Although, this op-ed piece is a good one, posing an important question to think about in regards to the economic policy of a country & for countries, worldwide, my own view says, regardless of which economic policy we come up with, we will still have these booms & busts.
The idea of free markets, capitalism, democracy, social democracy etc are all good & noble, but the problem in them lie in the proper implementation of these ideas. We cannot ever properly implement it ... without religion.
Now, people will groan, what religion has to do with free markets or democracy or capitalism?
I can't talk about this from other religions since I don't know what other religions say or don't say about the problems the whole world is having by adhering to these ideals. I can, though, talk about economic policy & capitalism from Islamic perspective.
Since, this is a very long & deep topic to discuss even from a religious perspective, so I'll talk at a high-level. I will say here that Islam doesn't forbid capitalism. Today's problems are not with Capitalism itself; it's other factors making problems for Capitalism. What are those problems?
1. Greed: Islam abhors greed. Even Christianity has greed as one of its 7 deadly sins. One of the 10 commandments, "thou shall not steal," includes greed (when one is greedy, they will steal to satisfy their need).
Problem is greed is actually considered good in secular or atheist world. For instance, entrepreneurs are told to be hungry & greedy to achieve greatness or whatever they are trying to achieve. So, if Facebook takes your personal data & sell it to third parties for profits, then you can't complain, because it's part & parcel of free markets. Nothing is right or wrong in free markets.
After the 2008 crisis, there was, & still is, a lot of noise about market regulations in US & Europe. Well, the government agencies were made. Regulations were enacted (after they were heavily watered down, thanks to the heavy lobbying efforts from the Wall Street crowd). But, the implementation of those regulations are nowhere near to their initial objective. Why?
Because, for every law a human makes, an "anti-law" a human finds. What's an "anti-law"? A loop hole. We can see all around us that for every law, there are loop holes available.
We humans, regardless of how hard we try to make the strongest possible law, there will always be a loop hole. That's why, religion stopped it at the spiritual level; no greed. So, if bankers or executives or government leaders turn all devout Muslims, or Christians, or Jews or religious people tomorrow, they can't steal from the public to line up their own pockets. They have to shun greed for the public good.
What's that has to do with Capitalism? Capitalism says a society should have private enterprises. That's good & ok. But then, businessmen take that concept & open private companies & then to always earn more money (nobody can satisfy greed), they commit abuses (labour abuses, market abuses, corruption, lies, bribery etc etc) to fatten up their accounts. Of course, the result ends up being a major part of the populations keep becoming poorer & poorer. Inequality & injustice take the rein of society. A few elites take control of the liquidity in the market (money) & start controlling government so it makes policies favouring them (government leaders are paid handsomely). All because of few people became greedy.
2. Interest economy: Islam forbade interest because an economy based on interest creates a rich class & a poor class. Since, the money the rich has is making him/her more money, he/she will always make money without putting in that much effort, whereas, the poor does not have enough money, he/she will have to borrow more money (& hence, pay interest to the rich) to survive.
Relation to capitalism? As I said earlier, nothing is wrong with Capitalism as an idea, but this is one of the many factors which create problems for a society & its people, & then we blame capitalism.
3. Consumerism: It's sort of part of greed; a greed of accumulating / buying more things for yourself. So, of course, Islam abhors consumerism. Modern marketing thrives on this notion. Economy measurement tools, e.g. GDP are dependent on it. The more people buy, the more GDP goes up, the more a country is shown to be developing or doing good, economically.
Relation to capitalism? Again, one of the factors adversely affecting capitalism. In the race to sell more, business people abandon all ethics & morals (lying to people to buy houses with ultra-cheap interest rates, even when they know these people can't afford these houses) & people getting greedy to become homeowners at any cost. Result is in front of you all. After the house mortgages, credit card debts are the next mountain of the world. With ultra cheap interest rates around the world, people are on the hunt to load up their houses with things, even at the cost of racking up huge credit card debts. When interest rates are going to increase, & then people unable to pay their credit card bills or even service interests, the market gonna crash.
We are ready to blame Capitalism for all our economics ills but capitalism has nothing to do with whatever problem we are having. Capitalism only says private enterprises. It doesn't say anything about interest economy, consumerism, human greed, or economic measurement tools (e.g. GDP). But these, & other factors, affect how the economy performs, domestically & internationally. Most of these factors can be controlled only through religion.
Regardless of how much we think we are intelligent to make laws to control these factors, we can never completely eliminate them (there are always loop holes), & they will always win, & when these factors take over the society, the majority of human population suffers. This is not the first time we have seen human greed destroying the world; be it the Roman emperors pillaging other colonies (& for example, heavily taxing the public) to satisfy their greed or the 1 percenters of the current world keep amassing wealth, at the expense of the other 99%, to satisfy their greed.
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This is the year that economics might, if we are lucky, turn a corner. There’s a deluge of calls for change in the way it is taught in universities. There’s a global conference at the Organisation for Economic Co-operation and Development in Paris, where the giants of radical economics ... will get their biggest ever mainstream platform. And there’s a film where a star of Monty Python talks to a puppet of Hyman Minsky.
Terry Jones’s documentary film Boom Bust Boom hits the cinemas this month. Using puppetry & talking heads (including mine), Jones is trying to popularise the work of Minsky, a US economist who died in 1996 but whose name has become for ever associated with the Lehman Brothers crash. Terrified analysts labelled it the “Minsky moment”.
Minsky’s genius was to show that financially complex capitalism is inherently unstable. Under conditions of stability, firms, banks & households will, over time, move from a position where their income pays off their debt, to one where it can only meet the interest payments on it. Finally, as instability rises, & central banks respond by expanding the supply of money, people end up borrowing just to pay back interest. The price of shares, homes & commodities rockets. Bust becomes inevitable.
This logical & coherent prediction was laughed at until it came true. Mainstream economics had convinced itself that capitalism tends towards equilibrium; & that any shocks must be external. It did so by reducing economic thought to the construction of abstract models, which perfectly describe the system 95% of the time, but break down during critical events.
In the aftermath of the crisis ... Minsky’s insight has been acknowledged. But his supporters face a problem. The mainstream has a model; the radicals do not. The mainstream theory is “good enough” to run a business, a finance ministry or a central bank – as long as you are prepared, in practice, to ignore that theory when faced with crises.
That, effectively, describes the situation among the policymaking elite today. They are trying to wrestle the economy back into a state where their models can cope with it again, using measures their theories say are not needed: quantitative easing, bank nationalisations, partial debt defaults & currency devaluations.
The radical, pro-Minsky faction is at a disadvantage because it does not possess a complete alternative model of capitalism. Some have generated computer programs showing how financial crises happen. But, by their own admission, they do not have a complete alternative model of how capitalism works.
They are, admits Dutch finance professor Theo Kocken, “roughly right” rather than “exactly wrong”. Kocken’s solution is to concentrate on why we misperceive risk. Behavioural economics has had a field day since 2008, identifying problems for the human brain when faced with complex risks: oversimplification, overconfidence & “confirmation bias”, where we ignore facts that challenge our existing beliefs. But adding behavioural insights to the Minsky model of financial mania does not turn it into a theory of capitalism.
Here, the parallels with events in physics are obvious. After Einstein’s big breakthrough, we were left with 2 competing – & mutually incompatible – accounts of the laws of physics. Einstein himself was dissatisfied with this, pursuing from the 1920s a “theory of everything”. It is a laudable aim in economics too. And this is where we come to the turning point. The defenders of orthodox economics & the Minsky rebels are, essentially, asking the same question: “What does capitalism normally look like?” The one answers “stable”; the other “unstable”. But it’s the wrong question. The right question is: Where are we in the long arc of capitalist development? Nearer the beginning, the middle or the end? But that question goes to the heart of darkness.
For the mainstream, their convictions about equilibrium & abstract models were always founded on the belief that capitalism is an eternal system: the social arrangement most completely reflecting human nature. Minsky’s followers, as with all followers of JM Keynes, assume that a better understanding of financial mania can stabilise an inherently unstable system. But even physicists, who study a universe that has lasted 13bn years, are prepared to countenance – indeed, are obsessed with modelling – its death.
So the pursuit of theory is obligatory in economics. The holy grail is not a new orthodoxy, cobbled together from Minsky & the remnants of mainstream thought so that bankers can construct trading models to iron out problems created by the way our brains work. The aim should be something bigger to model capitalism’s current crisis within an understanding of its destiny.
For me, the most fundamental question in economics still concerns the 2008 crisis. Was this event the last in a series of shocks needed to allow a third technological revolution to take off? Or was it evidence that capitalism’s tendency to adapt and reshape in response to technology has stalled, or is even finished? That is the shadow we have to jump over in economics. Amid a mania for “new economic thinking”, it is what we need to think hardest about.
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