One way of dealing with a broken economy: Ignore History

the past

“How do I define history? Well it’s just one f-ing thing after another.” The History Boys

As market continues to hit record lows every week, everyone and their mother has felt the “lack of confidence” that haunts the economy. Things have gotten so bad, quipped Jon Stewart, that the “British are cheering us up”, “and it’s like Seattle over there, rain, but without coffee.”

What’s setting this recession apart from all its predecessors is the fact that so many fast-and-loose rules have been broken. We’re told that young people nowadays can’t count on an ever-rising standard of living anymore. Nor can we expect the truism that housing prices have nowhere to go but up, and thus always a good investment. It’s hard to trust high-return investment brokers too, even those you’ve known for 50 years. Your corner community banks might go out of business and the next thing you know, the FDIC will be running it. All of these uncertainties, strung together, signal the utter collapse of confidence. Whatever our previously held ideas of people, institutions, and truisms may have been, that foundation is shaken and cracked.

But how sensible was it for us to subscribe to these rules in the first place? In retrospect, could all these occurrences not have been a series of lucky coincidences, happily re-enforcing themselves into our collective memory, and has since then become a self-fulfilling prophesy?

In political science, there’s a theory that addresses this issue, although in different contexts. It’s the idea of constructivism. It rose to prominence after the Cold War, as no existing theories were able to foresee and predict the sudden collapse of the Soviet Empire. In retrospect, it was hardly sudden, but hindsight is 20/20. So the idea of constructivism challenged the traditional assumption that the external environment determines one’s interest and subsequent behaviour. That is to say, too much emphasis had been placed on the power and structural limits of the system, and too little on the players within. For example, instead of thinking of these awful 10-year plans as a product of Communism, try to see how the practice of central planning shapes and even further solidifies the Soviet utopian commitment.

Do you see what that does? It implies a mutually re-enforcing snowballing effect between the system and its people. They reciprocate and mirror one another by defining and re-defining both parties’ interest, beliefs, and actions. If all goes well, the ideas or ideologies behind the momentum becomes more and more entrenched, until one day, it’s hard to distinguish cause from effect, or whether the chicken or the egg came first. It’s hard to qualify how much of the systemic responses are created by us, and how much of our behaviour is dictated by the system.

But instead of seeing the past like a continuous feed-back loop, us human like stories, told in a linear fashion. And when it comes to the past, we love to connect the dots, and then simplify. The many nuances, contradictions, and kinks in history are smoothed out and written out of books. There might’ve been no extraordinary build-up, no list of forces that contributed to one climax as opposed to the anti-climax of another possible ending. Maybe history, in all its glory, is just us stitching an accidental past into a coherent story. Maybe, it was just one thing after another, after all.

Unfortunately for our economies, the loop ran out, and we are forced to face the cognitive dissonance that we’ve worked hard to foster over the last couple of decades. For years, our beliefs in the ever-rising price of the housing market (darn demand and demographics) perpetuated and encouraged the continual injection of liquidity into the credit market. We took that as a signal that we were on the right path, and pushed the housing bubble further along, while helping ourselves to some generous consumption habits. We had all but forsaken the pursuit of productivity and real value creation. But the wheels kept turning, and the system happily complied by signaling what the players had been projecting onto it for years.

Now the party’s over, all previous experiences and expectations of how the system should function are subject to stress testing and dismissal. The best we can do is not to lament the disarray and passing of our past beliefs, but to construct a healthy and sustainable economic environment for the future. So long as we are wedded to the idea that the market will function in the way that it had always been, we will only delude ourselves as we did in the last decade: by creating a debt-induced bubble and then watch it disappear into thin air.

picture source: Miss-Nefer

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