Yes the pun is intentional. The fund managers of finance capital and the great minds of bourgeois economics have got us into a fine mess – that’s a little bit off the mark as I will relate later. In the wake of this The Economist, gifted spokesman of high capitalism and much esteemed by many for its tight and cogent style, has made an ass of itself. After much prevarication it took the plunge and the July 18-24 issue sought to face up to "Modern Economic Theory: Where it went wrong and how the crisis is changing it". A leader article and two linked features sally forth to put capitalism back in the intellectual saddle. It makes a hash, remarkable for shallowness but entertaining in laundering the soiled linen of capitalism’s macroeconomic giants.

The great macroeconomists of the capitalist world are a bunch of unmitigated asses. Oh yes, if I said this you would sneer – "Marxist jackass! These are great men; get lost!" Well, and if these smart-asses say so about each other, then what? The names of the bourgeois world’s great economists are Robert Lucas (University of Chicago Nobel laureate), Robert Barrow (Harvard), Nobel laureate Paul Krugman of Princeton, Brad DeLong (Berkeley), Willem Butler (LSE), Michael Farma (Chicago), two more Nobel prize winners Joseph Stiglitz (Columbia) and Myron Scholes, and a few others and their acolytes and disciples. En passant, Scholes is a shady wheeler-dealer convicted of $40 million tax evasion as a partner in the infamous LRCM outfit that crashed in 1998.

Now for a sampling of what these worthies say about each other; all quotes of one guy referring to another in a public forum or in print. "Making truly boneheaded arguments"; "making ancient and basic analytical errors all over the place"; the past 30 years of macroeconomic teaching at American and British universities were "a costly waste of time"; "the Dark Age of macroeconomics"; macroeconomics of the past 30 years was "spectacularly useless at best, and positively harmful at worst"; and much more. This is the stuff that these mighty minds have flung at each other in the last two years. It matters little which was said by whom against whom; the whole lot are blabbering like babies. So what would you say if I claim that in the shadow of the Great Recession of 2008, the prize winning economists of the capitalist world, in their own words, have become a blithering cacophony?

Let me quote two more short passages from this issue of the Economist. "These internal critics argue that economists missed the origins of the crisis; failed to appreciate its worst symptoms; and cannot now agree about the cure. In other words, economists misread the economy on the way up, misread it on the way down and now mistake the right way out". Of course the Economist knows not a whit what Marxists have been saying for the last ten years; even here in Lanka at seminars held at venues such as the Ecumenical Institute in Havelock Town. Commenting on the dire confusion among these learned gentlemen, the magazine laments that: "They (others) accuse economists like Mr DeLong and Mr Krugman of falling back on antiquated Keynesian doctrines – as if nothing has been learned in the past 70 years. Messrs DeLong and Krugman, in turn, accuse economists like Mr Lucas of not falling back on Keynesian economics – as if everything has been forgotten in the past 70 years!" Such is the disarray among the towering eggheads atop capitalism’s Himalayan heights.

There are two indissolubly linked questions, first, why did the global capitalist system capsize? Second, why did the professionals in investment banks and funds, ‘quants’ designing clever risk and derivatives algorithms and armies of investment analysts, as well as the laureates who entertained us in the previous paragraphs, get it all so horribly wrong? The Economist fails to properly frame, let alone answer the first question. All we get is a repeat of the old narrative we have heard ad nauseam; chronic US balance of payments deficits and mountains of dollar indebtedness, reckless consumer borrowing egged on by lenders awash with money, finance capital overshadowing the real economy, an alphabet soup of unethical derivatives products, all culminating in the house and asset price bubbles. Everybody has read this storyline no end of times; I too have thrashed it half a dozen times in these pages.

Everybody knows the narrative, but what made it happen? Was it a rare and disastrous conjuncture of fortuitous events, was it a consequence of the larceny of mega-felons like Bernie Madoff, was everything fine but just the regulatory regimen lax, or was it flawed derivatives or silly Central Bankers? Or perhaps it was a combination of these factors as the Economist would have us believe to sell us an unconvincing chop suey of assorted hogwash.

What the Economist and these "bonehead" economists will not undertake is scrutiny of whether the basic dynamic of capitalism is prone to periodic crises of catastrophic proportions. Even if the chef had well cleaned the ingredients for the chop suey, a chronic gastric distemper could not have been averted, so long as capitalism functioned as capitalism.

The rate of profit in the real economy was collapsing and the astronomical growth of fictitious finance capital parallel with growth of crazy asset price bubbles was built-in, it was a structural feature. Insane credit availability driving consumers and home buyers into a black hole with no light at the end of the tunnel was not the work of mortgage agencies gone mad. No, excess liquidity had to be shoved somewhere and returns had to be realised; and there was no way out in the real economy. The trade deficit with China, Japan and the petroleum exporters and its recycling back to America through Treasury and corporate bonds was a particular feature of this crisis, but at root a systemic not an accidental or contingent feature.

The Great Crash of 2008 was structural and systemic, it may have come a little earlier or later, it may have been managed to manifest itself in different ways, but at root it was as unavoidable as our genes assert that ageing cannot be reversed. This is what that panoply of economic stars we spoke of will not accept; will not even examine. That is what turns them into a cacophony of irritated dons who cannot agree on anything. If they look below the shallow surface at capitalism’s inner processes and frame the system’s dynamics, then they will begin to forge agreements. Hence my initial caveat that blaming the expert was somewhat off the mark, the fault lies more in the organism than in the doctor. The dialectical way to put it is this: Their inability to theorise is but the reflection, in thought, of their inability to separate from capitalism’s political praxis.

Nevertheless, if you are interested in the nitty-gritty stuff, for a hair-raising account of the role of Goldman Sachs in orchestrating five recessions, type,

http://www.rollingstone.com/politics/story/29127316/

followed by

the_great_american_bubble_machine, and then click.

But I do repeat that the root of the problem, the inexorable pressures that drove investment banks, hedge funds and finance houses in this perfidious direction, is to be found the deep structural properties of capitalism itself.

And if these great scholars had seen the source of the problem could they have helped fix it better and earlier? Well that depends; an earlier and more forceful drive to state capitalism, on a global scale, would have allowed a more controlled crash. But even the current limited drive in a state capitalist direction is being blocked by a constellation of vested interests. There is no guarantee, then or now, of defeating these interest lobbies. So as I said, it depends.

The Economist touches some theoretical points and it behoves us to follow up; the efficient market hypothesis (EMH), rational expectations and behavioural schools, and DSGEE – more on that in a moment. Let us dispense with the first two mythologies quickly. EMH says that the market is omniscient; "the price of a financial asset reflects all available information that is relevant to its value". Basically it is market worship; leave it to market forces, they distil and incorporate all that matters; trust markets in price discovery and resource allocation. All the EMH pundits have now shut up. Did the housing market in the US get prices right or was it stratospheric mockery? What about asset price bubbles, and pricing risk, was not this market as inane as the inmate of a mental asylum? The Great Crash of 2008 has laid the EMH to RIP.

Rational expectations theory (REH) was championed by Nobel laureate Robert Lucas and says that economic agents (buyers, sellers and investors) function to maximise their expected benefits. They make the best guess of the future and use all available information correctly; hence the expected outcome does not differ from efficient market equilibrium. The theory assumes that people do not make systematic errors when predicting the future, and deviations from the perfect are only random. The results of REH are the same as those of EMH – a fat lot of good!

This kind of bull was possible because the bubbles of the long past – Tulip Mania (1641), South Seas Bubble (1720) and others - were long forgotten. The assumption that economic actors were rational was too much to get away with once the dot-com bubble burst. We had a correction and a generalisation; we had behavioural economics (BE), a generalisation of REH, which said people were not rational but too confident of their own abilities – the method also allowed for modelling other behaviours. Long ago The Madness of Mobs by Charles Mackay described the irrationality of human behaviour in inflating investment bubbles and Freud’s work in the 1920s focussed on the irrational unconscious in crowd behaviour (see my summary in the Sunday Island of 3 May 2009). The REH thesis was too much to get away with and the retreat to BE was unavoidable.

Dynamic stochastic general economic equilibrium (DSGEE) modelling is a tool I am familiar with in my research work - if you replace "economic equilibrium" with "electrical engineering". The mathematical and algorithmic procedures are similar. ‘Dynamic’ means the algorithm can propagate internal changes to reflect real system evolution – whether economic factors or types of electric power plant. The word ‘stochastic’ accommodates probabilities. Wind speeds change so much that I can only meaningfully represent them with probability distributions when assessing wind power generation. Similarly, when treasury departments and central banks make economic forecasts it is better that, say oil prices, interest rates or currencies be represented, in the algorithms, by a range of probability values.