People, Morality, Credit and Economics – A Reflection

Again, I’ve been bothering poor people on economics forums with my points of view…

…so, dear reader, I now, again, get to bother you too!

I recently posted responses to a very good article by a blogger “Sell On News”, here.

His post is duplicated here, for your convenience:

Economics is people not arithmetic

Posted by  in Economicson Jan 21st, 2012 | 27 comments

The non-reaction of the markets to the ratings agencies downgrades of European debt underlines a persistent characteristic of the markets that is all too often forgotten. Especially by economic commentators. If it were simply a matter of extending the arithmetic of current economic performance into the future, then economic predictions would usually be right. On the contrary, they are usually wrong.

This piece in the Financial Times has a salutary reminder of just that:

Perhaps the most honest perspective, and one cherished by forecasters, is that we have “low visibility” on the US economy. It is one of those catch-all phrases that might one day serve as an epitaph for our times. It may also help to remind ourselves just how bad the forecasters have been. A few years ago a Berkeley study apparently found that monkeys aiming at a dartboard were more accurate than professional forecasters.

Perhaps we need to hire those monkeys to help us anticipate where the euro crisis is going (dart boards don’t cost much). In the meantime, it is worth asking why economists are so often wrong. There are the obvious reasons. Too many “factors” to consider. The folly of projecting to the future what has happened in the past. The irrationality of those supposedly rational actors, with their paroxysms of fear and greed. There is the problem of poor or partial information. One person I know who works in the ratings agencies says they really know little about government finances, and in any case they are required to follow certain lines to please their pay masters.

Then there are some deeper reasons. The problem of non-linearity in complex systems, which makes them inherently unpredictable. The impossibility of including in any predictive model the knowledge that people have of that model. This of course renders any prediction fragile. In a sense it means that the only predictive models that can actually be considered reliable are those that nobody knows anything about. Those that are understood can of course be undermined by the development of strategies to exploit the predictions, and those strategies will, by definition, be outside the models.

One could go on, but I believe there is another blindness in economic commentary that is especially telling. Jane Gleeson-White, in her book “Double Entry” shows how economic statistics derive from the double entry system developed by the Italian mathematician Pacioli in 14th century Venice. It is a worthy reminder that financial transactions, the capital markets, are a social artifice, a created thing. They are not laws of the universe, immutable and sovereign. Yet that is how economists treat them and that is the prism through which we have come to see the world.

Gleeson-White tracks how ubiquitous the binary system of accounting has become in economic statistics and economic theory, including Marxism. Weber equates double entry with capitalism itself. She does not mention it, but the idea of “balancing the books”, credits matching debits, is implicit in General Equilibrium theory, which drives our idea that “economic imbalances” are to be guarded against (an idea with merit, of course, if transactions are not to be undermined).

The insistence on interpreting economic transactions as an inviolate system, like a natural system, that is subject to scientific laws is, I suspect, the main reason why economists are so wrong. They are not looking at a natural system, they are looking at a created, artificial system that need not be the way it is. The statistics, as Gleeson-White shows with her description of Keynes’ development of GDP and other national economic statistics, was based on a series of assumptions about what should be considered valuable. Different assumptions could have been made. If they had been, we would now have a different picture of economic progress and relative wealth.

So here’s a suggestion.

Maybe economists should view the “euro crisis” or indeed any other economic phenomenon, as a social artifice that must be interpreted using non-scientific methods — you know, look at the people involved, for instance. As for me, I suspect that the supposedly irresolvable arithmetic cul-de-sacs of European national finances are a bit of a mirage that the market will eventually tire of. That which is created can be uncreated. There is also something suspiciously biased about the concerns with, say Italian debt. At about $2 trillion, it is one sixth of Japanese debt and one eighth of American debt. It is little more than 1% of global debt. So why is it getting all the attention? The answer, I would suggest, is to do with ideology, politics and trading plays. People, in other words. Not arithmetic.

People cannot even START to be understood without appreciating their Nature and their Worldviews, the bases of their beliefs for absolutely everything,

From this stems the Value System; and from the Value System stems individual’s notions of “Value”; and from “notions” of value comes Morality.

And from the notions of Value, Morality Community, stems this arbitrarily delineated field of human interaction we call “Economics”.

Therefore, you cannot understand Economics if you cannot understand the true Nature of People and their respective worldviews, what their values and morality are.

This is very pragmatically expressed in an old Sales adage I learnt at the beginning of my career, and have never forgotten (and never will!):

“No Trust, No Sale”.

Read everything I said above into “Trust”; and everything else arbitrarily defined as “Economics” into “Sale”.


My 2c



And the next one, because I just can’t stop…! (What a nuisance I am!)


“The process of credit creation is, fundamentally, a belief that you can create something from nothing.”

I will agree slightly; but then disagree slightly.

To me, if credit creation is anything fundamentally, it is an expression of the beliefs that:

i) the person to whom credit is being extended can be trusted to pay it back (which would then destroy it);

ii) the person to whom credit is being extended will then act (morally) responsibly, and with wisdom and discernment, with the grace that has been extended to them, and not go and abuse that grace by making promises they can’t keep based upon the promise they have just made to another (by accepting credit), etc, etc, etc…

ie. Resultant “problems” from this scenario would be seen as accounting and/or economic or financial.

But, in fact, their ultimate nature is Moral, rooted in the morality and wisdom of the one extending the credit, and their subsequent actions whilst the transaction is, effectively, still “open”; and, similarly, for the one who accepted the credit, with their wisdom and morality, and their subsequent actions whilst the transaction is, effectively, still “open”.

You see, “credit” does not just “leverage” – it is also links and binds! It creates an economic/social/moral structure of its own, upon which lives become structured upon and around…in economic terms, this means businesses, jobs, institutions and even governments. All upon, and made from, a Moral fabric.

This/these credit “structures”, with their nature as such, are why economic failure can render such non-linear problems: all these morally-based, open/linked transactions suffer from effects in other linkages “up the various chains”.

It helps us understand why credit-laden systems fail so catastrophically and unpredictably: they fail as badly as relationships fail when morality is broken (usually, Trust); they ARE moral systems, and an “open” promise effectively broken because someone else even unwittingly broke their promise to you, is still a promise broken, with very real consequences.

“Do to others as you would have them do to you” is as true and fundamental today as when it was first spoken, and is part of every persons very fibre of being; As is “Let your ‘Yes’ be ‘Yes’; and your ‘No’ be ‘No’” – keeping our word/promises.

In my honest opinion, this all becomes a whole lot simpler when viewed through such a lens.

My 345344565 cents



/ramble off





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