Monday, 5 March 2012

ECONOMICS: The Book of Genesis, 'The Matrix' and Magical Glasses of Beer-- an Interview with Czech Economist Tomáš Sedláček (Highly Recommended)

Q: What is wrong with the economy?

A: It has become a tool without a soul. In other words, the question isn't whether or not the economy works but whether or not it works as we would expect it to. That is a difficult question to answer because first we must decide how the economy should work.

Q: How would we like it to work?

A: First and foremost it should be fair. The problem is that we need to start making value judgements. As I try to show in my book, Economics was always based upon values but we have tried to escape from this in modern time. The title of the book-- 'Economics of Good and Evil'-- is provocative because, supposedly, Economics should not concern itself with good and evil. The first rule of 'Fight Club' is not to talk about 'Fight Club'. The first rule of Economics is not to talk about good and evil, but in real life we do talk about them.

Q: I liked the example in the book of the journalist who asks an economist about inflation: 'How high is it?' '4.2%' 'Is that good or bad? What should it be?'

A: Or the example of Milton Friedman. He wrote that Economics should be a pure science. The word 'should' shows that in reality it is no such thing. We have to admit that Economics is influenced by values. Every day in the media we can read that gold is over-valued or under-valued, which shows that we have some opinion about how much gold should cost. This is exactly what the Occupy Wall St. movement are saying: we have created a tool which was meant to serve us but has ended up enslaving us. In the film 'The Matrix' the machines which are designed to serve us enslave us. In 'The Lord of the Rings' it is the ring which possesses Gollum and not vice-versa. Economics needs to rediscover its soul. A body without a soul is a zombie. Does it work? Yes, but not in the way it should. Economics once had a soul, which I am trying to rediscover.

Q: When did Economics lose its soul?

A: At the beginning of the 20th century, when the world was fascinated by Physics-- a science concerned with inaminate objects. Such was the extent of this fascination that people started to apply the same methods to the field of Economics. Why shouldn't we apply methods from Biology, Philosophy or Psychology? There is an old Czech joke about a policeman who is looking at the ground under a streetlight. A passer-by asks him what he is looking for. The policeman tells him he has lost his keys. "But you've been looking in the same place for 2 hours!" says the passer-by. "Yes, but this is the only place where I can see!" replies the policeman. That's the problem with Economics: we think that we can only come to the truth by following mathematical models.Many believe that mathematical Economics is the foundation for everything and that things like Philosophy are only the tip of the iceberg. I am trying to show that the complete opposite is true.

Q: Can you do Economics without numbers?

A: In our lives there are many values. Some can be measured with numbers, some cannot. Water, clothes, cells-- these can be counted. Love, friendship, beauty, fresh air-- these cannot be counted. If we apply the same model to everything we do not get the full picture. It is no wonder that Economics is hobbled. We seek absolute truth in numbers. In 'The Hitchhikers Guide to the Galaxy' humanity wants to know the meaning of life, the universe and everything. An amazing machine is built to answer this ultimate question and it produces the answer '42'. The author, Douglas Adams, was laughing at the fact that we always want numbers. But '42' does not make sense without context, just as 4.2% inflation does not make sense without context. We therefore have 2 types of truth, one which I call scientific truth and the other poetic truth. If we say that a woman is 'like a flower' it is complete nonsense from the mathematical point of view yet we all instantly understand that it means that she is delicate and beautiful. But we have inherited from the Pythagoreans that numbers are the realest part of reality.

When I ask my students for an example of a true sentence they always say something like '1+1=2'. It is interesting that we always want the truth to be objective. None of my students have ever said "I love my girlfriend." When we close our eyes and think about the truth we think about some formula which is detached from our own existence. Economics should be much 'softer', it should be aware that it operates in a context, not in a vaccum.

Q: But perhaps we are trying to get away from numbers. Take the concept of 'Social Capital' for example.

A:  The fact that we give something the name 'capital' does not mean that we understand it. When asked why a mother breastfeeds her baby, an economist will answer that she gains some utility from doing so. Using the word 'utility' does not mean, however, that he really understands. In the Bible, at the very begining, we are presented with the idea that what is hard tends to destroy what is soft. Abel is the wind, fog, something light. Cain means 'blacksmith', just like Agent Smith in 'The Matrix' trying to destroy Neo.He always attacks Neo, never the other way round. We have the same problem in Economics: 'hard' tends to displace 'soft'. One solution is to build protective walls around the 'soft'. A perfect example is Central Park in New York City. In the middle of Manhattan, where every centimetre is exploited with maximum efficiency, there is something which is seemingly useless. Yet we protect it. We say to the invisible hand of the market: your reach does not extend here.

Q: What is the effect of 'hard' displacing 'soft'?

A: Once upon a time there were no prices. There are whole areas of our lives in which we function just fine without prices, eg: family life. We perform exchanges, but we do not use prices. Make your wife breakfast and she will make you pancakes in the afternoon. There are no written rules to it but it works. On the other hand, in Greece or Lehman Brothers we had very precise rules, interest rates calculated down to hundreths of a per cent only to find out a few years later that none of it worked. In theory, if I am a banker and I have all these perfect models then I do not need to worry because the models will predict any crashes and I can avoid them. These models, however, are like car airbags which always work except when there is an accident.

Now we know that we lent to Greece at an interest rate which was too low. Had it been higher, we wouldn't have lent so much. The models failed in their calculations. These models are supposed to minimise uncertainty but they end up giving us an excessive sense of certainty which is not good. Imagine you are in a large hall and the lights suddenly go out. Someone shouts "I know where the doors are, follow me!" Everyone would do so and would run into the walls. That is the drawback of being certain in a fundamentally uncertain situation. If we were not sure how to act, everyone would get on their hands and knees and would feel their way towards the exits. It would be slow,but it would work because we would be recognising that the uncertainty exists.

Another example: imagine we are driving a car in which the gas and brake pedals randomly switch functions. Such a car should be driven very, very slowly and carefully because we do not understand how it works. At the moment we are driving this car vey fast.

Q: In your book we do not find many recommendations for rediscovering the soul of Economics.

A: Because it is not a book of answers. I am trying to show where we might find ourselves in the future. Above all, I want to show that we do not understand interest rates. I also write about the earliest known economic cycle in human history, something we are all familiar with but which is not usually looked at from an economic point of view. In the Book of Genesis the Pharaoh dreams of 7 years of feast and 7 years of famine. 7 years of GDP growth, 7 years of falling GDP. The moral of the story: do not eat everything you grow, save some for a rainy day. This advice is 3,000 years old and can be understood by a 7 year-old yet it is still wiser than all our econometric models. It is one of the key elements which is missing from our economy.

We think that we are in the middle of a depression.Wrong. We are in the middle of a manic depression. We over-estimate the good years, when we spend everything we earn, and we are therefore over-sensitive to the  bad years. Patients with manic depression are treated differently from those with depression. First we need to deal with the mania. The mania makes you think you are God, you spend more than you can afford. Manic depressives are given stabilising drugs which bring thier mood down on good days and raise it on bad days. We need to reduce the amplitude of the economic cycle, to make the boom less of a boom and the bust less of a bust. This should be the role of Economics, rather than striving for the impossible goal of permanent GDP growth. GDP may even need to be lowered for the sake of stability.

Q: In your book growth is compared to a new, secular religion.

A: Even our reaction to the crisis has been quasi-religious: why have the gods of growth forsaken us? How can we regain their favour? What type of cuts do we have to make for them to forgive us? The real question is this-- is growth a result of market capitalism or is it a sine qua non condition for market capitalism? I believe that democracy and capitalism can manage just fine without growth but it seems that most people think differently, politicians included. There is this idea that if there is no growth then we cease to be human beings-- we will go to war, we will start stealing. I do not think Europeans have to be like this. Otherwise we will die from debt.

Q: But growth does not just buy us new toys. It is necessary for things which are fundamental to quality of life. Healthcare, for example.

A: I have nothing against growth but what do we do when it does not exist? Imagine there are 2 beers on the table but there are 3 people. We need to have a philosophical, ethical and economic debate about who gets to drink. The richest person? The thirstiest person? Should ladies go first? Should whoever was first in the pub go first? Should we divide the beer? If so, how? Should we give priority to people who have never tasted beer before or should alcoholics have priority? It is a very complicated philosophical problem and until now our solution has been to make a third beer magically appear. This third beer is growth. For a long time we have been buying this third beer and keeping everyone happy. Now, this third beer has failed to appear.

Q: Doesn't that metaphor show that we are incapable of solving our own problems?

A: Yes. Only recently have we begun to pay attention to the problem of wealth distribution. Only now is the Occupy movement raising this question. Why didn't they do so earlier? They are not out to bring down capitalsim, they only want to highlight its injustices. Had the government not bailed out Wall Street, we would be seeing bankers out on the streets.

Q: It will not be difficult to change the perception of Economics as a science, perceptions are constantly changing. But how do we persuade politicians? 

A: It is a philosophical question and philosophers should play a key role, if not the key role in the debate. It is time to end this schizofrenia in which we always spend significantly more than we earn. It is OK to do so for a few years but not indefinitely. That is where we find ourselves today. We can either raise taxes, which nobody wants to do, or we can cut spending-- which is again something which nobody wants to do. Politicians should not have as much free rein over public debt as they do now. The ability to print money was wisely taken from them so time ago. If they could simply print more money then we wouldn't have debt but we would have hyperinflation. We took away their right to do so and now they cannot do it . As far as public debt is concerned, however, politicians can still do as they please, as they did in Greece. That is why we need to take these powers from them as well.

Q: The US government printed 8 trillion dollars and they do not have hyperinflation.

A: Yes, because they are in a recession. The problem with inflation is that you never know when it will hit and once it rears its head it is very hard to control. It is the same with deficits: we think that we have them under control, debt is seen as useful-- it buys you a car which you do not have, a home which is not yours etc.. We take on debt to help ourselves and we believe that we can control it but in reality we become its slave. This is what has happened to Greece and Hungary. They are slaves and cannot do as they would wish.

Q: I know I shouldn't ask for predictions from someone who does not believe in predicting the future but... can Economics transform itself?

A: The best thing we can do is to break our own rules. Some systems work better if you ignore the rules and regulations. Work-to-rule is a good example: if everything is done exactly by the book the system breaks down. In human history more harm has probably been done by sticking to rules than by breaking them. How many times do parents say "if you carry on misbehaving there will be no presents"? How often do parents keep that promise? Whether in Greece, Hungary, Ireland or the US, we broke our own rules because it was the only possible thing to do. If we had grimly stuck to the rules like Calvinists then the world would be lying in ruins. Economics as a science finds itself in a great place, it is being re-thought and reinvented. Only now is there the poltical and social need for new thinking, which was not there a few years ago.


Tomáš Sedláček – author of the book 'Economics of Good and Evil: A Search for Economic Meaning from Gilgamesh to Wall Street'. At the age of 24 he was appointed Economics advisor to Czech president Vaclav Havel. In his book he argues that Economics should not limit itslef solely to Mathematics but instead should seek to incorporate thinking from other fields, above all from Humanistic disciplines-- because the economy is a human creation, existing in a human reality which cannot be fully fathomed by numbers alone. The English edition of the book is published by Oxford University Press. 'Yale Economic Review' has hailed Sedláček as one of the 5 most promising young economists in the world.

Interviewer: Kuba Kapiszewski  Taken from 'Przegłąd' magazine.

The original Polish interview can be read here.


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