Posts Tagged ‘economics’
By fetishising mathematical models, economists turned economics
into a highly paid pseudoscience, The new astrology
Since the 2008 financial crisis, colleges and universities have faced increased pressure to identify essential disciplines, and cut the rest.
In 2009, Washington State University announced it would eliminate the department of theatre and dance, the department of community and rural sociology, and the German major – the same year that the University of Louisiana at Lafayette ended its philosophy major.
In 2012, Emory University in Atlanta did away with the visual arts department and its journalism programme.
The cutbacks aren’t restricted to the humanities: in 2011, the state of Texas announced it would eliminate nearly half of its public undergraduate physics programmes.
Even when there’s no downsizing, faculty salaries have been frozen and departmental budgets have shrunk.
Economic theory is caught up with abstract theories rooted in shaky hypotheticals. By mistaking mathematical models for empirical science, economists have become like astrologers, peddling ideas that a public is hungry to believe. Last week’s most-read: ow.ly/10cjf0
But despite the funding crunch, it’s a bull market for academic economists.
According to a 2015 sociological study in the Journal of Economic Perspectives, the median salary of economics teachers in 2012 increased to $103,000 – nearly $30,000 more than sociologists.
For the top 10% of economists, that figure jumps to $160,000, higher than the next most lucrative academic discipline – engineering.
These figures, stress the study’s authors, do not include other sources of income such as consulting fees for banks and hedge funds, which, as many learned from the documentary Inside Job (2010), are often substantial. (Ben Bernanke, a former academic economist and ex-chairman of the Federal Reserve, earns $200,000-$400,000 for a single appearance.)
Unlike engineers and chemists, economists cannot point to concrete objects – cell phones, plastic – to justify the high valuation of their discipline.
Nor, in the case of financial economics and macroeconomics, can they point to the predictive power of their theories.
Hedge funds employ cutting-edge economists who command princely fees, but routinely underperform index funds. Eight years ago, Warren Buffet made a 10-year, $1 million bet that a portfolio of hedge funds would lose to the S&P 500, and it looks like he’s going to collect.
In 1998, a fund that boasted two Nobel Laureates as advisors collapsed, nearly causing a global financial crisis.
The failure of the field to predict the 2008 crisis has also been well-documented. (I think many predicted the coming catastrophe: The timing was political in nature)
In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics […] has succeeded: its central problem of depression prevention has been solved’.
Short-term predictions fair little better – in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.
Nonetheless, surveys indicate that economists see their discipline as ‘the most scientific of the social sciences’.
What is the basis of this collective faith, shared by universities, presidents and billionaires?
Shouldn’t successful and powerful people be the first to spot the exaggerated worth of a discipline, and the least likely to pay for it?
In the hypothetical worlds of rational markets, where much of economic theory is set, perhaps.
But real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy. (Math models should be generated from actual data, and Not used to generate hypothetical numbers)
As an extreme example, take the extraordinary success of Evangeline Adams, a turn-of-the-20th-century astrologer whose clients included the president of Prudential Insurance, two presidents of the New York Stock Exchange, the steel magnate Charles M Schwab, and the banker J P Morgan.
To understand why titans of finance would consult Adams about the market, it is essential to recall that astrology used to be a technical discipline, requiring reams of astronomical data and mastery of specialised mathematical formulas.
‘An astrologer’ is, in fact, the Oxford English Dictionary’s second definition of ‘mathematician’. For centuries, mapping stars was the job of mathematicians, a job motivated and funded by the widespread belief that star-maps were good guides to earthly affairs.
The best astrology required the best astronomy, and the best astronomy was done by mathematicians – exactly the kind of person whose authority might appeal to bankers and financiers.
In fact, when Adams was arrested in 1914 for violating a New York law against astrology, it was mathematics that eventually exonerated her.
During the trial, her lawyer Clark L Jordan emphasised mathematics in order to distinguish his client’s practice from superstition, calling astrology ‘a mathematical or exact science’. Adams herself demonstrated this ‘scientific’ method by reading the astrological chart of the judge’s son.
The judge was impressed: the plaintiff, he observed, went through a ‘mathematical process to get at her conclusions… I am satisfied that the element of fraud… is absent here.’
Romer compares debates among economists to those between 16th-century advocates of heliocentrism and geocentrism
The enchanting force of mathematics blinded the judge – and Adams’s prestigious clients – to the fact that astrology relies upon a highly unscientific premise, that the position of stars predicts personality traits and human affairs such as the economy. It is this enchanting force that explains the enduring popularity of financial astrology, even today.
The historian Caley Horan at the Massachusetts Institute of Technology described to me how computing technology made financial astrology explode in the 1970s and ’80s.
‘Within the world of finance, there’s always a superstitious, quasi-spiritual trend to find meaning in markets,’ said Horan. ‘Technical analysts at big banks, they’re trying to find patterns in past market behaviour, so it’s not a leap for them to go to astrology.’
In 2000, USA Today quoted Robin Griffiths, the chief technical analyst at HSBC, the world’s third largest bank, saying that ‘most astrology stuff doesn’t check out, but some of it does’.
Ultimately, the problem isn’t with worshipping models of the stars, but rather with uncritical worship of the language used to model them, and nowhere is this more prevalent than in economics.
The economist Paul Romer at New York University has recently begun calling attention to an issue he dubs ‘mathiness’ – first in the paper ‘Mathiness in the Theory of Economic Growth’ (2015) and then in a series of blog posts.
Romer believes that macroeconomics, plagued by mathiness, is failing to progress as a true science should, and compares debates among economists to those between 16th-century advocates of heliocentrism and geocentrism.
Mathematics, he acknowledges, can help economists to clarify their thinking and reasoning. But the ubiquity of mathematical theory in economics also has serious downsides: it creates a high barrier to entry for those who want to participate in the professional dialogue, and makes checking someone’s work excessively laborious. Worst of all, it imbues economic theory with unearned empirical authority.
‘I’ve come to the position that there should be a stronger bias against the use of math,’ Romer explained to me. ‘If somebody came and said: “Look, I have this Earth-changing insight about economics, but the only way I can express it is by making use of the quirks of the Latin language”, we’d say go to hell, unless they could convince us it was really essential. The burden of proof is on them.’
Right now, however, there is widespread bias in favour of using mathematics. The success of math-heavy disciplines such as physics and chemistry has granted mathematical formulas with decisive authoritative force. Lord Kelvin, the 19th-century mathematical physicist, expressed this quantitative obsession:
When you can measure what you are speaking about and express it in numbers you know something about it; but when you cannot measure it… in numbers, your knowledge is of a meagre and unsatisfactory kind.
(The irony is that economics can be measured, and the math models are attempts to fit the massive data of all kinds of measures)
The trouble with Kelvin’s statement is that measurement and mathematics do not guarantee the status of science – they guarantee only the semblance of science. When the presumptions or conclusions of a scientific theory are absurd or simply false, the theory ought to be questioned and, eventually, rejected.
The discipline of economics, however, is presently so blinkered by the talismanic authority of mathematics that theories go overvalued and unchecked. (Should be at least evaluated at each crisis and changed)
Romer is not the first to elaborate the mathiness critique.
In 1886, an article in Science accused economics of misusing the language of the physical sciences to conceal ‘emptiness behind a breastwork of mathematical formulas’.
More recently, Deirdre N McCloskey’s The Rhetoric of Economics (1998) and Robert H Nelson’s Economics as Religion (2001) both argued that mathematics in economic theory serves, in McCloskey’s words, primarily to deliver the message ‘Look at how very scientific I am.’
After the Great Recession, the failure of economic science to protect our economy was once again impossible to ignore.
In 2009, the Nobel Laureate Paul Krugman tried to explain it in The New York Times with a version of the mathiness diagnosis. ‘As I see it,’ he wrote, ‘the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.’ Krugman named economists’ ‘desire… to show off their mathematical prowess’ as the ‘central cause of the profession’s failure’. (At least the models should be simple for the financial people understand what they are applying)
The mathiness critique isn’t limited to macroeconomics.
In 2014, the Stanford financial economist Paul Pfleiderer published the paper ‘Chameleons: The Misuse of Theoretical Models in Finance and Economics’, which helped to inspire Romer’s understanding of mathiness.
Pfleiderer called attention to the prevalence of ‘chameleons’ – economic models ‘with dubious connections to the real world’ that substitute ‘mathematical elegance’ for empirical accuracy.
Like Romer, Pfleiderer wants economists to be transparent about this sleight of hand. ‘Modelling,’ he told me, ‘is now elevated to the point where things have validity just because you can come up with a model.’
The notion that an entire culture – not just a few eccentric financiers – could be bewitched by empty, extravagant theories might seem absurd. How could all those people, all that math, be mistaken?
This was my own feeling as I began investigating mathiness and the shaky foundations of modern economic science. Yet, as a scholar of Chinese religion, it struck me that I’d seen this kind of mistake before, in ancient Chinese attitudes towards the astral sciences.
Back then, governments invested incredible amounts of money in mathematical models of the stars. To evaluate those models, government officials had to rely on a small cadre of experts who actually understood the mathematics – experts riven by ideological differences, who couldn’t even agree on how to test their models.
And, of course, despite collective faith that these models would improve the fate of the Chinese people, they did not.
Astral Science in Early Imperial China, a forthcoming book by the historian Daniel P Morgan, shows that in ancient China, as in the Western world, the most valuable type of mathematics was devoted to the realm of divinity – to the sky, in their case (and to the market, in ours).
Just as astrology and mathematics were once synonymous in the West, the Chinese spoke of li, the science of calendrics, which early dictionaries also glossed as ‘calculation’, ‘numbers’ and ‘order’. Li models, like macroeconomic theories, were considered essential to good governance.
In the classic Book of Documents, the legendary sage king Yao transfers the throne to his successor with mention of a single duty: ‘Yao said: “Oh thou, Shun! The li numbers of heaven rest in thy person.”’
China’s oldest mathematical text invokes astronomy and divine kingship in its very title – The Arithmetical Classic of the Gnomon of the Zhou. The title’s inclusion of ‘Zhou’ recalls the mythic Eden of the Western Zhou dynasty (1045–771 BCE), implying that paradise on Earth can be realised through proper calculation.
The book’s introduction to the Pythagorean theorem asserts that ‘the methods used by Yu the Great in governing the world were derived from these numbers’. It was an unquestioned article of faith: the mathematical patterns that govern the stars also govern the world.
Faith in a divine, invisible hand, made visible by mathematics. No wonder that a newly discovered text fragment from 200 BCE extolls the virtues of mathematics over the humanities. In it, a student asks his teacher whether he should spend more time learning speech or numbers. His teacher replies: ‘If my good sir cannot fathom both at once, then abandon speech and fathom numbers, [for] numbers can speak, [but] speech cannot number.’
Modern governments, universities and businesses underwrite the production of economic theory with huge amounts of capital. The same was true for li production in ancient China. The emperor – the ‘Son of Heaven’ – spent astronomical sums refining mathematical models of the stars.
Take the armillary sphere, such as the two-metre cage of graduated bronze rings in Nanjing, made to represent the celestial sphere and used to visualise data in three-dimensions. As Morgan emphasises, the sphere was literally made of money. Bronze being the basis of the currency, governments were smelting cash by the metric ton to pour it into li. A divine, mathematical world-engine, built of cash, sanctifying the powers that be.
The enormous investment in li depended on a huge assumption: that good government, successful rituals and agricultural productivity all depended upon the accuracy of li.
But there were, in fact, no practical advantages to the continued refinement of li models. The calendar rounded off decimal points such that the difference between two models, hotly contested in theory, didn’t matter to the final product.
The work of selecting auspicious days for imperial ceremonies thus benefited only in appearance from mathematical rigour. And of course the comets, plagues and earthquakes that these ceremonies promised to avert kept on coming.
Farmers, for their part, went about business as usual. Occasional governmental efforts to scientifically micromanage farm life in different climes using li ended in famine and mass migration.
Like many economic models today, li models were less important to practical affairs than their creators (and consumers) thought them to be. And, like today, only a few people could understand them.
In 101 BCE, Emperor Wudi tasked high-level bureaucrats – including the Great Director of the Stars – with creating a new li that would glorify the beginning of his path to immortality. The bureaucrats refused the task because ‘they couldn’t do the math’, and recommended the emperor outsource it to experts.
The equivalent in economic theory might be to grant a model high points for success in predicting short-term markets, while failing to deduct for missing the Great Recession
The debates of these ancient li experts bear a striking resemblance to those of present-day economists.
In 223 CE, a petition was submitted to the emperor asking him to approve tests of a new li model developed by the assistant director of the astronomical office, a man named Han Yi.
At the time of the petition, Han Yi’s model, and its competitor, the so-called Supernal Icon, had already been subjected to three years of ‘reference’, ‘comparison’ and ‘exchange’. Still, no one could agree which one was better. Nor, for that matter, was there any agreement on how they should be tested.
In the end, a live trial involving the prediction of eclipses and heliacal risings was used to settle the debate.
With the benefit of hindsight, we can see this trial was seriously flawed. The helical rising (first visibility) of planets depends on non-mathematical factors such as eyesight and atmospheric conditions. That’s not to mention the scoring of the trial, which was modelled on archery competitions (Unrelated measure, Not measuring valid parameter). Archers scored points for proximity to the bullseye, with no consideration for overall accuracy. The equivalent in economic theory might be to grant a model high points for success in predicting short-term markets, while failing to deduct for missing the Great Recession.
None of this is to say that li models were useless or inherently unscientific. For the most part, li experts were genuine mathematical virtuosos who valued the integrity of their discipline. Despite being based on inaccurate assumptions – that the Earth was at the centre of the cosmos – their models really did work to predict celestial motions.
Imperfect though the live trial might have been, it indicates that superior predictive power was a theory’s most important virtue. All of this is consistent with real science, and Chinese astronomy progressed as a science, until it reached the limits imposed by its assumptions.
However, there was no science to the belief that accurate li would improve the outcome of rituals, agriculture or government policy.
No science to the Hall of Light, a temple for the emperor built on the model of a magic square. There, by numeric ritual gesture, the Son of Heaven was thought to channel the invisible order of heaven for the prosperity of man. This was quasi-theology, the belief that heavenly patterns – mathematical patterns – could be used to model every event in the natural world, in politics, even the body.
Macro- and microcosm were scaled reflections of one another, yin and yang in a unifying, salvific mathematical vision. The expensive gadgets, the personnel, the bureaucracy, the debates, the competition – all of this testified to the divinely authoritative power of mathematics.
The result, then as now, was overvaluation of mathematical models based on unscientific exaggerations of their utility.
In ancient China it would have been unfair to blame li experts for the pseudoscientific exploitation of their theories. These men had no way to evaluate the scientific merits of assumptions and theories – ‘science’, in a formalised, post-Enlightenment sense, didn’t really exist.
But today it is possible to distinguish, albeit roughly, science from pseudoscience, astronomy from astrology. Hypothetical theories, whether those of economists or conspiracists, aren’t inherently pseudoscientific. Conspiracy theories can be diverting – even instructive – flights of fancy. They become pseudoscience only when promoted from fiction to fact without sufficient evidence.
(But for no avail. Experimental minds to learn how to design and run experiments are Not formed in schools, even in most universities)
Romer believes that fellow economists know the truth about their discipline, but don’t want to admit it. ‘If you get people to lower their shield, they’ll tell you it’s a big game they’re playing,’ he told me. ‘They’ll say: “Paul, you may be right, but this makes us look really bad, and it’s going to make it hard for us to recruit young people.”’
Demanding more honesty seems reasonable, but it presumes that economists understand the tenuous relationship between mathematical models and scientific legitimacy.
In fact, many assume the connection is obvious – just as in ancient China, the connection between li and the world was taken for granted. When reflecting in 1999 on what makes economics more scientific than the other social sciences, the Harvard economist Richard B Freeman explained that economics ‘attracts stronger students than [political science or sociology], and our courses are more mathematically demanding’.
In Lives of the Laureates (2004), Robert E Lucas Jr writes rhapsodically about the importance of mathematics: ‘Economic theory is mathematical analysis. Everything else is just pictures and talk.’ Lucas’s veneration of mathematics leads him to adopt a method that can only be described as a subversion of empirical science:
The construction of theoretical models is our way to bring order to the way we think about the world, but the process necessarily involves ignoring some evidence or alternative theories – setting them aside. That can be hard to do – facts are facts – and sometimes my unconscious mind carries out the abstraction for me: I simply fail to see some of the data or some alternative theory.
Even for those who agree with Romer, conflict of interest still poses a problem. Why would skeptical astronomers question the emperor’s faith in their models? In a phone conversation, Daniel Hausman, a philosopher of economics at the University of Wisconsin, put it bluntly: ‘If you reject the power of theory, you demote economists from their thrones. They don’t want to become like sociologists.’
George F DeMartino, an economist and an ethicist at the University of Denver, frames the issue in economic terms. ‘The interest of the profession is in pursuing its analysis in a language that’s inaccessible to laypeople and even some economists,’ he explained to me. ‘What we’ve done is monopolise this kind of expertise, and we of all people know how that gives us power.’
Every economist I interviewed agreed that conflicts of interest were highly problematic for the scientific integrity of their field – but only tenured ones were willing to go on the record. ‘In economics and finance, if I’m trying to decide whether I’m going to write something favourable or unfavourable to bankers, well, if it’s favourable that might get me a dinner in Manhattan with movers and shakers,’ Pfleiderer said to me. ‘I’ve written articles that wouldn’t curry favour with bankers but I did that when I had tenure.’
when mathematical theory is the ultimate arbiter of truth, it becomes difficult to see the difference between science and pseudoscience
Then there’s the additional problem of sunk-cost bias.
If you’ve invested in an armillary sphere, it’s painful to admit that it doesn’t perform as advertised. When confronted with their profession’s lack of predictive accuracy, some economists find it difficult to admit the truth.
Easier, instead, to double down, like the economist John H Cochrane at the University of Chicago. The problem isn’t too much mathematics, he writes in response to Krugman’s 2009 post-Great-Recession mea culpa for the field, but rather ‘that we don’t have enough math’. Astrology doesn’t work, sure, but only because the armillary sphere isn’t big enough and the equations aren’t good enough.
If overhauling economics depended solely on economists, then mathiness, conflict of interest and sunk-cost bias could easily prove insurmountable. Fortunately, non-experts also participate in the market for economic theory.
If people remain enchanted by PhDs and Nobel Prizes awarded for the production of complicated mathematical theories, those theories will remain valuable. If they become disenchanted, the value will drop.
Economists who rationalise their discipline’s value can be convincing, especially with prestige and mathiness on their side. But there’s no reason to keep believing them. The pejorative verb ‘rationalise’ itself warns of mathiness, reminding us that we often deceive each other by making prior convictions, biases and ideological positions look ‘rational’, a word that confuses truth with mathematical reasoning.
To be rational is, simply, to think in ratios, like the ratios that govern the geometry of the stars.
Yet when mathematical theory is the ultimate arbiter of truth, it becomes difficult to see the difference between science and pseudoscience. The result is people like the judge in Evangeline Adams’s trial, or the Son of Heaven in ancient China, who trust the mathematical exactitude of theories without considering their performance – that is, who confuse math with science, rationality with reality.
There is no longer any excuse for making the same mistake with economic theory. For more than a century, the public has been warned, and the way forward is clear.
It’s time to stop wasting our money and recognise the high priests for what they really are: gifted social scientists who excel at producing mathematical explanations of economies, but who fail, like astrologers before them, at prophecy.
Are you poor? Raise your hand!
Posted on: January 20, 2009
Are you poor? Raise your hand! (January 20, 2009)
If you are in a situation that prevents you to participate in social life then raise your hand: you are considered materially and morally poor. It follows that you are poor if you are stuck in your “home” because you cannot mingle with people, in a society that expects standards in elegance, in frequency of eating out, of taking vacations, and of transportation means. In a culture of “fitting in” you are poor if you were raised not to incur debt that your hard earned job cannot cover. You are the poorer if the standard of living in your country is expensive and the facilities of support are not suitable in times of emergencies, for health coverage, for children well being, for continuing education, and for opportunities to work.
If you feel ashamed to invite “friends” home because it is in shamble, the furniture and appliances outdated, or the walls needing another layer of paints then you are poor in such a society. If you feel inclined to cancel invitations to weddings because you cannot afford a decent gift for the married couple then you are poor in such a society. If you are unable to enroll your kids in private schools because public schools are considered not equipped for the education “performance” standards then you are poor in such a society. You got the gist of my definition; except in situations of basic survival necessities, then the concept of being poor is specific to the culture and tradition of a society.
There are many definitions of belonging to a “poor status”; it ranges from daily nutritional quality, to the minimum hourly labor rate, to the minimum amount for renting, and leading an independent living; to the bare subsistence for survival such is the condition of over two billion people around the world.
The European Union has come up with a statistical limit for being classified as poor. The office of statistics in the EU (Eurostat) adopted the median income for a State (the dividing amount of income that splits two equal number of earners) and then categorizes the poor whose income is within the 60% of the lower median income range. Thus, it does not matter how the State’s economy improved, or the standard of living improved, or your income improved there will always be 30% of the population considered as poor (for example, 60% *50% = 30%). Consequently, an EU State member has to allocate budget and plan to support 30% of the needy population.
The EU definition for being considered poor is an operational categorization for a consumer economy. If your income or the financial facility structure in your society prevents you to fit in a consumer society, to purchase an outfit that is the fashion of the year, to participate in the cultural and artistic activities, to visit a bar once a month, to go out and see the latest movie, or to buy tickets for festivities and sport events then you are not promoting the internal market economy and you are poor and need serious support to fit in as a citizen.
The life of the hermit in a remote location is certainly hard; the life of a forced hermit in towns and cities is by far much harsher. The hermit in cities has to construct his own model or philosophy to life and death; he has to build his specific character to survive the harsh facts within his society. I have this theory: a poor State economy combined with poor financial credit facilities and high consumer standards the higher the odds for frequent civil wars.
Blood all over the floor (December 8, 2008)
It is 1952 and General Douglas Mac Arthur was saying “Our relative decline, our incapacity to conserve our resources, the vertiginous growth of our national debt, and the weight of our financial engagements are putting our next generations at risk”.
It is 1972 and the inflation was rampant; the Midwest farmers were in high debt and Latin America was in acute debt. President Carter order the FED chairman Paul Volcker to contain inflation.
Volcker invited the Wall Street Journal executives for lunch and asked them “When blood is all over the floor, would you guys support my policy?”
The executives did not hesitate and they were affirmative.
The US returned to a strong dollar policy.
The Midwest farmers sold their farms at peanut prices and Latin America experienced blood shed for half a century, such as genocides, dictatorship, military coups, facilitating the investment of the US multinationals, destroying the equatorial forests, and barbarically excavating raw material mines in Chili and Peru and so on.
The US has been indebted for over half a century at the expense of over two billion people living under the survival level. I have a simple question:
And the question remains|:”why the US should not experience blood on the floor?”
In the nineties, many books were published warning that the premises and practices of “mondialization, or globalization” are volatile and highly flammable.
For example, Danny Roderick (1997), in his “Has globalization gone too far in its way?”, stated that
1. First, eliminating regulations on commerce and investment was premature;
2. Second, that there was lack of fairness in the practices among the developed and under-developed States.
3. Third, that the US and European quality standards were being forced on States that cannot produce according to the satisfaction of the western nations; that was an excellent excuse for outsourcing and relocating factories in countries with cheaper manpower; the consequence was that all these products could not be exported but into States with the same quality standards.
What would happen if these markets stopped importing?
All the products that are not fit for inner commerce would have to be sold as scrap.
4. Fourth, the coverage of social guarantees was exhausted in the under-developed States and the population left to mend for themselves. The Establishments in the US mocked these warnings since “History has reached an end” and the US economic model was in for ever.
The unemployed in the US have no where to go to die within their family members.
In China, millions of the little people are being forced back into their remote villages. To do what?
Most probably the Chinese out of work in sweat shop factories would die away from urban eyes and far from the media.
The US people have been in debt for a decade to cover all kind of charges because their earnings in the last two decades were lowered constantly while 1% owns one fifth of the US wealth.
I have a simple question “why those blood sucker billionaire capitalists should not have their blood spattering on the floor?”
For regaining confidence in Capitalism: What is “Gold-paper currencies”?
Posted on: December 1, 2008
For regaining confidence in Capitalism: What is “Gold-paper currencies”?
For a sustainable growth: Gold-paper currencies? (October 28, 2008)
I have this gut feeling that, if one major superpower does not adopt for a period gold currency, then confidence in paper money or investment gimmicks is not going to fly.
In these uncertain financial crisis and economical deflation, I suggest a psychological incentive for people to recover some sense of value to their currencies. My idea is to issue hard currencies that are an alloy containing the quantity of gold commensurate to the large denominations. This currency would be almost as thin as paper money and could not be forged, unless the amount of gold is the same as the officially issued currencies.
This project should be feasible: Gold can be made as thin as needed, and if we find a cheap metal or plastic that can add resistance and flexibility to the currency to be folded, and handled as paper money then everybody would be satisfied.
At first, the gold paper-like money could be distributed at a rate of say 1% higher over its real value to recover the upfront expenses, in addition to the increase in market value of gold, averaged once a week. These extra expenses would not discourage the use of paper money for those who could not afford the extra cost of gold currencies.
The higher denomination currencies would be larger to keep the same thinness as the other smaller denominations. As the value of gold would certainly keep increasing, the government would, at interval, retrieve the older currencies from the market and replace them with smaller size currencies containing the market value of the amount of gold in the alloy. This idea is logical because the gold-paper currencies would require less gold as its value increases.
Travelers could then exchange their State own gold-paper money abroad and register them at any bank for Interpol investigations in case of thefts and get exactly the same money value of the respective States. Obviously, all governments that signed in to this system would have to submit to international control when issuing gold-paper money for credibility and quality reasons.
I believe that with real gold-paper money then the businesses of currency speculations and rate of exchanges should wane and quickly disappear. What might remain is currency trade or the accumulation of gold in rich sovereign funds.
The governments would quickly learn to issue enough gold-paper currency to satisfy internal commerce. The superpowers and regional powers would exercise political and military “incentives” on weaker and unstable States to issue more gold-paper currency than needed for inner commerce but then they would have to deliver real gold and good value products to retrieve the surpluses.
The US Administrations do not have real value money or real value economy to hoard gold and will not be able to do so for many decades to come; only China, India and the rich oil-producing States with small populations would be the major players in currency trade of gold-paper money.
There are several policies that governments would revisit to manage this new system. Governments might issues a composite weight of the amount of gold-paper and regular paper money that should satisfy internal commerce. Either the gold-paper money would concentrate in the hands of the rich and thus reducing commerce to regular money with industries specialized in high quality and luxury products for the rich and industries focusing on lower quality and basic products for the masses; or the little people would not desist from the gold-paper and use them as personal saving account in their homes and thus deflation would hit the economy due to the lack of currency circulation.
Consequently, governments would have choices to either limit the amount of gold-paper in circulation to encourage circulation of money or eliminate regular paper currencies to force the masses into liberating their hoarded gold-paper.
The same pitfalls and recurrences of the present monetary system would be exhibited but the remedies would be more straightforward to comprehend by the common people. Furthermore, an interesting phenomenon will emerge: cultures where mostly little people horde the gold-papers and cultures where gold-papers are concentrated in the class of the rich. Well, if there is civilization clashes then this division between the two types of cultures would set the foundations for a new sociology science where the manipulation of hard money is the first principle.
This system would require many fine tuning but the advantages must far exceed the disadvantages for smaller and weaker States. Countries with real value-added economies would not be affected by any mischievous financial embezzlement schemes in destabilizing their financial status because the middle classes would have re-learned the value of hard money and desist from speculative schemes for some times.
This re-learning process of the value of real hard money is the fundamental benefit of the new system so that financial history would repeat its cycle of development for the century. In any case a genuine International Monetary Control and Management Fund would be instituted to focus on the circulation of money within and among States and help in the synchronization of real commerce.
The crux of this gold-paper currency system is to stabilize growth to a sustainable level for human kind. Since gold is limited on Earth and its production has reached a limit, wild GNP rate of increases would slow down; redundant and irrelevant consumer products would make room for basic products essentials for the survival of mankind. The new economical strategies would focus on cutting cost, cutting waste, re-cycling and vigorously researching for substitute renewable energies for the benefit of all States.
Priorities and revised economic models for enterprises (November 29, 2008)
Within a month of the Wall Street financial crash, major EU industries (excluding the financial, real estates, and insurance institutions) have laid off over 62, 000 jobs and the USA over 77, 000 jobs. There is no end in the forthcoming months and the jobless rate has broken all record high. The communication, auto, computer hardware, retail stores, airline, and chemical companies are the hardest hit so far. As the jobless rate increases then society would drift into unstable climate of insecurity in individual health and safety and retention of their properties. Without a climate of security no influx of investment can repair the long-term malaise in the slow moving society to recovery. It is a definite pattern that in any downturn the workers, elderly and new employees, are the first to be laid off. As if it is the manpower that was the culprit and not the management. Consequently, a revised understanding of what constitute the worst case impact on a society should be evaluated.
Economical models for the productivity of enterprises need to be revised to include the sustainability of enterprises under fluctuating and cyclical financial crisis. The working capital should be able to remain intact for the demand cycle and the value added in manpower quality of the main industry units unaffected by the flux of capitals. Consequently, I suggest tackling two fundamental concepts.
First, the working capital should be managed differently from the general acceptable accounting procedures to resist fluctuation in central rate and money devaluation. It is very reasonable that the retirement funds of the manpower and the stocks purchased in the company by the manpower be within the working capital management. The manpower should then feel highly active to evaluating and discussing how the working capital is allocated and invested.
Second, we need to start a new field for defining added-values and how to measure it concretely instead of rationalizing it as a proxy ratio. Added values should be measured accurately because it is intrinsically related to the quality of manpower. Added-value is what makes an industry viable economically to the workers, stakeholders, and society in general. It would not be a piece of cake to operation value-adding parameters; otherwise I would not be suggesting a new economic field for the characterization of what we mean by value-adding economy. Every industry would have to define its value adding element such as in the service industry, hardware products, software products, chemical, car, heavy duty machineries, tourism industry, commercial banking, and financial investment banking, and so on. Every industry has it proper cyclical market demands and its competitors, localized or multinational, dependent or not on cyclical supplies of raw materials or manpower.
I am afraid that the first criterion that would jump to mind is for the concept of value-added economy to be represented in monetary terms, which is not the proper criterion. Value-added economy is the investment in the manpower; for example, programs in continuing education, acquiring new skills, versatility and flexibility to fill vacancies, knowledge of the competition, the products, the tools, and the equipments. Value-added economy is raising the quality of the manpower so that a large company would aid in subsidizing private complementary companies, from among its qualified personnel, when the tough gets going. Value-added economy is elevating the knowledge of the personnel and assisting them to find new jobs during harsh downturns. The only monetary value or ratio associated with added value would be the expense (value added capital) invested for manpower quality relative to working capital (VAC/ WC) for raising the quality and professionalism of the manpower. When this ratio diminishes then a company has gotten lax and is turning away from the new fundamentals. Obviously, an independent team should be hired to prepare, control, manage, and evaluate the effective progress in manpower quality at all levels of skills.
Quantifying the quality of workers and employees is the main task in measuring value-added industries; it is feasible and its time has finally come and it should be the optimizing factor in equations instead of rates in profit, shareholders equity, return on capital and so forth. Inevitably most of the variables used in current optimizing model of financial and economic problems would still be effective, many with significant re-definitions, but when the re-orientation is based on the added value of manpower then a new picture would emerge and standard financial analysis re-discovered.
The quality level of the manpower can be defined as the potential added value (PAV) in time of crisis and the working added value (WAV) in normal business cycles. WAV is the criterion that stocks in the market are valuated in addition to other financial criteria; PAV would have critical significance in times of hardships, especially, if the company recorded the events when this potential was managed and directed in previous situations to overcome serious market or natural conditions. As armies conduct maneuvers to test the readiness of its effective so companies have the duty to conduct maneuvering re-organizations of potentials to test and evaluate its field readiness and re-evaluate its programs for value adding quality in manpower. I think that the more credible and frequent the organizational maneuverings the higher the market value of the company. The more frequent the maneuverings the more evident would be the needs for downsizing and decentralizing and retaining coherent and manageable number in work force.
Adonis Diaries 