THE ECONOMISTS' NEW CLOTHES

Tuesday 23 February 2010, 13:39

Adam Curtis Adam Curtis

It is astonishing that everything about the credit crisis is still discussed in the technical terms of economics. Although, as most commentators agree, almost all economists failed to predict the financial crisis that swept through the western economies in 2008 - we still slavishly discuss and analyse it in their technical terms.

Whether it is straight journalism, or columnists' rants, or even imaginative responses like the play Enron, the problem is described either as a technical system that went wrong or as a set of strange inventions that were then corruptly used by bad and greedy people. And in doing this all the journalists, and the critics, and the playwrights earnestly try and explain to us the system in the terms, and the framework of "market-speak" created by the economists and the financiers.

The high point of this came last week when lead items on TV news were devoted to the letters written by two opposing groups of economists. It was the height of absurdity as economists from the opposing camps came on News-24 to announce pompously that "this is far more important than politics". As David Blanchflower (ex-member of the Monetary Policy Committee) pointed out in a really good piece in the New Statesman - HERE - they have absolutely no basis for any of their claims. The reason is that they have no idea what is going to happen to the economy in the next 12 months.

But more than that - perhaps the economists are the problem? That they themselves cannot see the full dimensions of the project of which they have been a part.

But still we listen to them, and still our journalists use their language and assumptions.

Which means that despite the disasters we are still trapped in the economists' world.

But the moment you pull back and look at that world from a wider perspective strange things start to emerge.

When the neoliberal project first began in 1979 with Mrs Thatcher the idea was that politicians would give away power to the markets and the state would shrink. Over the past 15 years the idea of the "market" has been extended to practically every area of society - education, health, even the arts. But to make this happen those running the neoliberal project had to enforce it by creating vast and intricate performance indicators and feedback systems (which in many cases led to wide scale absurdities). And to do this they used the mighty power of the state.

The crucial thing is that these systems had practically nothing to do with the original idea of the "market". They are actually a strange pseudo-scientific piece of planning engineered by politicians and groups of technocrats that borrowed far more from cold-war ideas of feedback engineering and cybernetics than from the risky roller coaster of the market. And to create the systems they had to greatly enlarge the state and the extent of its power, which is the very opposite of the vision of a free-market utopia.

And when you examine the roots of the neoliberal idea of the market it gets odder still. The ideas that rose up in the post-war years that captured the imagination of people like Mrs Thatcher are actually a very strange mutation of capitalism. If you listen to interviews with Friedrich Hayek he talks far more like a cold war systems engineer discussing information signals and feedback than Adam Smith with his theories of Moral Sentiment.

While the roots of the technical systems that the banks created to manage risk also lie back in the cybernetic dreams of the 1950s and 60s. Dreams not of progress through the dynamism of markets - but of using computers to create a balanced, almost frozen world. - just like in the Cold War.

Which raises the question - have we misunderstood what we have lived through since 1979?

We think it was the resurgence of capitalism. But maybe it was something very different? Something that we can't see properly because we are still trapped in the economists' world and their mindset.

I am putting up a film I made as part of the Pandora's Box series - because I think it is relevant. The Pandora's Box series looked at how scientific ideas were taken up and used by politicians and other powerful groups to justify what were essentially political attempts to change and re-engineer the world.

In this episode I argue that Mrs Thatcher's monetarist experiment of the 1980s was not just giving power away to the markets. In reality it was a pseudo-scientific attempt to re-engineer Britain that had far more in common with the preceding Old Labour attempts at "scientific" economic planning that it did with any free market theory.

And I think it would be good to pull back and look at the recent crisis in the same terms.

The film also includes the most fabulous machine I have ever seen. A giant interconnected system driven by water to model the whole British economy.

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    Comment number 1.

    I was professionally employed as a 'feedback engineer' from the mid-seventies to the late nineties and it was painfully obvious that many of the 'social' feedback systems put in place could never work. The use of performance indicators when humans are so self-evidently highly adaptable and the underlying 'measurements' were so poor was especially doomed to failure. Engineering feedback systems are astonishing in their ability to perform well but depend on the availability of precise, reliable and meaningful measures of the underlying systems. This high-quality data is almost never available outside of engineering systems designed according to well-known, long established principles.
    Politicians, influenced by management 'gurus' with a naive understanding of the principles of feedback control but without a deep comprehension and experience of the limitations and pitfalls, failed to grasp - and still fail to grasp - this fundamental fact. Further, the 'markets' - those self-optimising feedback systems which are supposed to offer almost magically perfect solutions to the problems of supply, demand and distribution are themselves theoretical constructs which bear only a passing resemblance to what actually happens in real life. (see John Kay's excellent book "The truth about markets - ther genius, their limits, their follies" http://www.thetruthaboutmarkets.com/).
    Asymmetry, or lack, of information and the corruption of information by noise or poor measurements are key reasons why markets (and many social engineering projects beloved by the politicians) fail to operate as expected. These problems have been known for a very long time (~100 years) in engineering; methods for dealing with them in some circumstances have been developed and work well within limitations. But the techniques are complex, require sophisticated mathematics and subtle computer programming. They are essential to put a lander on the moon: they do not lend themselves to grand political and economic projects.
    I enjoyed "The Trap". The story is similar: adoption of a powerful theoretical construct taken out of context and combined with a lack of understanding of the consequences of the idealised axioms on which it was based.
    ----------------------------------------------------------------
    By the way, while feedback engineering, systems and information engineering certainly came of age as disciplines during the cold war, they are much more widely used for benign purposes than you seem to imply: from vehicle braking systems and flying aircraft to keeping your hard disk spinning accurately, from noise reduction in MP3 players to protecting your on-line banking, from the precision of MRI scans to stabilising ferries so you don't get sea-sick, and a million more applications besides.

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    Comment number 2.

    The problem is Economics is a human construct yet economists and governments act as though it is physics and that it's "laws" cannot be broken. The rules and trends was devised to simplify the complex interactions of a large population. A million people buying and selling with their own individual needs and desires cannot be expressed in a formula. The statisical models may show the most likely event but the sever scenarios at the edges of the curve cannot be ignored. They will occur at some point.

    People are greedy and will look to increase the size of their margin. We're also self-aware. This means that if you could model our behaviour, we would be aware of the model and adapt our behaviour to increase our own profit margins.

    Once the banks knew that the governments would pick up the "toxic assets" the value of those assets rose. Perhaps if they'd been at that value before, they wouldn't have been quite as toxic? I wouldn't be surprised if banks struggling with cash flow, sold these assets to other banks to bring urgent cash, whilst the buying bank knew they would profit when they overcharged the government to secure said assets.

    If these economists try to predict the banks behaviour they're behaviour wil change in response to the prediction. It's like trying to measure the size or speed of an electron. The act of observing changes the observed.

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    Comment number 3.

    Yes. AC.

    But it's all so complicated to deconstruct.

    This is all known.

    Why do you think it important to highlight? Steam is water.?? Why don't you give us some answers to your thinking? let's go from there.

    IF YOUR REMIT IS TO GO " IS'NT IT WEIRD?". then no go.

    If your thinking is to plug leaky ideals, to transmit an alternative,better way, then lets go with it.

    Your questions are Kosher. But I am not sure whether you are tickling your audience for a connected response or a reaction. And why?..

    Do you have to justify your blog, and payment, for this website??

    I endorse this website, wholeheartedly...but am less than happy about what's happening here....

    Chris D





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    Comment number 4.

    I believe I saw the machine in your film in the Science Museum in their computer department. It doesn't run but they do show footage from a documentary of it running (it might very well be this film!)

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    Comment number 5.

    @ Chris D - I don't think it's Adam Curtis' job to tell us what to think.
    Appreciate a bit of probing, the lack of any political edge is a positive thing for me, as no man has all the answers, being honest about that is very refreshing. And plenty questions can be a pretty good start.

    I know a few economists who work for the treasury who basically admit their practise is a load of rubbish beyond the basics. It's hard to see where to go when mainstream political thought has to appeal to some sort of economic ethos when it really starts to look like it is all just complete speculation. I would be less annoyed if it was viewed as it is, a tendencious social science rather than something concrete. The machinery image is a good one, it highlights how ridiculous the conceit is to attempt to predict the behaviour of an entire economy which depends on a myriad of fluke occurences to come about.

 

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