Economics in the news (1/12/15)

Two news stories of note this week:

1. Vermont’s push for public banking failed to net them a public bank, but did successfully pass law making the state’s surplus funds (about $10 million) available for public works project loans (energy efficiency, infrastructure, etc.) to an extent not previously achievable. In other words, just the threat of public banking freed up money for public projects that “fiscal responsibility” had previously withheld.

This certainly better than nothing, but is not as good as fractional reserve lending (i.e. banks making money out of thin air), but is progress. A public bank would make ten times more money available for public purposes.

This new spending / lending also evaluates projects based on something other than profitability for capitalists like Goldman Sachs. If profitability for Goldman Sachs sounds like absurd criterion for public funding, that’s because it is.

The pursuit of profitability alone distorts good outcomes. For one example, Michael Pollan notes how profitability guides botanical research: “Golden rice” provides a profit center for Monsanto because it produces rice with an essential human nutrient (vitamin A), but one could accomplish the same thing without that Monsanto profit by encouraging rice consumers to plant squash somewhere in their fields (between the rice, behind the house, etc.). The distortion is a product of “profit determines whatever is good.”

This is a limitation of pure market capitalism.

2. U.C. Davis economists published a study about the correlation between financialized economies and financial instability. Essentially, as private borrowing increases, the chances for something like the Great Depression, or the Great Recession also increase. These observations are old hat to Modern Money Theorists like Steve Keen, who literally predicted the Great Recession based on the ratio of private borrowing (note: not government borrowing) to GDP. If you read the comments in the linked article, you’ll see several commenters point this out.

What’s notable about the Davis study is that it comes from mainstream, orthodox economists, and is a rare instance of looking at the correlation between theory and reality for such economists. Yes, a conventional economics education remains “a £9,000 lobotomy,” or more accurately, an advanced form of superstition, with relatively little correlation between theory and experience.

Economics is not alone in pursuing such empirical phantoms. Nineteenth century medicine prescribed purges and bleeding. Doctors only stopped doing so after experimental evidence demonstrated patients untreated by such “remedies” recovered sooner.

Modern Land-Use Planning has a similar problem. Says Jane Jacobs, one expert in the field, “The psuedoscience of planning seems almost neurotic in its determination to imitate empiric failure and ignore empiric success.”

Even supposedly “objective” physics was attached to non-empirical results. Said Max Planck (the discoverer of the “quanta” of quantum mechanics): “The truth never triumphs. It’s opponents simply die out. Science advances one funeral at a time.”


3. Bernie Sanders appoints Modern Money Theorist Stephanie Kelton as minority economist on the Senate budget committee. This is a pretty big deal if only because it breaks the “radio silence” about the alternative to the conflict between team red and team blue (which is no conflict at all, but strictly the Kayfabe manufactured to distract the public from policy malfeasance).

I’d urge you to read the article, and see for yourselves. Essentially, Ms. Kelton’s heterodox economics a) predicted the Great Recession when orthodox economists didn’t, and b) offers a very nice way out that might even work (in contrast to the dithering and propping up of the Ponzi capitalism that we’ve seen so far)!