"Economics After the Crisis," by Adair Turner, MIT Press 2012
"Money and Sustainability," by Bernard Lietaer, Christian Arnsperger, Sally Goerner, Stefan Brunnhuber, Triarchy Press, 2012
The essential link between "Economics After the Crisis" by Adair Turner and "Money and Sustainability" by Bernard Lietaer and his co-authors is the agreements that the authors arrive at independently: conventional economics is bankrupt, at last revealed by the financial crises of 2008 still reverberating in recessions in real economies worldwide.
Lord Adair Turner who oversaw Britain's Financial Services Authority typifies the elite, top-down view in this slim volume of essays based on his Lionel Robbins Memorial Lectures in 2012. Lord Turner's analysis is worth our attention since he may be tapped as the next head of the Bank of England. He catalogues all the aspects of policy failures and how many were rooted in the many assumptions of conventional economic theory that proved wrong: from "efficient markets" and "rational actors" to the many "externalized" costs. These blinded policy makers, asset managers, corporate executives and accountants to these ignored threats overhanging balance sheets, institutional portfolios and GDP-measured national accounts. Turner pinpoints erroneous discount rates, ignoring of avoided costs, insights of other disciplines and scientific research.
Much of this critique is now commonplace and widely accepted since brain scientists, endocrinologist and behavioral psychologists invalidated much of conventional economics. In addition, economic theories from left to right took much of finance, debt money-creation and credit-allocation as given. Yet many financial models took invalid economic assumptions as their basis, such as general equilibrium, "market completion," and the normal distribution "bell curve" model in statistics.
Lord Turner points to finance, his regulatory bailiwick and how it became a bubble driven by such assumptions and the fact that "making money is the raison d'etre of the financier." Yet he does not dig further into the nature of money, the politics of its creation and how credit is allocated - crucial for his job! Nor does Turner offer much to those looking for deeper reforms such as the need for financial transaction taxes, circuit breakers to curb high frequency trading, separating retail banking from investment banking, curbing derivatives and leverage - making this book less useful.
Enter Bernard Lietaer and his co-authors and their deeper analysis in "Money and Sustainability: the Missing Link." As mentioned, most economic textbooks and financial models take money as a given with its three familiar functions: a unit of account, a medium of exchange and a store of value. Only recently -- as we witness on TV money being printed and monetary policies spotlighted -- have the secretive processes of money-creation and credit-allocation become visible. The financial crises of 2008 and bank bailouts led to the rise of the Tea Party and its early slogan: "where's my bailout?" but was soon captured by big donors and lobbyists for anti-government laissez faire. The global Occupy Movements of the 99% were fueled by similar anger at Wall Street banks, the bailouts and unfairness. Money-creation and banking became a target of closer examination. Even Mervyn King, Governor of the Bank of England opined, "of all the ways of organizing banking, the worst is the one we have today. Change is, I believe, inevitable" (speech in New York, October 25, 2010).
From the time of Aristotle who asserted that money exists "not by nature, but by law," money-creation and credit-allocation have been the essence of politics and power in societies. Kings and rulers controlled money-issuance most often to finance wars, conquest on foreign ventures and to maintain control over their populations. Lietaer and his co-authors delve into this history of money-creation and point to the blindness of all schools of economics from the Austrians to Marxists of the extent to which money-creation influences human behavior, societies and cultures. They examine how fractional reserve banking, and its creation of money as debt overtook direct minting of money by governments and how compound interest and discount rates create un-repayable debts and many of the risk-taking and short-termism which leads to financial collapses.
The authors point out that while private debt has more than 5,000 years of recorded history, the emergence of public debt was in 12th century Venice, secured through a state monopoly on salt. The modern government debt market took off only after the English Consolidating Act of 1751, creating "consuls" and later "gilts" and other government bonds. Central banks began with Sweden's Riksbank in 1668. The Bank of England, founded in 1688, was granted a monopoly over issuing paper money. In the USA, after many conflicts over the role of its earlier national banks, the Federal Reserve Act was passed in 1913, as a private corporation owned by its twelve regional banking groups, with its Federal Reserve Board as its governing façade with members appointed by the President and approved by the Senate. Only in 2011 did a majority in Congress join with media in demanding the first ever audit of the Fed and the over $13 trillion it supplied to the large banks following the 2008 crises (www.sigtarp.gov).
Fast forward to 2012 and the authors cite all the well-known evidence of how finance and markets have changed: globalization, computerized high frequency trading on 50 or more electronic exchanges, 24/7 markets, systemic risk, contagion, herd behavior, securitization, derivatives including credit default swaps, some $4 trillion of daily foreign exchange - with greater leverage and speculation.
Not surprisingly, the authors cite the increasing numbers of crises in financial systems documented by Reinhart and Rogoff in "This Time It's Different" (2010) and the IMF's tally of crises that hit 180 IMF countries between 1970 and 2010 (1971-75, 1976-80, 1981-85, 1986-90, 1996-2000, 2001-2005 and 2006-2010), with 145 banking crises, 208 monetary crashes and 72 sovereign debt crises (IMF, Washington, DC, www.imf.org). The authors ask if a car, a plane or an organization had such a track record, would there not be a universal outcry to send the designers back to the drawing board? They expose an underlying issue: all schools of economic thinking view the monopolistic creation and circulation of a single (national) currency as a given, so they do not see the need to question the current established modus operandi. Even ecological economists are frequently unaware of how central is the assumption of monopolistic bank-debt driven currency in driving unsustainable GDP-growth. Dennis Meadows, co-author of the famous Club of Rome report, Limits to Growth (1972), admits in his foreword to "Sustainability and Money" to the same blind spot.
I began to examine the role of money creation in my "Creating Alternative Futures: The End of Economics" (1978), and I agree with the authors that the design of money, how it is issued and credit is created are indeed hidden variables. Any examination of these is fiercely resisted by those who operate these monetary and credit systems and others with vested interests in maintaining them - including politicians and legislators. Regulators also have been captured in these arbitrary systems and suffer from "theory-induced blindness" to use Daniel Kahneman's term in his "Thinking Fast and Slow" (2011). Mass media and the financial press accept all these conventional models and metrics as given and transmit acceptance to the public of dubious statistics that conceal structural problems, such as unemployment levels and GDP-measured "growth."
The authors explain in detail why none of the current reforms will work and why the next crisis is imminent: most are still rooted in delusional statistics (Beyond GDP) and the unstable structure of global finance. As I have also pointed out for decades, this structure still rests on traditional economic models that misclassify economies as closed systems in general equilibrium (Arrow and Debreu, 1959), assuming a progressive "market completion." In reality, of course, economies are dissipative structures requiring constant input of energy, materials and human effort, resulting in higher levels of entropy in the environment (Henderson, 1981, 1988). Similar errors are the mathematical assumptions of debt-based currencies and compound interest, which force more energy and materials exploitation and eventually lead to un-repayable debt levels and the ubiquitous defaults previously described by Reinhart and Rogoff.
In reality, the economics models must be transcended and incorporated into systems analysis and modeled as complex flow networks using thermodynamics and balancing between the three resources of human development: energy, materials and information, the latter being the dominant factor. When we see financial systems in this light (similar to electrical grids), we see, as the authors show, that they are too interconnected and maximized for too narrow a model of efficiency, which respectively maximize flows of electricity and money. The authors present a model demonstrating the trade-offs between such narrow efficiency and the equally important need for resilience - which generally requires restoring diversity (as in micro-grids for local electricity rather than the vulnerability and transmission losses of national-scale grids).
These two books, taken together, illuminate aspects of our financial system usually neglected but vital to healthier restructuring of our still-fragile, unfair and widely mistrusted financial markets.