A meta-analysis of the economic crisis

It’s helpful when trying to gain new perspectives on a situation to elevate the altitude of the analysis. I thought I’d apply this to the current economic crisis by considering the study of economics.

Called a “social science”, economics bears similarities to other sciences in that it’s about describing coherent stories that explain what we see happening around us. Unlike traditional sciences, there’s no proof or disproof with economics. And taken to extremes, economics can collapse into being little more than competing ideologies (consider the great Keynesian-monetarist debates which have been recently reawakened).

The problem with relentlessly pursuing any economic ideology is that it lacks the nuance, balance and refinement to reflect the difference between theory and reality. Free market economics makes perfect competition its holy grail, unencumbered by government regulation. In neoclassical economics, perfect competition relies on actors in the market having perfect information and acting rationally on it. When has that ever been the case?

Consider the current recession, noted by some to be an “irrational recession” because it hasn’t been caused by either a resource shortage, or the bad-tasting medicine of interest rate spikes being used to stifle inflation. In fact, like the 2001 recession, it’s been caused by over-investment – in this case in real estate, last time technology. That hardly suggests perfect knowledge, does it?

And how can we get ourselves out of the recession? We could all really do with some solid consumer spending. But who’s going to spend copiously right now? We need individuals to take actions, which if taken en masse, would be for the greater good. But if you and I can’t rely on everyone else analysing the situation rationally and taking the same action, our risk in maxing out our credit cards is simply too high.

On the other hand, the government intervention of the Keynesian ideology isn’t a silver bullet. The problem is the difficulty with actually getting it right. Take US agriculture, for example. Since the 1970s, successive US governments have been successively whittling away the basis on which US agriculture was set up after WWI, by substituting the Ever-Normal Granary approach (which purchased surplus grain from farmers when bumper crops caused prices to fall, then sold that grain onto the market when bad harvests caused price spikes – thereby creating a self-funding stabilising influence on the national grain market) with a target price policy (under which the government paid farmers a top-up to a target price if market prices fell below) and then regularly reducing that target price. Because under this model, farmers are not incentivised to cut production when prices fall, US corn surpluses have grown for 30 years, leading to corn finding its way into more and more foods in industrial food production processes. The vast majority of the ton of corn that each American consumes per annum is not eaten as fresh corn cobs, cornflakes or tortillas, but as high-fructose corn syrup in carbonated drinks, modified or unmodified starch, glucose syrup, maltodextrin, crystalline fructose, ascorbic acid, lecithin, dextrose, lactic acid, lysine, maltose, MSG, polyols, caramel colour, xantham gum, and in the meat they eat owing to the corn fed to the livestock (including cows, which as ruminants can’t naturally digest grains). Poorly implemented market policies and regulation are having an immense impact on the American diet and the health of the population, which probably won’t even be understood for generations.

One of the reasons why the policies have been put in place is because agriculture as a sector just won’t conform to the free market theories of economics that have become so beloved of the leaders and influencers of the developed and developing world since the fall of the Berlin Wall. Unlike other markets, where price elasticity means that price falls increase consumption, agriculture just won’t work like that – peaks and troughs in production need to be managed. If farmers could work together sensibly, they’d cut corn production in the US significantly to arrest the fall in prices that they’ve been experiencing since the ‘70s. But like the distrustful consumers, who can’t rely on each other to boost spending, farmers also can’t rely on each other to cut production.

That’s why cartels, like OPEC, are formed, so that producers can share information and use it to manage what happens to the prices in a market. Free market theorists like Milton Friedman are fanatically opposed to this, but surely there has to be an application for it in some cases – like Fairtrade coffee production. And it is certainly the case that the over-investment in totally risky sub-prime real estate and the purchase of these sub-prime backed securities was the result of a fantastic failure to properly regulate the markets and demand transparency and accountability. And therein lies the rub: theories are just theories. They need careful analysis to work out if they actually apply, or to examine how they should be modified and adapted to the situation in hand. Once they become ideologies, the opportunity for that analysis is lost in a wave of fanaticism. Finance ministers around the world right now need to take care not to be fundamentalist about theory in dealing with the economic crisis, but instead employ the best mix of both the monetarist and fiscal tools at their disposal.

The role of digital in balancing the cycle

My two previous posts present a worrying possible conclusion to the way we’re living and the impact that we’re having on our own social fabric and environment today. It’s always easy to criticise and find the negative in our situation, so I’ve been thinking about what we can do to improve the situation, and what role digital should play in that.

First on the list is to inform people. Most people willingly choose the best for themselves and others when they are furnished with the information to do so, unless they absolutely can’t afford to do otherwise. But even affordability is a matter of priority. Who would knowingly choose to feed their children food that they knew to be gradually poisoning them and risking future debilitating diseases if they correctly understood and assessed those risks. These decisions come down to being well-informed. And that’s one of the things that the Internet and digital communications are best at.

Annie Leonard’s The Story of Stuff is a great example. I’m not sure how visitor numbers have changed over the last couple of months since I first saw it, but the “Over 4 million viewers” label is pretty impressive. It’s clearly been designed for grass-roots distribution.

Here’s another example:
YouTube is obviously a brilliant application for viral distribution, and so are many of the other social networking sites, like Facebook, on which the embedded video was shared by many.

Second is providing access to choice. Being well-informed isn’t enough if you can’t choose the better option. Being here in Canada has provided a clear example. Food products containing genetically-modified crops do not have to be labelled as such either here or in the USA. I’m not going to wade into the GMO debate here and now (although I might well enjoy doing so in the future), apart from to say that at the very least, consumers deserve the ability to choose whether or not they purchase GMO.

The cross-border, niche-market possibilities offered by the Internet make providing choice much easier, and enable consumers not to be reliant on the large, multinational corporations who dominate physical retailing in so many parts of the developed world. Instead, digital channels provide a platform on which local artisans can reach a market for their products, and offer alternatives to the existing distribution processes and market dynamics. Etsy is a great example of this. Now imagine this kind of platform applied to hand-crafted or artisan-designed and –developed goods from developing countries.

Third, and most importantly, is democratising access to power, which sounds incredibly lofty, but needn’t be. It’s about giving local people more input on the decisions that are made locally. Frequently, the most important of these are town planning decisions, such as, should Tesco be given planning permission to open an out-of-town supermarket here? Where I used to live in Southwark, London, I would receive three to four invitations to local consultations per year. The consultations were always conducted as town hall meetings – usually at about 6pm. They were almost impossible for people working up in town to go to. These kinds of consultations are the ideal forum to open up to digital channels. The more we open them up, the more we expand the exchange of information with the local community and allow them to have an active say in the way their towns develop.

The big sticking point with all of these things is the digital divide. It could be argued that it is those who don’t have access who have the greatest need for the benefits that digital access brings: a subject for another day.