Science Looks At The Economy

Interesting: as the economy goes south, just as any other sector, the scientific world is impacted. When science is impacted, scientific inquiry turns greater attention to root causes. We have before cited articles originating in the scientific and mathematics communities about cultural phenomena. Mathematicians like Mandelbrot looked at financial forecasting instead of cotton markets and recursive geometric patterns. Scientific American looked at overreliance on financial software and the perennial debate between science and religion.

It’s not so much that scientists are necessarily more objective than the specialists in other disciplines whose theories scientists dissect and analyze. After all, scientists have their own axes to grind too – look at the historic “War of Currents” vendetta between scientific legends Thomas Edison and Nikola Tesla.

Leaders and specialists in the great academic social disciplines – psychology and economics, to name a couple – tend to divide into ideological camps too. John Maynard Keynes and Adam Smith are history’s great primordial archetypes in the world of economics, defining philosophical and social structures that were intended to best explain and foster sound economies and commerce. Alan Greenspan is the greatest living proponent of one of those philosophical systems, laissez-faire capitalism.

What’s interesting is how, when science turns its attention to disciplines other than its own, scientists are sometimes able to innovatively strip away all the ideological baggage and just look at the operation of the structure. When Mandelbrot looked at the economy, he didn’t see a clash between deficit spenders and budget balancers. He saw dangerously naive forecasting models, an economy teetering on the far side of chaos theory, ice skaters on a region of instability outside the envelope of predictability.

In the March 2009 Scientific American, opinion columnist Jeffrey D. Sachs has published “The Economic Need for Stable Policies, Not a Stimulus”. An extended version of the magazine article is available on the Scientific America web page. Sachs is director of the Earth Institute at Columbia University:

The U.S. political-economic system gives evidence of a phenomenon known as “instrument instability.” Policy makers at the Federal Reserve and the White House are attempting to use highly imperfect monetary and fiscal policies to stabilize the national economy. The result, however, has been ever-more desperate swings in economic policies in the attempt to prevent recessions that cannot be fully eliminated.

Sachs argues that, rather than restoring equilibrium to the economy, we are – at this very moment – introducing new destabilizing forces. With the huge budget deficits and zero-interest policies that we hope will spend our way out of the recession, we’re trying to rescue the economy with the equivalent of trying to balance a steel ball bearing on top of a glass bubble. Sachs argues that when Greenspan increased liquidity with low interest rates in reaction to financial turbulence in 1997-1998, he accidentally set off the bubble – and bust – and, consequentially, the housing bubble – and bust.

What we have here is the ironic portrait of an ultra-conservative Republican administration trying to control the economy, and, in so-doing, over-controlling it into destructive destabilization. It was “Great Communicator” Ronald Reagan, father of the modern conservative movement, who in 1988 famously said, “Government is not the solution to our problem; government is the problem.”

How prophetic!

Sachs does not address the emergency mentality of current counter-recession measures: the justifiable collapse of confidence in the credit institutions, the huge increase in the jobless rate, or the soaring personal and corporate bankruptcy rate, and I don’t think it was his intention to minimize the urgency of today’s issues. He calls for avoiding “dangerous swings” in the interest rate, and a gradual return to something approaching a balanced budget. He cautions against more tax cuts. He urges us to “stop panicking.”

With jobs, credit, and the market in free-fall, what is a profligately overextended nation to do? Sachs doesn’t argue that we don’t have an emergency. He agrees that short-term improvement hopefully may result from the Obama programs, but councils that we need to start looking for a way back to sound fiscal policy sooner rather than later.

In the balance, this has that old ring of economic conservatism to it, doesn’t it? We need to remember that “right-wing” and “conservative” have not meant the same thing for a long time: the monetary and fiscal policies of the previous administration were anything but conservative.

To me, the point is that no political ideology has a real handle on the economy, or is likely to acquire one soon. We need to get better at examining what our monetary and fiscal policy actually does, not how it fits into some prefabricated legacy mantra of partisan politics.

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