Schumpeter wins, we lose

I've been angry for years about the level of economic ignorance amongst politicians, civil servants, journalists, financial professionals, intellectuals, the public, and, above all, the mainstream economics profession. Though every experience provides new evidence of our collective stupidity, after a while it is hard to keep raging. It's not that the anger has gone, it's just that the utter futility of expressing it yields eventually to weariness and frustration.

So I've not felt driven to post anything for a while. And I can't even bring myself to fire off a broadside at the latest stupidity in the Government's latest round of consultations on energy policy. What's the point?

But for the record, I am more angry now than I have ever been. The everyday frustrations of living in a corporatist world continue much as before. My heightened anger (which threatens to become internalized as depression and lethargy) is not about the detailed frustrations, but about the generality. Forgive me a quick post on the state of the economy, which comes from no specialist knowledge and will tell the handful of regular visitors to this site little that they don't already know. But I just want to put it in writing so that, when night inevitably follows day, I can have the sad satisfaction of saying "I told you so".

Politicians, academics, commentators and other intellectuals will lie once again that the next disaster was unpredictable, just like every other predictable disaster whose clear alarm bells they have ignored because of the political and psychological inconvenience and incompatibility with their failed philosophies. The supposed unpredictability of bad events by models that claim to be a great guide to policy and future outcomes (so long as everything is going well) is the greatest of the modern "saving lies" deployed by interventionists to minimize the cognitive dissonance they ought to suffer from repeated evidence that their view of the world is simply broken.

Thanks to a failure to understand the true nature and effect of monetary expansion and of government corporatism and mangerialism, we have been accelerating down an economic cul-de-sac for the past 15 years or so (and indeed, the past 150 years or so, with only brief interludes where the brakes were applied, without ever bringing the juggernaut to a halt). We have consumed too much and not created enough wealth. We have borrowed too much and not saved enough. We have confused consumption with growth. We have been busy consuming our capital, and frittering away our economic good fortune, so painstakingly built over the preceding 200 years. We have fooled ourselves that we can live on the never-never.

Eventually, in 2000 and then again in 2008, the delusions became so obvious that even the intellectuals and the public couldn't continue to fool themselves that the economy was balanced and valuations were rational. It was the time that some of us had been waiting for - a time for a correction, where money (whether saved or borrowed) would become more expensive, and asset prices would return to levels that reflected our real ability to fund them. The correction wasn't just inevitable, it was necessary. One result of that correction would be that those who had remained prudent in the face of all the delusions created by the mass irrationality (of individuals and organizations, including governments) of the previous decades would finally be rewarded for their prudence, while those who had been swept along by the folly would be punished.

So what did governments around the world decide to do? They decided to do everything in their power to encourage more consumption and less wealth creation, to reward borrowing and punish saving, to protect weak businesses and penalize strong ones.

And in one sense, it appears to have worked in its own terms (if its objective was to provoke those who still had some cash left into spending it). For many of those who had clung to prudence despite all the incentives of the previous decades, the creation of conditions in which they are punished more heavily than ever at a time when they should finally be benefiting, seems to have been the straw that broke the camel's back. At least, that appears to be the explanation for the behaviour of prices in the financial markets recently. In any normal market, the values of equities, bonds, gold, other precious metals and commodities would not all travel in the same direction, as they have been for the past 7 months. That behaviour can only mean one thing - a wall of money looking for any home that offers prospects of some sort of acceptable return.

I had thought that Quantitative Easing was the direct culprit, but in the UK at least, I understand that almost all of the BoE's freshly-minted money is going directly to buying government debt, and even in the US, it isn't being used in a way that would filter quickly and directly through to the markets. It seems (from what financial professionals say) that the wall of money is coming from the retail market - it is ordinary savers looking for anywhere that their money can do better than earn 1 or 2% interest without having to lock it up for extended periods.

It's desperately sad. Apart from the minority of the minority who are still resisting the pressures, this was the last of our capital, owned by people who knew better than most how to look after it. But now they are being driven to gamble it like their imprudent predecessors. And when the market takes another turn for the worse, which it surely will, most of what's left of our capital will, in its turn, be destroyed or diminished.

Thus, another group - the group who should have been the last resistance to the old folly and the foundation of a renewed rational economy - will find themselves dependent on the state, and mistakenly disillusioned with "the market". It is unfortunate, to say the least, that we use the same word to describe the financial lottery of the City and the concept of voluntary exchange, so that people are inclined to blame the latter when they are swept onto the rocks of the former by the irresistible tide of government intervention. And ironic that, finding themselves on the rocks, they acclaim the powers of the tide to sweep them (and the rest of us) to safety.

It's consistent with Schumpeter's pessimistic prediction. Perhaps Brown and Balls aren't so stupid after all. Perhaps they knew that they could dress up policies, which were ultimately destructive of the capitalist system that they secretly long to replace with the socialist utopia, as supposedly free-market and consistent with mainstream economic guidance.

But I don't think so. I think they were just ignorant like the rest of the population. There's no way it could have worked without the rest of the developed world following suit, and there's no way that all the governments of the developed world were pursuing the same secret agenda. George W. Bush as secret communist conspriator? Not likely, despite the evidence of his expansion of government. It's cockup, not conspiracy. It's the result of the gradual decline in intellectual standards that started in the mid-nineteenth century and culminated in the false and dangerous view of how the world works that predominates today. It may lead us into an economic, political and intellectual lobster-pot from which it may be decades (if ever) before we can escape.