausible but inevitable.
And, again in a fundamental sense, that is how creativity in all fields works. Focusing solely on the negative is itself a form of delusion.
I don´t mean by this that you can wish yourself into any outcome you want. There are also physical laws at work that you have to accept. You cannot wish away a contraction of the economy because of overspending, for instance. The economy has to correct.
But the effects of the contraction, the extent, and its resolution can in fact be ameliorated by a change in attitude.
And by staying alert to every possibilty, we can also sense when deterministic interpretations – such as, “this is the way capitalism is” — are being used to cover up what is in truth a very manipulated reality.
In that case, what we should focus on is an imagined ideal, the way capitalism should be, which may be implausible or even a crock, in some views, but is our only true guide to a way out of this debacle.
This is why I wrote, in 2007, that the economy didn´t have to crash. It was in a PR piece for the book.This wasn´t because I lacked a healthy sense of reality. But reality in the sense that physicists understand it is a very different thing from the “common sense” understanding of reality. The physicists´view is actually closer to what might be called implausible or even unbelievable. But it´s none theless true. The same divergence between common sense perception and underying reality exists in the economy. Cynicism is often right. But not always. Pessimism is often warranted. But not always.
There were fundamental problems in the economy in 2006-2007, but the way the crash occured struck me then as very strange.
I suspected at the time that some of the indices were manipulated…and now the deepcapture team (and others like Pam Martens) have shown how they could have been (see prior posts).
In time, you are going to find that this is true of many of the indicators we use to read the mood of the investing public. Markets are driven by emotions. And smart crooks with the ability to manipulate that emotion can make big money from the manipulation….
And if they can, it stands to reason they will.
What is surprising is only why it took so long for supposedly tough minded financial reporters to figure that out.
In any case, whether manipulation is proved or not, what ordinary people can do is to take for their model the good trader. Good traders are people who can “keep their heads when all around you are losing theirs and blaming it on you”..as Kipling said.
The hall mark of expert trading is to control the emotions and rein them in from succumbing to mass moods. What does that mean in practical terms?
It means when everyone is panicking, look for silver linings, and when everyone is complacent, learn to worry…
John Thain now admits no one at Merrill had any idea what their CDOs (collateralized debt obligations) were worth. They created them on computer programs. Not only was the global economy rear-ended by a bunch of greedy corporate hacks, it turns out they were too dumb to know what they were doing and too reckless and arrogant to ask. It’s bad enough being scammed by psychopaths. It really hurts to be scammed by morons.
“We think it’s good news that Thain is now emphasizing the knowledge problem when it came to banking–highly paid, well-educated people at the top of their field just didn’t understand the credit derivative products they were buying and selling. This is important as much of our financial reform seems to ignore this problem, focusing instead on fixing incentives in compensation.
It also undermines the idea that the Fed–or any other regulator–will be able to properly assess the risk of these kinds of derivatives.”
My Comment:
I’ve always suspected this, because in graduate school one of my close friends was working on a PhD in finance (where he’d ended up after starting out in mathematics). He was very smart and believed that you could quantify decision- making at all levels. He wanted to turn the social sciences into the hard sciences. We had passionate arguments about this, since I thought the hard sciences were a very faulty (if useful) model for the arts and humanities. I was flabbergasted to find out one day that he didn’t understand what a mortgage was – he lived in such a rarefied world of theory and had been a student for so long. It wasn’t that he lacked empathy or emotions. He didn’t. What he lacked was any experience of the practical world. [He ended up becoming a trader for JP Morgan and had an office at the World Trade Center. Fortunately he wasn’t in on 9-11].
“The Science and Ethics of Cooperation,” by Michael Townsey, Prout Institute:
“The cooperative system is fundamental to the organization and structure of a Prout (the Progressive Utilization Theory) economy. It is an expression of economic democracy in action – cooperative enterprises give workers the right of capital ownership, collective management and all the associated benefits, such as profit sharing.[i] Prabhat Ranjan Sarkar, the propounder of Prout, goes further and argues that an egalitarian society is actually not possible without a commitment to the cooperative system.[ii] The commitment is not just to an economic order but also to a cooperative ethic and culture. This essay explores some of the scientific evidence that humans have a predisposition to cooperation and in particular to economic cooperation. The evidence comes from a new and exciting field of research known as neuro-economics. We then turn to those insights provided by sociological studies.
Neuro-economics
Neuro-economics is the study of the neuro-physiological underpinnings of economic decision making. The field is new and providing unexpected insights into human economic behavior. Classical economic theory requires individuals to make complex calculations to maximize their personal advantage or utility. Utility, however, is a strangely ambiguous concept. On the one hand it is given a numerical value which implies the counting of something but on the other it is entirely abstract and not anchored to anything in the real world that can be counted. The advent of neurophysiology led to the idea that utility was really a surrogate for some chemical currency inside the brain, with most interest focused on serotonin molecules because these are known to be responsible for the experience of pleasure.
It turns out that a wide range of molecules of emotion[iii] impinge on the mental cost-benefit calculations that are supposed to take place inside the brain and they have unexpected effects. For example, in a ‘sharing experiment’, person A was asked to share a sum of money with person B. These experiments demonstrated behavior inconsistent with neoclassical theory. People appear to put a high value on fairness. In a follow up experiment, persons A and B were placed in the same experimental scenario as before, but they were (unknowingly) given an intranasal administration of oxytocin. Oxytocin is a neuropeptide that plays a key role in social attachment and affiliation in animals and causes a substantial increase in trust in humans. In these experiments the effect of oxytocin was to increase the amount of money that A gives B. The experimenters concluded that “oxytocin may be part of the human physiology that motivates cooperation.”[iv] It is worth adding that such hormone-mediated interactions are not confined to human relationships but are also likely to be involved in human-animal relationships.[v]
Oxytocin is not the only neuro-chemical to promote cooperation. Recent observations of bonobo monkeys in the jungles of the Congo reveal fascinating contrasts with chimpanzees.[vi] Bonobos are matriarchal and show little aggression compared to the patriarchal chimps. Chimps respond to strangers with aggression, while bonobos demonstrate curiosity. When under stress, chimp tribes degenerate into fighting while bonobos respond to stress by engaging in collective sexual activity. Scientists have concluded that bonobos demonstrate higher levels of trust both with each other and with strangers. Of most interest, however, from a neuro-economics point of view, is the ability of the monkeys to perform a simple task requiring cooperation in retrieving some bananas that are out of reach. Although both species are intelligent enough to work out a solution (for example, by one climbing on the shoulders of the other or by one holding a ladder for the other), the chimps fail because they cannot trust one another. On the other hand, bonobos have no trouble cooperating to retrieve the bananas.[vii]”
Political theorist Guy de Bord on the spectacle of public life:
“The concentrated spectacle
The spectacle associated with concentrated bureaucracy. Debord associated this spectacular form mostly with the Eastern Bloc and Fascism, although today mixed backward economies import it, and even advanced capitalist countries in times of crisis. Every aspect of life, like property, music, and communication is concentrated and is identified with the bureaucratic class. The concentrated spectacle generally identifies itself with a powerful political leader. The concentrated spectacle is made effective through a state of permanent violence and police terror.[edit]
The diffuse spectacle
The spectacle associated with advanced capitalism and commodity abundance. In the diffuse spectacle, different commodities conflict with each other, preventing the consumer from consuming the whole. Each commodity claims itself as the only existent one, and tries to impose itself over the other commodities:
Irreconcilable claims jockey for position on the stage of the affluent economy’s unified spectacle, and different star commodities simultaneously promote conflicting social policies. The automobile spectacle, for example, strives for a perfect traffic flow entailing the destruction of old urban districts, while the city spectacle needs to preserve those districts as tourist attractions.
The diffuse spectacle is more effective than the concentrated spectacle. The diffuse spectacle operates mostly through seduction, while the concentrated spectacle operates mostly through violence. Because of this, Debord argues that the diffuse spectacle is more effective at suppressing non-spectacular opinions than the concentrated spectacle.
The integrated spectacle
The spectacle associated with modern capitalist countries. The integrated spectacle borrows traits from the diffuse and concentrated spectacle to form a new synthesis. Debord argues that this is a very recent form of spectacular manifestation, and that it was pioneered in France and Italy.
According to Debord, the integrated spectacle goes by the label of liberal democracy. This spectacle introduces a state of permanent general secrecy, where experts and specialists dictate the morality, statistics, and opinions of the spectacle. Terrorism is the invented enemy of the spectacle, which specialists compare with their “liberal democracy”, pointing out the superiority of the latter one. Debord argues that without terrorism, the integrated spectacle wouldn’t survive, for it needs to be compared to something in order to show its “obvious” perfection and superiority.”
My Comment:
Thanks to reader J. T. Gordon for reminding me of this. I’ve posted before on de Bord and the notion of the spectacle of society. Like so much powerful analysis, this one too has roots in the ideas of Friedrich Nietzsche, one of the most productive thinkers of the last 150 years.
What should be noted here is that in the spectacle of secrecy, the greatest emphasis is placed on openness. Thus, “freedom of speech” occupies a central position in the culture. By this means, all barriers to privacy are brought down, all psychological barriers between the individual and the crowd. Yet, this openness at one level (in public culture) operates side-by-side with secrecy at the highest level (governments and corporate leaders).
(More later)
Back…
Reading through this again, I feel I need to question De Bord’s division, which corresponds to communist, capitalist and liberal democratic. It’s too neat. In fact, things are much more muddy
Goldseek radio has an interview with Robert Prechter here.
Prechter’s 2002 book, “Conquer the Crash,” predicted the current economic collapse and this is an interesting and wide-ranging interview. Prechter is a renowned Elliot Wave theorist and a long-time prophet of depression.
Summing up his most important points:
*We have been in a developing deflation since 2002
*Debt is the problem, not paper-printing.
*Gold will hold value and do well, but it won’t go to the moon
*Cash is a good place to be
*The market will go down for a replay of 2008, in spades
Friedrich Hayek on “the pretence of knowledge:”
“Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process… will hardly ever be fully known or measurable.”
Thanks to Kevin Duffy.
The Upanishads are Sanskrit texts of commentary on the four primary Vedic religious classics of Hinduism (the Rig, Sama, Yajur, Atharva).
This passage is a commentary on dream analysis contained in one of them:
“Dreams, therefore, are due to repressed desires. This is one of the causes behind dreams. This is the only factor that the psychoanalysts of the West emphasise. But Indian psychologists and psychoanalysts, like the Raja Yogins and the philosophers of the Vedanta, have touched another aspect of dream. The dreams may be, to some extent, of course, the results of complexes created by frustrated desires. But, this is not wholly true. Dreams may be due to other reasons also; one such reason being the working of past Karma. The effects of past Karmas, meritorious or unmeritorious, may project themselves into dream when chances are not given to them for expression in waking life. Also, a thought of some other person may affect you. A friend of yours may be deeply thinking of you; and you may have a dream of him, or you may have a dream with experiences corresponding to his thoughts. Your mother may be far away, crying for you, and her thought can affect you; you may have a dream. All this is equal to saying that a telepathic effect can produce dreams. In the case of spiritual seekers, Guru’s grace can cause a dream; and catastrophic experiences that one may have to pass through in the waking world may pass lightly as a dream experience by his grace. Due to the power of the Guru, one may have a dream suffering, instead of a waking one…….. The reason is that you oppose their function in waking life, due to the assertions of the ego. You counteract Isvara’s working and Guru’s blessing by the action of your own egoism. But, in dreaming, the ego subsides, to some extent. You become more normal, one may say, and you approximate yourself more to reality, rather than to artificiality, in dream. Thus, it is easier for these powers to operate in dream than in waking. .”
— The Mandukya Upanishad on dreams, elucidated by Swami Krishnananda
“It is not because the truth is too difficult to see that we make mistakes… we make mistakes because the easiest and most comfortable course for us is to seek insight where it accords with our emotions – especially selfish ones.”
-Solzhenitsyn
(Thanks to reader, Sean)