Old and useless

Everyone knows about and likes to quote that snooty saying, “When facts change, I change my opinion. And what do you do, Sir?” But no one knows who actually said it — Keynes, Churchill or Samuelson. All three have been credited with it, or its variations. 

Never mind, though. What’s important is not that we change our opinions only after the facts change but — and far more importantly — also periodically ask if the facts, especially the really big ones, have changed. Most policy errors happen because the world over, the politicians and the bureaucracy are not trained to ask this question. Nor, it seems, are economists.

Not to labour the point too much let me ask: Are economic theories — and policies that come out of them —invariant to population size? Would a theory and resulting policy or set of policies that worked for 350 million people in the 1960s work just as well for 1,300 million people in the 2020s? 

Would theories that were formulated in countries that had tiny populations — say less than 15 million — hold good for countries that have huge multiples of that number? Will the shape of the different curves that economics relies upon mutate into a new ‘normal’ shape that is more representative of population size?

How can economics follow a business-as-usual model when global population has gone from one billion in 1900 to well over seven billion now? If light bends near a heavy gravitational force, why can’t economic theories?

New wine needs new bottles

Take monetary economics. The never-ending and expanding supply of the global reserve currency, the dollar today, and maybe the yuan tomorrow, is altering the shape of the yield curves so much so that they have become shapeless. 

Could not the same thing be happening in the face of the never-ending and expanding supply of people? Could not every old assumption break down? Or, what happens to that wonderful policy tool, the Keynesian identity, when it is asked to stabilise aggregate demand for seven billion people? 

I will tell you what: It leads to massive financial crises because debts don’t get paid, first by individuals and then by governments. That is perhaps why even George Soros is worried that we are going to get another 2008-like crisis. 

He may well be right about a new crisis but he is quite wrong when he says that it will be because governments are spending less than they should and that their austerity programmes are to blame. The simple fact is that governments don’t any longer have any choice. 

They just don’t have money to spend. Instead, it is investors like Mr Soros who do. And when they spend, the shape of the yield curves starts to converge, which is not at all what governments want. That puts paid to much of the Keynesian solution.

Or, to put it differently, if everyone agrees that governments must have the monopoly on the use of violence to maintain order in society, how can they concede it to the financial markets in the case of economies? 

But this is exactly what has happened. And that’s why economics needs to come up with new theories.

Copulation and population 

The premises on which the old theories were based have changed completely. One of these premises was — yes —no change in population size.

In fact, to the best of my knowledge economic theory never takes into account population dynamics. Demography is for lesser intellects.

The number of people is always taken as being fixed just like the amount of land is. This works for land but not for population. The correlation between that very natural human activity, copulation, and population has been established beyond doubt. 

When Malthus was wringing his hands, both land and capital were fixed. Today, capital is not. Everyone just prints off notes.

Indeed, it is not capital at all in the strictly economic sense of the word in as much as it must enhance the owner’s capacity to do useful work and doesn’t. Betting in the global financial markets doesn’t qualify as capital.

That is why I think that with their huge populations, Indian and Chinese economists now have a unique opportunity to come up with alternative economic theories that are more suited to their needs. And as in Europe in the first half of the 20th century, the need is the same: How to prevent the collapse of established authority.

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