Archive for October 6, 2010

The Financial Equivalent of Bloodletting: 1

October 6, 2010 8 comments

For much of western history, physicians used to treat almost any disease through bloodletting and purging. The reasons offered for such treatments were many, but centered around getting rid of “bad humors”. Many educated, influential and clever morons were involved in the promotion and defense of such treatments.

Today we know that bloodletting and purging were much worse than not treating many diseases.

So why did the clever high IQ morons of those ages support, defend and promote ideas that harmed their patients? Were they not observant? Or were they fatalistic? or just plain stupid? Two words- “dogma” and “ego”. It was the toxic combination of dogma and ego that led many clever morons to kill their patients.

Now consider the state of economics today. Though some consider it a science, it lacks many of the features of hard sciences like physics and chemistry- including the ability to make useful and accurate predictions.

Many school of economics believe that excess money circulation is the cause of many economic ills. They all argue for restricting and/or reducing money supply. But, short of hyperinflation, is there ever a true ‘excess’ of money? Does reducing the volume, flow and distribution of money ever help right an economic system?

If you think of money as blood, it will be obvious that efficient circulation of money and preventing its accumulation are necessary for the system to be healthy. A system that pools blood in a few organs while depriving other organs of blood is by definition diseased.

Reducing the amount of money or its velocity in an already malperfused system will not cure any disease, though it might kill the system faster. You cannot cure the effects of malperfusion by reducing the flow and volume of blood. Removing and treating the conditions that cause malperfusion alone can make the system healthy again.

But that requires redistribution of blood (money), by various means.

Austrian economics promotes bleeding the patient to get rid of ‘excess’ and ‘impure’ blood, neo-classical economics promotes infusing saline to replace volume to the poorly perfused tissues while Keynesian economics advocates blood infusions. Though the last option is a good start, it cannot work for long unless the underlying cause of malperfusion is rectified.