Economic pessimism - a polemic

(Note: This article is in response to a preponderance of pessimism which culminated in the US some two weeks ago, but may be re-ignited by the budget super-committee's epic fail, and which is just reaching an apex in Europe.)

Nouriel Roubini was retroactively awarded the appellation "Dr. Doom" for purportedly predicting the global financial crisis (I attack Roubini and the author of this article, from the International Business Times, below). In 2010 he was 12th of 100 top global thinkers in a list by Foreign Policy. Other maverick economists also recognized, again retroactively, for anticipating the crisis are Robert Schiller and Raghuram Rajan.

While these thinkers deserve plaudits for their foresight and originality, and Roubini specifically impresses me with his erudition in this interview with the grill-master, Tom Keene, I think the wailing and gnashing-of-teeth have gotten out of control. Public discourse has jumped from excessive, pre-crisis optimism and faith in the market to apocalyptic dread. I, for one, am sick and tired of the crisis fetish.

Take Roubini's claim, from this interview with the Wall Street Journal, that "Karl Marx had it right. At some point capitalism can self-destroy itself. That's because you can not keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What's individually rational ... is a self-destructive process."

Well, one should not reject academic-historical claims out of hand, but this is almost certainly going too far. What does it mean, first of all, that capitalism can self-destruct or that individual rationality is self-destructive?

Perhaps nothing, but in essence, it's an emergence claim. When phenomena at one level causally relate to those at another level, there is said to be a relationship of emergence. Economists typically aver a necessary relation of higher level effects to lower, individual level causes, which is explanatory reductionism. In this (cherry-picked) quote, Roubini assumes that causal individuals act rationally; behavioral economists, such as Schiller, would tend to disagree. Nonetheless, even in this simplified case, the aggregate, macro, system-level society-economy may crash. The emergent effect may be decidedly sub-optimal even given micro-level optimality conditions (generally guaranteed by perfect rationality among other things). Economists axiomatize rationality such that individuals maximize utility subject to preferences and a budget constraint. Alternatively, Ian Hacking (1983) holds that rationality does little explanatory work, but irrational does. For him, irrational means nutty, unsound, vacillating, unsure, lacking self-knowledge, and so on.

According to Hacking's definition, some people are irrational a lot of time time and all people are irrational at least some of the time. But it doesn't really matter, or so says Roubini. Even in the perfect-rationality limiting case, the economy can implode because it may have its own adaptive or path-dependent logic or be subject to radical and rapid changes, tipping dynamics, or system-internal defects, the seeds of its own destruction, à la Marx.

Now we're back on track with Roubini. He says that companies, during hard times, are incentivized to stockpile and reduce employee payouts, and their employees in turn are incentivized to stockpile and reduce consumption. A typical Keynesian stagnation spiral, but not what Marx was talking about at all. And Roubini claims that the stimulus was too meager, but that's what Keynesians always kvetch. Furthermore, just because the economy can self-destruct doesn't mean it will. And self-destruct? That means, what, exactly? Teleology has gone out of favor for good reason. For Marx, the end of the road is Utopia; for Dr. Doom, it's Dystopia. And for the world or humanity as a whole, perhaps it's self-annihilation. But even if that's the case, who really cares?



I'm unwilling to decry Roubini, Marx, or the Keynesians as wrong, but I do think they are wrongheaded. They are redundant and lack creativity yet make strong and dire commitments from their prophetic soapboxes. Meanwhile, from my soapbox, I modestly shelter in ignorance on the grounds that neither I nor (virtually) anybody else really understands the economy and its immediate or long term trends or internal contradictions. The evidence is mixed and anybody who stakes a strong claim at this point is more or less throwing the dice. If this appears an epistemological cop out to a pragmatic problem, consider the writer of the International Business Times article (above). He ends his Roubini-Marx piece with the empty platitude: "To say that the current economic order is not experiencing a crisis would not be accurate." But this means only slightly less than Roubini's claim that the markets "do not work." What markets, where, for whom? If the only three options are strong commitment, ignorant cop-out, and vacuous platitude (here I'm exaggerating), I'm happy where I am.

The fact is that there are robust incentive for pundits and media outlets to take a stand: make news, make waves, make a name, make money. Momentum is news; stasis is boring.

Of course, not nobody understands the economy, and many people are smarter, more experienced and more dialed in than I am. And I could make a prediction, but instead of taking an over-confident and disingenuous stance, I'd rather discourse on the discourse and (ha ha!) complain about the complaining.

In this case, economic pessimism has been funneling out of the media pie hole for weeks on end and it seems about time we tire of the "look at me, we're screwed!" stuff (even if it's true!), and demand some moderation. Doom and gloom may sell, but they're becoming monotonous and distorting our vision of the economy.