Three reasons for the failure of economics

The science of economics can seem very complex and intimidating. In fact, many of the theories and mathematical models employed by economists really are incredibly complex and intimidating. However, the reasons for the failure of economics really are surprisingly simple and can be summarized in only three points:

  • Modern economics believes that the laws of economics govern the laws of nature.
  • Modern economics has devised far too many mechanisms for consuming the future.
  • Modern economics has stripped away all incentive to build individual financial resilience.

According to my understanding, these three points represent the crux of the crisis that threatens our civilisation today and I think that it is absolutely imperative that members of the general public form an understanding of these absolutely vital issues. Let’s therefore discuss these points in a little more detail:

1. The laws of economics vs. the laws of nature

The first thing I have to establish is that I’m a big fan of the free market economic system. I think that the basic laws of supply and demand should be allowed to freely govern economic decisions with minimal government intervention. However, the free market system needs one vital tweak: it needs to price in the ecological carrying capacity of our planet.

The basic problem with free-market economics is that the market is just as short-sighted as the players participating in it. For example; as long as fossil fuels are the cheapest source of energy, the free market will dictate that we burn fossil fuels for the majority of our energy needs. Everyone knows that we will have to make a massive energy transition during the 21st century, but modern economists simply assume that the free market forces of supply and demand will take care of this. The theory is simple: as fossil fuels become scarcer and more expensive, the free market will simply create alternative energy sources and rebuild our energy infrastructure in a very natural way.

That sounds very nice and all, but there are at least two major problems with this approach. The first of these is called climate change and, if the vast majority of climate scientists are correct, freely burning fossil fuels until the market naturally dictates a transition to alternative sources will cause our children and grandchildren to die in a 6° global warming hell. Secondly, the transition to a low carbon economy will take decades of time and trillions of dollars and this very long and expensive transition period will cause a massive fall in living standards when we finally find out that the laws of nature make the rapid transition dictated by the laws of economics totally and utterly impossible.

In fact, the natural limits of our planet are the primary reason why I think that a painful collapse is 100% guaranteed if we stick to the current status quo. More information on this is available on separate pages discussing the economic effects of expensive energy and dwindling planetary resources.

In summary, if the laws of nature (i.e. the natural carrying capacity of our planet) are not fundamentally incorporated into the laws of economics, our global economy is fundamentally doomed. Right now, this can be done through a simple redistributive value added tax (VAT) which makes products with a high environmental impact more expensive and those with a low environmental impact cheaper. If we make this one simple tweak, we will be able to harness the incredible power of the free market to drive the global economy towards sustainability. The only little problem is getting the world to actually do this…

2. Consuming our future

The totally ridiculous public and private debt levels of developed nations are testament to this second fundamental fallacy of modern economics. In order to pursue the most central objective of modern economics – perpetual economic growth – amid increasing resistances from the aforementioned laws of nature and also the law of diminishing returns, modern economics has had to come up with a wide range of tools for raking in ever increasing amounts of economic growth from the future.

The primary mechanisms for doing this include ridiculously cheap public and private debt, ever more unsustainable welfare promises, and futures and forward contracts (derivatives). All of these financial instruments lay claim on the production of future generations, essentially promising the labour of tomorrow for consumption taken today. And yes, the truly scary thing is just how unbelievably enormous these financial instruments have become.

Sure, even a child can see that this entire system is totally unsustainable with many similarities to a Ponzi scheme, but the massive culture of consumerism and entitlement that has taken over the world will ensure that our democratic society keeps on utilizing these tools so that we can continue living as far beyond our means as at all possible. These totally unsustainable tools will therefore continue to be freely implemented, contributing to the instability and injustice of our modern society by making it more profitable to speculate than to produce, until the majority of world citizens have at least a basic understanding of these vitally important matters.

Since the crisis really began in 2008, another completely unsustainable tool; printing money, has been applied with ever increasing frequency. The basic idea of printing money is that rich nations with traditionally strong currencies can simply print more of this currency to pay down their debt. You can only do this without massively devaluing your currency as long as your currency has an excellent reputation as a reliable store of value. Over the past five years, countries like the USA have managed to print trillions of dollars without causing too much inflation, but the reputations of their currencies have suffered quite substantially. The impending collapse of the dollar is now all over the internet and more and more countries are choosing to use other means than a dollar for international transactions. But still, the central banks of America and Europe have just recently announced that they will keep on printing money “for as long as necessary”.

The term most often use for this kind of behaviour is “kicking the can down the road”. In essence, every time that rich nations arrive at the point where they will have to cut spending and welfare benefits (the can), they instead choose to create more money out of thin air to allow them to take on even more debt (thereby kicking it a little further down the road). And yes, as it is with all superficial and temporary fixes to fundamental problems, this only delays and accentuates the eventual reckoning.

In summary, the financial tools which allow hundreds of millions of people to consume far more than they produce are fundamentally unsustainable and, the longer we indulge in them, the more severe the eventual crash will be. In the end it is very simple: if we keep on consuming our futures it will not be long before we have no future left. For more detailed information, please check out the example economy in this page series.

3. Lack of financial resilience

While further discussions on the previous two points have been linked to other page series, the remainder of this particular set of pages will focus on this third and somewhat less mainstream point. The basic problem is that our fundamental culture of consumerism and entitlement has led us to a situation where the majority of people have virtually no financial resilience, implying that they are instantly bankrupted by any significant financial setback (e.g. a job loss, a serious medical condition, significant price inflation or a rise in interest rates). Such a society where the majority of people live from paycheck to paycheck is guaranteed to be highly economically unstable.

And yes, as the rest of this page series will strive to demonstrate, the building of individual financial resilience is the one and only route to completely sustainable economic prosperity. This journey starts on the next page.

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