The current economic situation is in many ways better than what we have experienced in years. Against that background, we have stuck to the rebalancing scenario. Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India. In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.
OECD Economic Outlook 2007
GNP growth will average around 3.75% per annum between 2008-2015 — even if there is a down- turn and US instability.
Economic & Social Research Institute (Ireland) Medium-Term Review No. 11 2008
The above quotes might give one cause for derision. How could such acknowledged experts, well resourced, stuffed with economists and consulted by governments, get things so wrong? Especially when the risk at issue, the popping of a credit bubble, was about as vanilla as an economist could get. So precisely wrong too, certainly not 3.5% or 4%!
In reality quite a few people saw the risk of the bubble bursting, some not even professional economists, but they tended to operate on the fringes of established consensus, and by extension, a social periphery. Thus their views could be dismissed precisely because they represented a fringe view. In such a way consensus defends itself.
A consensus becomes established out of the persistence of what it attempts to describe. It is inherently retrospective. It tends to assume that what has been, must continue. A couple of decades of low interest rates and stable global economic growth, and well, it becomes the natural order of things. Here’s Ben Bernanke in 2005:
“We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize….”
Of course subsequent events proved that just because something never happened before does not mean it could never happen.
Because bubbles tend to be pleasurable, consensus can be so much harder to break. The public wills the same consensus, and when it is refracted in our social worlds we make it our own. Who wants a great party terminated by a tug on the arm saying “it’s time to go home now, work tomorrow!”
When the conditions that underpinned the consensus change, it can be very difficult to acknowledge and let go of our attachment. For acknowledgement means rejecting not only the familiar but something that may have embodied our status, past efforts, our hopes and even our collective mythology.
Defending the dominant consensus is always reasonable, confident and considered, for it is born out of the cosmology or world-view of the age. But world-views shape their own perceptions and contain the narratives of their own defence. The defenders of the status quo invariably point to self-aggrandizing statements about the consensus (we’re better central bankers now…… our financial networks have dispersed the risks of old… new technologies have transformed how economies work). Or when challenged they might use what philosophers refer to as arguments from authority: Prof X, Nobel laureate says… the IMF says… or, it’s the trivial outcome of The Big Complicated Theory You Clearly Don’t Understand!
Consensus offers status and reward for those who can navigate its waters. Further, status salutes status. We warm to those who confirm our attachment to our understanding of the world and all that we have invested in it. A respectable institute conscious of its status will desire to work with someone of equal or higher status; or a government will deem it appropriate to only work with high status advisors (usually the most expensive). So consensus is re-enforced….and Ireland gets Merrill Lynch.
There is wisdom here too. It’s far better to be wrong in a consensus crowd than wrong on one’s own. Better to say: “don’t blame me, everybody else, even the best advisors, got it wrong”, rather than “OK, I’m sorry, they were cheap and hairy, but they seemed to make sense at the time”.
So what might we learn from the inability of this consensus view to adapt to the reality of the growing credit bubble?
The easy answer might be to be very sceptical of economists, especially when they are telling you what you want to hear. Actually, one should just be wary of economics, left, right or green. Amid some insight, it’s a dodgy mix of contingent assumptions treated as laws, and myth and ideology peddled under the cover of mathematics and wishful thinking. Further, it’s not good for economists or society that they seem to have been transformed into universal commentators hooked to a hokum science making them the true inheritors of the astrologer-astronomers of the papal courts declaiming an earth-centric universe.
But a better and more honest answer might be to acknowledge that consensus is a feature of the tribal nature of all human societies. To be part of a community is to share consensus, not one but many – dynamic, interacting and often contradictory. Consensus is of our nature, our tribal glue. Some are shared by few, some are so deeply and widely permeating that we barely notice their presence. Some may be very good or useful descriptions of reality, at least for a period, but some may not be (as our opening example attests). But it’s good to remember we’re all deluded about something or other.
So our next question presents itself. Since we are unlikely to have banished forever delusions buttressed by consensus; could we at this very moment be sharing a world-view or deep consensus that might soon be shattered by a reality far more challenging than what we now call a ‘crisis’? Could there indeed be a critique on the fringe, dismissed of course, that might be, if not quite correct, at least a more realistic view of our contemporary predicament, given the uncertainty in all things?
First we might ask, who might be holding the prevailing consensus that may also be a delusion? Well, if I may:
Those who think economic growth will return, that technology will continue to get more complex, or that China will rise. Those who think our complex societies can be maintained; those who think we will again be as rich as we are now; or who think starvation could not return to Europe in the coming decade. Those who think their jobs, their standard of living, their water and sanitation, their health-care, and their pensions are a right rather than dependent expressions of a moment in history. Those economists and politicians of all political hues who fill the airwaves with ‘solutions’. Those who think Angela Merkel, ‘the Bankers’, the Fed or ECB, the US president, or ‘the Elite’ or ‘the People’ are in control, rather than just co-dependent parts of an immeasurably complex and uncertain system coming to the end of its life. Those who think that if only those in power were replaced by someone as caring and wise as, well, they are, all could be made well. Those who think fracking or the development of new oil production will last much longer. Those who think Germany and the United States could never go the way of Greece, or worse. Those who think this, this is austerity, rather than the ripple before the storm. Maybe also those who haven’t been paying attention.
And what if a fringe makes such claims, for there is a cacophony of voices? Our current consensus view may indeed be correct, and the fringe view ludicrous. But as we have seen, it’s not axiomatic. And because risk is a combination of the chance of an occurrence and the severity of impact, a warning of a major impact – even if relatively low chance of happening – should make us concerned. What’s more, the root warnings have re-appeared repeatedly, from diverse sources, over decades and increasing in more recent times.
But, very briefly and acknowledging some contention, the conditions for concern might be summarized as follows.
We are trying to comprehend our world within the world-views and economic orthodoxies developed over an extra-ordinary, two-hundred year period of compound economic growth. This growth was coincident with increasing wealth, complexity and globalized integration. Part of our dominant consensus is that this trend will continue. Much of what is important to us, how we live, our expectations, what we value and hold dear, was shaped by this process. And we, the global 10%, have done well out of it.
The fringe view is that this growth is over – we are at the limits to growth, now. At issue is the stability of the globalized economy. We are moving into a deepening global deflationary depression, interspersed with dangerous and possibly irreversible shocks to the systems that support our basic welfare. We will lose much of what we take for granted and things we have come to call our own. We are entering an era of real danger and unpredictability.
This is because we are at an historic point of convergence. Firstly, we have reached the limit in the credit backing of our financial, monetary and banking system. We are at the same time hitting profoundly destabilizing ecological limits preeminent at this time is that we are almost certainly at the peak of global oil and food production. Put another way, we are at the limits of the system of trust and solvency that underpins the trade upon which we depend. We are at the limits of the least substitutable energy source that, by the laws of physics, is necessary for economic maintenance and growth. We are at the limits of our most fundamental human sustenance. They are the three most critical structural pillars of the globalized economy. Like a three-legged stool, the whole system can become destabilized by the buckling of just one.
In addition, and almost completely unacknowledged is that the changing nature of the globalized economy – increasing integration, complexity, speed and inter-dependence – has made us very much more vulnerable to this convergence. Further, such complexity makes it very difficult, or even dangerous to try and ‘fix’ its parts.
If we were to acknowledge such a fringe view we would be urgently preparing for profound change – for when real change is forced upon us we may have much less room for manoeuvre. We would be embracing austerity because of its inevitability, and in doing so, transform it. From top to bottom, we would be working on our food security, the resilience of critical services such as sanitation, monetary systems, governance, and re-working work. We would have begun the personal and collective psychological processes that might allow us avoid some of our species most destructive passions that can emerge in a time of crisis, and instead use it as a source of creative and positive change.
Of course, no detailed explanation for such a fringe view has been provided here. For most though, none is needed. They already know this view is nonsense. Why worry, it’s a fringe view… why with shale gas, technology, markets, stopping austerity, green growth, changing the monetary system, getting rid of the ‘wrong’ people….so many options! Anyway haven’t people been saying such stuff since the time of Malthus, and they’re still wrong! Aren’t the experts in control?! But an economist said…! Quite….quite.
Featured image: Pages from 1550 Annotazione on Sacrobosco’s Tractatus de Sphaera, showing the Ptolemaic system.