In analysing the most recent financial crisis, we can benefit somewhat from the misfortune of recent decades. The approximately 100 crises that have occurred during the last thirty years – as liberalisation policies became dominant – have given us a wealth of experience and mountains of data. If we look over a 150-year period, we have an even richer data set.

With a century and half of clear, detailed information on crisis after crisis, the burning question is not “How did this happen?” but ‘How did we ignore that long history, and think that we had solved the problems with the business cycle’? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris.

Markets are not stable, efficient, or self-correcting

The big lesson that this crisis forcibly brought home – one we should have long known – is that economies are not necessarily efficient, stable or self-correcting.

There are two parts to this belated revelation:

• One is that standard models had focused on exogenous shocks, and yet it’s very clear that a very large fraction of the perturbations to our economy are endogenous.

There are not only short run endogenous shocks; there are long run structural transformations and persistent shocks. The models that focused on exogenous shocks simply misled us – the majority of the really big shocks come from within the economy.

• Secondly, economies are not self-correcting.

More…

To add an asymmetric point on the question of “endogenous” and “exogenous.” If nature, including the economy, is fundamentally asymmetric, then it is interconnected is such a way as to make perfectly exogenous shocks impossible. But borderlines can and should be drawn to define circumstances and cases arising in models within the economy, within nature. But nothing can be totally outside the asymmetric economy. This endogeny, as described in Unicycle, provides a foundation to deduce a progressive ethics of the market, as well as more generally.

It is predictable that the political orientation of believers in a self-righting market would be temperamentally against endogeny and prefer to emphasize “outside” shocks to the economy that would supposedly upset its closed perfection, as though there are perfect circles in reality. The illusion is to think we can step outside the market (try fasting); if we want to help the market, we must do something positive about it.

Heraclitus, according to Plato, famously said something like: we can’t step in the same river twice; he might have added something like: nor can we step out of the “river of asymmetry,” where all our actions together include the bustling marketplace, day after day.

Et voilà! Life can be so simple.

The Immorality of the Interest Rate Hawks

And Paul Krugman wonders, “Will it make any difference that Ben Bernanke has now joined the ranks of the hippies?”

Earlier this week, Mr. Bernanke delivered testimony that should have made everyone in Washington sit up and take notice.

First of all, he pointed out that the budget picture just isn’t very scary, even over the medium run: “The federal debt held by the public … is projected to remain roughly 75 percent of G.D.P. through much of the current decade.”

He then argued that given the state of the economy, we’re currently spending too little, not too much …

Finally, he suggested that austerity in a depressed economy may well be self-defeating even in purely fiscal terms: “Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”

So the deficit is not a clear and present danger, spending cuts in a depressed economy are a terrible idea and premature austerity doesn’t make sense even in budgetary terms …

Mr. Bernanke is a fine economist, but no more so than, say, Columbia’s Joseph Stiglitz, a Nobel laureate and legendary economic theorist whose vocal criticism of our deficit obsession has nonetheless been ignored. No, the point is that Mr. Bernanke’s apostasy may help undermine the argument from authority — nobody who matters disagrees! — that has made the elite obsession with deficits so hard to dislodge.

But let’s back up historically, to the founding of what we might call modern conservatism in early nineteenth-century Britain and France. There were some – Frédéric Bastiat and Jean-Baptiste Say come to mind – who believed that government should put the unemployed to work building infrastructure when markets or production were temporarily disrupted. But they were balanced by those like Nassau Senior, who spoke out against even famine relief: Although a million people would die in the Irish Potato Famine, “that would scarcely be enough.”

Read where we went from there, here. And note the morality; without keeping track of what has been thought, let alone the data, how can we identify extremes? Easy to see how philosophy as a rational discipline gets so easily on the defensive. When you hear that philosophy is just an opinion or that it isn’t relevant or that economics (basically the study of survival) is boring, check your purse or wallet!

Update:

Here’s the article we’ve been waiting for: How Austerity Kills (NYT). And here’s the book! The Body Economic: Why Austerity Kills by David Stuckler, a senior research leader in sociology at Oxford, and Sanjay Basu, an assistant professor of medicine and an epidemiologist in the Prevention Research Center at Stanford.

More: Austerity: The History of a Pernicious Idea by Mark Blyth, reviewed by Ruy Teixeira in The New Republic.

Paul Krugman presents: Paul De Grauwe and the Rehn of Terror

“Nobody has taught me as much about the euro crisis as Paul De Grauwe, who brought to the fore a crucial point almost everyone was overlooking: the importance of self-fulfilling debt panics in countries that no longer have their own currencies. Now he has a new paper with Yuemei Ji following up on that insight, and offering yet more evidence of the incredible unwisdom of European economic policy.” –Paul Krugman

A certain strand of Beltway political thought has a problem with the budget deficit. By definition the failure of the parties to agree to a balanced deficit reduction package is equally the fault of both Democrats and Republicans. That’s a core element of BipartisanThink. At the same time, deficit hawks actively want to get politicans to agree with their prescriptions. So the risk always exists that the hawks will get what they want and someone will agree with them. That’s what’s happened with Barack Obama and most of the Democratic congressional leadership. At that point, a paradox occurs since again, by definition both parties are equally to blame.

Jonathan Chait notes that the Washington Post editorial page has seized the bull by the horns today, blaming both sides equally for the sequester standoff, even though the Post’s editorial board dislikes the GOP’s proposed sequester offsets—deep cuts in programs to poor people—and favors the Democrats’ proposed sequester offsets—cuts in farm subsidies and the “Buffett rule.” But where Chait sees illogic, I see the exploitation of an important principle. It involves the use of the word “serious,” as in, “neither party has staked out anything like a serious negotiating position.” By invoking the Principle of Seriousness, a way is provided out of the box …

Once you embrace the Principle of Seriousness, the way is clear for rigorous BipartisanThink.

Yglesias provides further scenarios in BipartisanThink Takes a Counterfactual Turn.

In David Brooks, Obama Plan Birther, Repents!  Chait shows us how the paradox of bipartisan symmetry winds up with absolutist extremes.

As a general rule, the craziest, most rabid, most provably false political ideas come from the political extremes. They flourish within small ideological subcultures that lock out opposing viewpoints. But occasionally such weird myths can be found not on the fringes but in the center.

A virulent example of this has emerged during the latest iteration of the fiscal debate. Advocates of what Matthew Yglesias calls “BipartisanThink” have found themselves trapped between two impulses. On the one hand, they fervently believe that the country’s most vital priority is to pass a plan to reduce the deficit through a mix of cuts to retirement programs and reduced tax deductions. On the other hand, they believe with equal fervor that the two parties are equally to blame for the country’s problems in general, and the failure to pass such a plan in particular.

Their problem is that one party agrees with them completely, and the other rejects them. This creates a paradox between the two mental tentpoles of BipartisanThink. The solution is to simply wish away the facts, thus bringing them into line with reality.

Life is asymmetric; so is balance. The nuanced positions and shades of meaning that David Brooks and the BipartisanThink cohort perhaps aspire to are not to be found in trying to close the circle with pure symmetry. They will only wind up increasingly excluding the reality of what is needed. They become the cold opposite of moderation, opening the back door to fanaticism. The responsibility is almost scary, because without these “moderates,” how would the mad Tea Party (including its so-called regular folks) ever get any traction?

For another example of this unfunny phenomenon of myth and denial of reason, here is Paul Krugman via Mark Thoma, where the various terms like “Principle of Seriousness” and “BipartisanThink” are added to “symmetry”:

As always, many pundits want to portray the deadlock … as a situation in which both sides are at fault, and in which both should give ground. But there’s really no symmetry here. A middle-of-the-road solution would presumably involve a mix of spending cuts and tax increases; well, that’s what Democrats are proposing, while Republicans are adamant that it should be cuts only.

Words almost fail to describe the paradox. New ones most welcome! within reason, or not. Time for a break.

Equal Opportunity, Our National Myth By JOSEPH STIGLITZ

President Obama’s second Inaugural Address used soaring language to reaffirm America’s commitment to the dream of equality of opportunity: “We are true to our creed when a little girl born into the bleakest poverty knows that she has the same chance to succeed as anybody else, because she is an American; she is free, and she is equal, not just in the eyes of God but also in our own.”

The gap between aspiration and reality could hardly be wider. Today, the United States has less equality of opportunity than almost any other advanced industrial country. Study after study has exposed the myth that America is a land of opportunity. This is especially tragic: While Americans may differ on the desirability of equality of outcomes, there is near-universal consensus that inequality of opportunity is indefensible. The Pew Research Center has found that some 90 percent of Americans believe that the government should do everything it can to ensure equality of opportunity.

. . .

Economic mobility in the United States is lower than in most of Europe and lower than in all of Scandinavia.

. . .

How do we explain this? Some of it has to do with persistent discrimination. Latinos and African-Americans still get paid less than whites, and women still get paid less than men, even though they recently surpassed men in the number of advanced degrees they obtain. Though gender disparities in the workplace are less than they once were, there is still a glass ceiling: women are sorely underrepresented in top corporate positions and constitute a minuscule fraction of C.E.O.’s.

. . .

The life prospects of an American are more dependent on the income and education of his parents than in almost any other advanced country for which there is data.

After World War II, Europe made a major effort to democratize its education systems. We did, too, with the G.I. Bill, which extended higher education to Americans across the economic spectrum.But then we changed, in several ways. While racial segregation decreased, economic segregation increased. After 1980, the poor grew poorer, the middle stagnated, and the top did better and better.

Americans are coming to realize that their cherished narrative of social and economic mobility is a myth. Grand deceptions of this magnitude are hard to maintain for long — and the country has already been through a couple of decades of self-deception.

Without substantial policy changes, our self-image, and the image we project to the world, will diminish — and so will our economic standing and stability. Inequality of outcomes and inequality of opportunity reinforce each other — and contribute to economic weakness, as Alan B. Krueger, a Princeton economist and the chairman of the White House Council of Economic Advisers, has emphasized. We have an economic, and not only moral, interest in saving the American dream.

A cosmic coincidence, but the Chelyabinsk meteor and 2012 DA14 are reminders of the deadly power of small asteroids. Perhaps mother nature is telling us to take this threat a little more seriously — Alan Fitzsimmons, London Independent

Thinking asymmetrically, pure coincidence is an absolute symmetry, which according to the Transformation Proof does not exist, so there are many and various connections between asteroid 2012 DA14 and the Chelyabinsk meteor, even though these connections can become extremely attenuated. The lack of pure coincidence anywhere means that significance is never entirely absent.