Calculus and the Depression

I am out and about with my 'troubadour tutor' hat on at the moment, because like most people I need to put a little extra in the bank for them to waste, otherwise they will be lighting a bier with me on top of it. The other night, I was tutoring a young woman from Warwick, whose maths was far better than mine but who needed to revise the framework of economic theory she was expected to know. This led me into about four hours discussion of the relationship of policy, liberalism, and the self-interest of economists as they related to something called the Solow model, which is fundamental to supply-side thought. Our discussion also turned onto classical monetarism.

It has made me think, more than anything else, about the implications of calculus for understanding the mess the world is in. My friend Martin Kelly thinks that economics is a pseudo religion. I disagree; I think that many economists confuse their social and political aspirations with a pseudo-theistic reading of the particular theory that they follow, but that facts are relatively neutral. The ability to talk the language of Economics is also, to be vulgar, useful to the bourgeois and the aspirant bourgeois. It is one of those forms of horseshit by which people can demonstrate to each other that they are clever in a sound way so that they can be trusted with giving working people orders in return for other people's cash.

It makes me think, though, and I like it for that. For instance, if a model suggests (as the Solow model in part does) that economic units, and particularly labour productivity and technology must constantly be improved to stave off the entropy implicit in diminishing returns because steady states of growth are implicitly unstable, one can preen and say 'see, this market-based theory explains everything, and we really need to keep working like good Protestants'.

Or, one can, like Marx, note the direct relationship between the repulsiveness of industrial work and pay rates. One could take the view pace Christopher Lasch that the interesting thing about the theory would be its relationship to a professor on the cusp of middle age who had experienced the depression, and who wrote in an America whose physically collapsing presidents--Eisenhower and Kennedy both--were desperate to produce an appearance of vigour to meet with the challenges of decolonisation, the cold war, and the height of an oil-and-arms power that seemed boundless. Or one can say, 'interesting that the calculus tells you one thing if you just look at firms, but a different thing if you look at the wider economy'.

The wider economy. Clever men and women applied themselves to the business of the market and of maximising firms, and showed through numbers how it was possible, in the past four decades, to 'outrun growth'. In theory. But all the while, they ignored the gross imbalances in savings, and the decline of financial and moral capital that the growth which they had unleashed had created. They divorced themselves from the wider picture of ordinary lives. So now, when another economist comes to apply his clever mind to the wreckage of the global boom he finds that the numbers all worked narrowly; but that the debt crisis is generally unsolvable without agony, and possibly not solveable at all.

Karl Denninger's analysis is I think (though I do not hold myself out as an expert) impeccable. He has pointed out that some people are viewing the present crisis as one of global overcapacity. There may be a lot in the idea that there are simply too many factories oriented to consumer and capital production in places where wages and lives are cheap. However, he also points out that savings have been radically reduced, and fiat currencies have replaced ones substantially backed by something else over the past forty years. He has concluded that, from high to low, debts cannot be serviced and that we may be on the verge of some series of desperate defaults, dodges, or attempts to defer or inflate it away.

If American and British governments deliberately drive up inflation to destroy debt, they will drive down their currencies and undermine their import-dependent economies. If they set up toxic banks, or subsidise existing ones, the problem will be that they are again essentially monetising. I'm not so sure that any in the political class in the republic or elsewhere really understand NAMA, the thing that it proposes to use as the bait on the line for recovery. God knows what it will attract in a small economy, and I would think it almost certain madness in a big one.

Denninger, who is by no means mad (I think that this impressive cv belongs to him), has concluded that there is a very very great danger of the implosion of the fiscal and monetary system. The numbers and functions by which he comes to this conclusion emerge from calculus--still the most beautiful and powerful tool we have as a species invented in a long time. To paraphrase American gunslingers, it doesn't lie; people do, mostly to themselves.

How we deal with the danger is what most people will think economics is--a bit like thinking Catholicism is all about the Borgias, or the agenda-driven persecutions of those who would use it for their own purposes over the millennia. I would suggest to readers looking for some deeper explanation of why we are where we are to go and look at the sensible economists, the peak oil blogs, the more arcane bloggers and then, I think, we are all going to have to take a big breath and realise that, as one other blogger put it today, we're not out of the recession. We're in the depths, the channels are narrowing, and there is something else with us down here.....