Saturday, March 21, 2009

Free markets are always irrational

Free markets are always irrational

The markets are rational. From that inviolate truth, a pillar of economic thought for 233 years, flows all else economics understands about markets, men, and money - an unalterable belief that markets can be measured, quantified, cut and pasted in mute acceptance that under it all lies the consistent and undeniable force of rational behavior, a religion gone unquestioned.

The theory of rational markets - that buyers and sellers will always act in their best interests - was given life by Adam Smith in his Wealth of Nations in 1776. The new study of economics, born into a moment between ages, grew and developed with its gospel already written and sanctified. Economics became nothing more than competing studies that tried to squeeze the maximum utility out of the blandness of rational, human behavior. The competition reached a turning point at the end of two brutal wars and an economic depression that sent buildings full of newly minted economists running for their slide rules.

The rational behavior of man had succeeded in removing more than 160 million rational men, women, and children of free will from the market, and with the dull precision of 100 million mallets, rationally pummeled the earth to pieces in its own best interest. Regardless, it still came to pass that "rational", as they say, was written by the victors, and so from the smoke and ruin of trial by fire came the forged steel sword of the American Way, embracing its own best interests by clinging to the myth as flag, an inviolate symbol of the good, the bad and the ugly.

Patriotism - an exceptionally irrational behavior - became welded to the economic cause. Free markets are rational. One choice, two options - we are right, or they are wrong. Walking off the battlefields of Europe and into the womb of America at Bretton Woods, no one questioned the unconscious absolute that free markets are rational, blinded as they were by the sheer joy of having lived to tell. And again, the participants of Bretton Woods, having given birth to the World Bank and the International Monetary Fun and who built the world we thrash around in today were doing so in a single moment of time, between two very different ages.

In the years since 1944, we have clung defiantly to our patriotism, our democracies, our guns, and our religion. Empires have fallen, backward societies been saved, and the planet has become a patchwork of nominally free collections of consumers and producers, all herded into crayon borders that even at the time defied common sense. The nation state was king, dividing the earth into sections of untenable, fortified camps.

However, in the latter half of the 20th century, the rational behaviors of heretofore sequestered buyers and sellers left the confines of their nation states and roamed the earth, commerce unfettered from the chains of dogma. Rational became a moving target. Entire populations were making decisions that were in no way in their best interest (Unless you can explain going into debt for water toys and plasma TVs).

The computer and the Internet sped self-interest around the earth, leveraged 32 to 1 by irrationality itself. Growth became the new dogma, and any behavior that helped the cause became rational. In a simpler age, we congratulated ourselves on the self-interest that had kept our irrational need for nuclear weapons from killing us all. Now, on the cusp of a thermal nuclear financial meltdown, we learn for the first time that indeed man, entrusted with the buttons, will without question slide off the safety and push down hard and fast with all he's worth - and everybody else's while he's at it.

In this, our age - standing as we are in a moment of time between the old and the new - man is no longer rational, nor can he be trusted with free markets. Everything we know about economic behavior must be reviewed and rethought ... right back to the root, back to Adam Smith, back to the beginning. Back before nationalism, socialism, capitalism and blind patriotism. Two hundred years is long enough to live a theory that was clearly wrong.

For after all, we live in a new age of individuals now, connected by the Internet, thrust apart and together by technology. Democracy has arrived to the people of the earth, freed of national boundaries by the World Wide Web. Humans are now at odds with economics, and classically trained economists are as relevant as the steam engine. Regression to the mean does not apply to bell curves of one.

There will be a fight to be sure. In America, there is no question but to do what it takes to get everything back to the past as fast as possible. Americans want to reset the machine and keep on playing. The rest of the world - who trusted their blood and treasure with the world's only superpower - feel differently about things. It wasn't them who killed the golden goose, but they were paying for the crime. A new global era was taking shape while Americans dithered over politics, Barack Obama's election being the last America would make without the input of the world.

There is, finally, a growing consensus (outside America) that in a modern age, individuals, groups and states do not seek to maximize their best interests. In fact, it turns out to be quite the opposite. All too often, and in ways that can demolish civilization itself, rational, free-thinking men with a stupendous concentration of power and wealth have acted in direct contradiction of what should have been their best interests - and ours.

Worse it seems, average workaday people in the millions and millions will do exactly the same thing, making free-market choices with their free will that will almost certainly lead to their undoing. Examples are everyday and everywhere, all the time.

Anybody got a smoke?

As he searched his world for data that would reinforce his theory of rational markets and men, Adam Smith could not have been aware of the phenomenon of tobacco, and the leading role it would play in future worlds. Would Adam Smith have written more or less than five large tomes if, a prophet of one, he wrote the bible of the next two centuries with access to the wealth of quantified and verified data that our age has developed about tobacco? How would Adam Smith have squared the absolute certainty of death, misery, and staggering social cost that smoking entails with the two thousand million free-market consumers who choose, with their own free will and in markets unconstrained, to pay good and ever increasing amounts of their own hard labor in exchange for regular doses of certain and conscious death?

How can states with hegemonic commitments to the scripture of rational markets, both encourage, tax and stand out of the way in the name of absolute theoretical freedom, while at the same time ignore the crushing mortality and exponential costs to society as a whole associated with the results of the same? The reason lies in the savage juxtaposition of an ancient, out-of-date philosophy against advances in natural sciences and the increasing ability for individual choice in a mysterious and complex world.

Rational markets could not have foreseen television, movie stars, and marketing, could not have imagined a plethora of endless choice, an antiquated system of competing nation states that would regress towards behaviors that were unsustainable, in free and open competition to profit from the misery and death of their own, democratic citizens.

On what rational scale can a classic economist argue that the consumption of food by wealthy, non-failed nation states is anything but destructive and self-defeating, when that food is poison at the consumption end of a system of free choice and unfettered markets? Far from acting in their best interests, the Western world's diet is killing its host, trading sustainable health, happiness and manageable costs for spectacular profits for a handful of smiling clowns, faux kings, and creepy old Kentucky Colonels.

In the end, maximum utility turns out to be a Frankenstein monster. In the salad days of the American Dream, it appeared certain that the combination of free, unfettered markets driven by rational, self-interested humans had indeed conquered nature. Wedded as they were to a glorious American Democracy, it didn't take a generation before the American Way had swept clean all remnants of any other time. So successful that all it took was life, liberty, and wads of printed cash to overcome the Soviet hulk in spending, bankrupting any chance to notice the failure of fundamental economics, a million miles below the euphoria.

Carried along by a human explosion, a demographic cohort born into a post-world-war world grew up and prospered as the human embodiment of self-interest, free markets and democracy. But somewhere along the line, the point of equilibrium was reached, passed and toppled over. The technology caught up to and passed the philosophy, the going got global, and the global got weird. Once the Excel spreadsheet hit the flickering workstations of the theoretical man, the invisible hand of Adam Smith had been crushed irreparably on the ladder of human folly.

Massive amounts of invisible capital poured across fibre optics, filling computer screens with uncountable digits impossible for coke-addled humans to imagine or fathom. Nothing less than a computer game ensued, using the invisible capital of the imaginary American Dream - leveraged beyond any common sense - in an online team shooter played in a private and expensive forum. All holy hell was unleashed with a few casual mouse clicks over coffee, by a single person seeking to maximize his utility, without a care or thought for what the result might eventually be.

The markets are not rational.

Civilization is only 10,000 years old, modern economics 200, and the great "success" of American capitalism but 60 of that. The next age will be one that recognizes that man must indeed have protection from himself, his foibles, and his technology. Once this economic storm has passed, the wreckage left behind will have been busted back to humility, and man will take his place amongst - and not above - the world around him. Man has built a civilization so complex and over-reaching that it no longer obeys the rules he wrote for it so very long ago. This, if ever there was one, is not a time for dusty books by dusty men, from another age, and another time....

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