Economics 101 — Becoming a Myth

Alan Greenspan’s mystique has been thoroughly demystified in the aftermath of the crash of 2008. That has not stopped him from offering more opinions. The other day, he opined that advancing equity markets would do so much more for the U.S. economy than dumping any more government stimulus into the already bursting with paper money financial systems. Well, duh! Of course, if equity markets were healthy and performing well, investors would return to them in droves and, in turn, indisputably boost overall confidence. No government can accomplish that without seriously rewriting the country’s income tax laws.

But how does Alan Greenspan recommend the boost be given to equity markets? Well, he is advocating higher taxes, even when the U.S. economy is one gearshift away from going in reverse. According to Greenspan, “There are risks, but our choice is not between good and bad, it’s between terrible and worse.” And this from the “smartest man in the room,” who in no uncertain terms is responsible for making things not just worse, but absolutely terrible when, during his reign as the Fed chairman, he supported insane tax cuts peddled by the Bush Administration. Yet, he chose a fine hour three years later to say that tax cuts are no longer sustainable and that the U.S. economy needs tax increases, not more stimulus!

Then again, how can we blame Greenspan? In a way, we have all created him, praising him for his role in the booms of the 1990s and early 2000s and for telling us only what we wanted to hear, and then blaming him for all the evils unleashed when the smelly stuff hit the fan in 2007. If nothing else, Greenspan only stuck to the guns of any traditional economist, firmly believing that the market is inherently stable, that most of the time it behaves rationally and even more often that it operates efficiently, provided the market is left to its own devices.

On the other hand, how can we not but vilify Greenspan for believing what is now turning out to be nothing but a pretty myth, in which not even the theory of supply and demand can bear scientific scrutiny any longer? He was the guy who was supposed to know. He was the country’s central banker for years. He was the country’s lead economist. He should have known that the math would not hold because the world has changed irrevocably and that the market is not some mythical creature that exists in a vacuum. There is no invisible hand that will make the things work out in the end. He should have known the risks and incorporated them in his policies long before all hell broke loose. That was his job and his responsibility.

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Perhaps this is why behavioral economics has gained momentum in the past two years, having long argued that the market is none of the things Greenspan had believed; i.e. stable and efficient. Instead, behavioral economists are viewing the market as a living organism of sorts, as a complex being, employing complex, non-linear relationships, and weaving large, complex networks. Some behavioral economists are comparing new economic models to defining a tumor through a mathematical proof.

In other words, economists today will have to re-learn everything. They will need new tools to deal with new realities and they will need to shed Economics 101 as a theory that has morphed over time into an ideology, rather than developed as a science. It is a dead myth, its theories largely dating from the 19th century, believed to be founded on a solid and unchanging structure. Well, the structure has collapsed and it has been shattered into millions of pieces that no one — including and particularly not someone like Alan Greenspan — can put back together again.