The Reincarnation of Crises

Mankind has been using money for thousands of years. Yet money is still a nebulous concept. The word itself comes from a title of the Roman deity Juno – Juno Moneta – the goddess of warning and advice, which seems uncannily appropriate, given the state of current affairs. However, I do not intend to embark upon an acute inquiry into the nature of money; rather, the purpose of this post is to share my perspective on the state of the world and the cyclical reincarnation of its problems.

Philip Coggan’s recent book, “Paper Promises: Money, Debt and the New World Order”, shares a number of tremendously insightful case studies. One of which is the story of John Law (1671-1729): the Scottish mathematician, gambler and early economist who left his homeland, and moved to France, after killing a man in a duel. Law was the first economist to implement ‘monetary easing’ as a way of boosting the economy (and paying off the French monarchy’s gargantuan debts). The bottom line was that Law’s scheme spectacularly failed. The credit he created did not get used to create new businesses or trade; instead, the money was diverted to speculation. Law could not stop the inflationary impact of the extra money he created without also destroying the speculative frenzy that supported his system. When his central bank collapsed, he was dismissed from royal service and eventually died in poverty.

John Law’s experiment was, in essence, an attempt to redefine money. The recent Masters of the Universe- the Finance dons- have done the very same. Once upon a time, money took the sole form of gold and silver coins. Now, it has evolved (or perhaps mutated, depending on your beliefs) into fast-moving digital entries on Bloomberg screens. Now I am not demonising modern finance, as it is crucial to material development. However we cannot afford to ignore the ominous historic parallels: John Law’s 18th century experiment was conceptually equivalent to the 21st century financial experiments that led to the current crisis. In both situations, money was redefined: In the Law case, a system of paper currency was introduced, replacing commodity money; in the current era, financial instruments became more intricate and complex, such as Over-The-Counter Derivatives.  Both of these new systems created tangible material gains, but then they both overindulged and crashed: “Wall Street got drunk… and now it’s got a hangover,” as former President George Bush eloquently summarised.

Questions loom large: Are we, the human race, truly developing? Are we fostering sustainable long run living? Or is the long run simply the reincarnation of the volatile short run? Will society be forever trapped in immortal cycles of creative destruction?

I recently met Bob Padron at my hall of residence, Netherhall House, in London. He was invited to deliver a presentation on the recent financial crises. Bob is an Economist who was trained at the University of California, Berkley and University of Navarra. He has worked in a number of research roles at academic institutions, including Yale University and also at Investment Banks. His talk was very well researched and he concluded somewhat philosophically. Bob believes that there is no miraculous mechanical cure to the world’s financial problems. Due to the disharmony between Mr. Economics and Mrs. Politics (as validated by the Eurozone fiasco), such a cure is a utopian ideology. But there is perhaps a way out of the medium of gloom. And this is through a shift in expectations. Expectations reduce joy. We, as a society, need to expect less (in material terms). We need to be more grateful for what we have in our lives as opposed to shedding tears over what we do not have. After all there is no limit to material desires. Someone will always have a larger house, a faster car, a sharper suit… If society liberates itself from this material matrix, then perhaps the vociferous circle of destruction can be squared.   No doubt, there will be many who scorn such an ideological solution- even Bob himself recognised the near-impossibility of such a scenario. But it is certainly a notion worth meditating upon.

Through my Ethics in Applied Economics module this year, I came across Michael Sandel’s book, “What Money Can’t Buy: The Moral Limits of Markets.” Sandel argues that we have drifted from having a market economy to being a market society; in recent times, market values have crowded out nonmarket norms in almost every aspect of life. The years leading up to the financial crisis of 2008 were of market triumphalism. They began in the early 1980s, when Ronald Reagan and Margaret Thatcher proclaimed their convictions that markets, not governments held the key to prosperity and freedom. However the glory years are over. The financial crisis serves as testament to the market’s inability to allocate risk efficiently. Many also feel that markets have become detached from morals and it is crucial that the nexus between the two is (re)established. Michael Sandel feels that greed only played a partial role in the financial crisis; the main cause was the expansion of markets, and of market values, into spheres of life where they don’t belong. Market values have crowded out nonmarket values worth caring about.

So this begs the question, do we need to embrace an alternative notion of ‘value’ in society, in order for a sustainable future? I enjoyed a 5-hour tea session with my close friend Neer Sharma, at Yumchaa on Goodge Street, a few weeks ago, and we discussed much of the above. As with most amateur philosophical musings, we were unable to offer constructive solutions but we were happy to pose plenty of problems!

The Economist, Joseph Schumpeter, believed that economic recessions are transition states from one stable economy to another. As changes and errors accumulate in a stable economy, it becomes unstable; a shift occurs, and the economy leaps into a new stable order. Physicist, Max Planck once said that science advances “one funeral at a time”. Perhaps this is the way of the world. And perhaps the reincarnation of crises is inevitable. Yet we must never give up on the quest for sustainable growth. In the words of Oscar Wilde, “Ambition is the germ from which all growth of nobleness proceeds.”

– Dhrupad Karwa

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