The tragedy of the commons: tosh

One of the most famous essays in the history of economic thought was not, at first glance, an economic essay at all. Garrett Hardin’s 1962 paper in Science, ‘The tragedy of the commons’, bestowed a name on the whole class of social phenomena in which many people are vying for a given resource (e.g., the common land on which they can all graze their cattle and sheep), but because there is no control over how much each one can use it, they all try to use it more and more, until eventually the resource collapses through overuse.

The standard interpretation of this paper is that, had someone owned the common land, those would not have happened. They would have husbanded their resources more thriftily, nurturing it so that it was not exhausted. In this way, converting the common land to private property would save the say. This is supposed to be a lesson for our various environmental conundrums: if only someone owned stuff, they'd take care of it properly and all our climate/resource/ecosystem problems would go away. Hurrah!

It is hard to say why this idea should have caught on. Certainly from an economic point of view it is not very plausible – especially in cases that impact our current environmental problems. Take the case of non-renewable resources such as oil or gas or mineral wealth. A country such as Saudi Arabia may wish to conserve its fields so that future generations may also benefit from them, but that is only a factor because the Saudi régime has responsibility for future generations. The same cannot be said for ExxonMobil, BP or Total. Their paramount interest is quite clear and usually (by environmental and social standards) very short term: profit-maximisation. If they leave the oil in the ground they will incur continuing costs (rent, interest, maintenance and operating costs) while being unable to extract a single penny from their investments. They also run the risk that their resources will be taken from them by future governments. It is even possible that future fears of carbon emissions could lead to oil being banned from vehicles, power stations and other uses for which emission control is difficult.

By and large, oil wells are costly and precarious investments. So what should be done about them? Unless there is a realistic expectation that future price spirals will raise prices high enough to justify the risks and the costs, the answer is surely to pump it out of the ground and sell it right now. From a capitalist perspective, there is after all no other point in conserving such resources. In the ground they are worth nothing, and no matter how carefully I husband them, oil will not grow again. The only question is when the right balance of risk, cost and price tells me to start pumping. Given that time is a factor in all three of these, the chances are that the correct answer will be ‘soon’. Or if not ‘soon’, then ‘right now’.

So there is little incentive for a capitalist corporation to conserve non-renewable resources, and if the ‘tragedy of the commons’ argument is deployed to ensure that such resources are properly managed from society’s point of view, it will almost certainly fail.

But renewable resources aren’t likely to fare much better, and for very similar reasons. It is true that a forest or a field of ripening wheat is a valuable resource made all the more valuable by the fact that, carefully conserved, it will generate a return indefinitely. If I over-exploit it – by clear-cutting jungle or exhausting soil by intensive monoculture cropping and massive inputs of artificial fertilisers – then I will eventually shrivel it up to the point where it ceases to be a valuable property. In that respect at least, privatising is seems to be at least a possible solution to the potential tragedy of the commons.

Unfortunately the situation is not quite so simple. As before it comes down to a balance of prices, costs and risks. What if the cost of the resource is extremely low? If, for example, it can be acquired from a friendly government for a very low price? For instance, until his government was understandably overthrown in March 2009, President Ravalomanana of Madagascar had an arrangement with the South Korean conglomerate Daewoo to lease 1.3 million hectares of farmland – an area a little less than half the size of Belgium - for nothing more than a somewhat nebulous promise concerning local employment. Rent? Nope. Guaranteed return? Nope. Or what if – as is often the case in developing countries - the local population is simply ousted from the land?

In such conditions, costs do not include a significant price for the land itself. In other circumstances, other combinations will lead to the same conclusion: that it does pay (commercially, if not for society as a whole) for a private owner to exploit a renewable resource to the point where its vitality is destroyed and it is left worthless. At that point the company moves on, to new land and rapid returns. And the people they leave behind, whose land they have destroyed? Who cares.

So again, if I hand over a non-renewable resource to private interests, will this help society avoid the tragedy of the commons? Probably not. Indeed, so great is the disparity in resources between agribusiness and individual commercial farmers that even if both took an equally predatory attitude to the land (which, in the history of farming, farmers have not always been reluctant to do ), the damage would be done far faster by the corporations.

Note also the one option this approach does not allow for: that all the people who share this common resource will simply get together and agree how it will be used. Which is odd, because that is exactly how the land – the very ‘commons’ from which Hardin starts out – was managed before the triumph of capitalism. Medieval and early modern rural communities used to agree on who could use the land and how much. They also used to rotate who farmed which land, so that everyone had a fair turn at the best land. This method for avoiding the tragedy of the commons continued in use until the local landlord decided they could make more for themselves if they threw the peasants and the small farmers off the land and replaced them with sheep or cash crops. This process, know to European history as ‘the Enclosures’ is notorious as one of the most brutal in our history.

In short, the tragedy of the commons was not solved by the introduction of private property rights to the common land – rather, it was caused by converting socially managed resources into private property.

Social alternatives to privatisation have been shown to work over and over again all around the world. Over and over again local populations have demonstrated that they are capable of managing local resources is highly productive yet sustainable ways, given only access to modern knowledge and small amounts of specialised support. And yet over and over again they have been ousted by local landlords and international businesses intent on seizing their land for their own selfish purposes. This pleases international economic bodies like the IMF, the World Trade Organisation and the many other bodies that cannot imagine a solution to the world’s problems that does not start from global markets. It also pleases national governments, whose all-important economic indicators are nicely bolstered by the increase in GDP and other pleasingly visible data. After all, non-market economic activity, however fundamental it may be to the real lives of real people, is not visible in the economic data, and so is obviously not real. The only people it does not please, in fact, are the families who are expelled from the land and end up in the slums of a Sao Paulo or a Mumbai, hundreds of miles form home and with zero prospect of sharing in any benefits from their land being stolen from them.

There have been many cases where local people have organised themselves to share resources in ways that are both economically and ecologically sound. They owe little to market rationality and less to the idea that the only solution to the ‘tragedy of the commons’ is for someone to own everything and for the rest of us to work for them.

So why does enthusiasm for Hardin’s paper – historically false and logically unconvincing even when it was written – persist to this day, to the point where it is routinely cited by environmental economists and enthusiasts for markets alike? Because, I suspect, it creates a pseudo-historical, pseudo-scientific justification for the status quo. Despite the fact that capitalism is so destructive to the environment, the correct answer, say both Hardin and economic orthodoxy, is more of the same. You cannot have too much property, too much competition, too much exploitation – otherwise people might start to ask not whether we should have more but whether we should have quite as much as we have now. And that would never do.

Markets and the Return of the Economic Zombie!

As someone or other once said, generals always plan to fight the next war with the weapons of the last. Much the same seems to be true of economists. In the light (if that is the word) of the last year or two, the idea that market economics is still a contender for the basic model for the economy is quaint to say the least. Even if you take capitalism for granted (which, for the time being, I think we can), markets and market theory are hardly contenders for tools for managing it. The reason I say this is because a) markets don’t really exist, and b) even if they did, standard market theory is at best half-baked and at worst simply false.

Perhaps I should restate the claim that markets don't exist. Markets don't exist as market economists imagine them. The assumptions market economics is based simply do not apply to current economic conditions, and have not been relevant for at least half a century. Market theory has always assumed a number of things (the various perfections of 'perfect competition'), most of which only really exist in minimal, distorted and illusory forms.

For example, 'perfect information' was always nonsense and we have a whole raft of industries - marketing, advertising and lobbying - on hand to keep things that way. The recent history of financial engineering also demonstrates amply how easy it was for markets to be dominated by mechanism that many players plainly did not understand, so that they had little idea what they were doing from day to day. Even George Soros said he had kept clear of derivatives because he did not understand them. Recent developments such as ‘deep pools’ can only worsen this situation by deliberately concealing market information. There are some areas where markets are still quite real, but I doubt that plumbers and fish markets command much of anyone’s GNP.

As for another key condition for markets to be efficient, ease of entry, this ceased to make any sense when economies reached the scale where only major corporations and governments could summon up enough capital to enter any major industry. Conversely, ease of exit was rendered irrelevant with the arrival of large-scale fixed capital as the sine qua non of most industries. Fixed capital is notoriously difficult to dispose of at a decent price even when it is still usable, and if you are keen to exit a market it is probably because it is shrinking, so you won’t find anyone to buy it.

Likewise for all the other key assumptions of market economics. They make a neat, if narrow, theory, but none of them actually applies under modern economic conditions.

As for the idea that market theory is at best half-baked and at worst simply false, market economics claims that markets will always tend towards equilibrium. This is hardly what history would suggest, and it ignores at least two intrinsic features of market economies.

Firstly, the various kinds of market imperfection I have just mentioned all serve to push markets into disequilibrium, because they create special interests (often very widespread or of involving very large players) who are keen to seek, create and exploit disequilibrium.

Secondly, the real tendency of markets is not towards equilibrium but towards bubbles and monopoly. Bubbles arise when it is not the intrinsic value of goods and services that are being invested in but movements in the market itself (i.e., when, as Keynes put it, the speculative froth on the surface of the stream of solid investments is inverted into a maelstrom of speculation that drowns out real investment). This inversion became inevitable as soon markets become a forum for making money by speculation rather than for allocating scarce resources. When this orgy of money-making has reached the point where market players start to notice just how far this process has diverted the formal ownership of resources from any economically plausible use, collapse ensues as inevitably as the original bubble.

Given how market economists like to define the market as an efficient mechanism for distributing scarce resources, inveterate leftists like me find it grimly ironic to note that it capitalism itself, whose sole rationale is to make money, that ensures that markets lead inevitably to bubbles, the misallocation of resources and collapse.

As Oscar Wilde said, a cynic is a man who knows the price or everything and the value of nothing, so it’s nice to see that even in the impersonal world of the market, the inherent cynicism of market theory gets its comeuppance. Pity about the millions of ordinary people whose lives it destroys.

As for monopolies, as we all know, productivity is generally much improved by economies of scale. That in turn generally demands large-scale investment, typically in machinery and rationalisations that are closed to small players. But this reduces the number of businesses that can afford to operate in this market, or for which the size of the market leaves elbow room. And so the spiral starts and continues until only a handful of players is left. Not technically a monopoly, so there is still some limited competition, but even an oligopoly consists of a small number of players whose interests vis à vis their customer are identical – and identically predatory. And certainly any notion of a free market has long since disappeared.

Another nice irony of market capitalism then: as with bubbles, monopolies show how it is the very workings of historic markets that rendered modern market theory irrelevant. Not in this case because they create bubbles that destroy the value even as they generate lots of money, but because they create an economic universe in which, far from a large number of small players buying and selling, a small number of truly vast players distort the entire economy to suit themselves.

Basically, Adam Smith’s enthusiasm for the market was based on an economy of small players with small, easily liquidated investments in a large market. A nice dream of a cosy middle class world. Market theory persists with this dream. But we don’t live there any more.

Leadership, Mr President? No thanks!

The United States is ready to lead. Barack Obama says so – in an article in yesterday’s Times. Oh good.

Actually, Mr President, I don’t think we need any leadership right now. The world has been its usual bickering and politically incoherent self while the USA was away, but actually I can’t think of anything that would have been better had it been around to offer its ‘leadership’ since 2000.

After all, what have the US government and its eager allies been up to all that time on the global stage? Iraq. Afghanistan. Radical disregard for climate change. Creating the sub-prime housing disaster. Deregulating finance to the point where the entire global economy was dislocated, millions thrown out of work and tens of millions of the already poor in developing countries were pushed down even further. The Washington Consensus thrust down everyone’s throats by the IMF, World Bank and WTO. I can’t say that American leadership is likely to lead us anywhere I would want to go.

Or perhaps it is American example closer to home we should admire. Gun crime. Banal culture. Corporate greed on a staggering scale. Untrammelled capitalism that, left to its own, would do it all all over again.

Meanwhile, who do they think they will be leading? The toadies in London, maybe. But France? China? Russia? India? Anyone at all in the developing world? No, not only do they not want American leadership but they would be deeply – and rightly – suspicious of anything the US government thinks is a good thing. With Russia as a neighbour and our energy supplies at Putin’s mercy, we Europeans have every reason to look for allies wherever we can find them. But leadership from the USA? No thanks. You may have the power - or at least, lots of guns and a proven enthusiasm for using them - but the authority leadership presupposes? What on earth makes Obama think American presidents have any of that left?

I like President Obama. He seems like a decent guy. But I still have problems with three things. Firstly, apart from his immediate reaction to the current economic disaster (largely created by allowing the American interpretation of capitalism – with which, as far as I can tell, Obama agrees - to have its reckless head), I have no real idea where he would lead us. Yes We Can? - Yes We Can What, exactly?. Secondly, until I see different, I will assume that American leadership will, as ever, assume that what is good for America is good for the world. This has not proved to be a very helpful policy in the past. And finally, I just don’t want his or anyone else’s ‘leadership’. I would be more than happy if the USA would just join in for once. Climate change in particular is far bigger than World Wars One + Two, so it would be nice if you could just show up on time for this one. If it isn't already too late.

Meanwhile, I really think it’s time Americans stated thinking seriously about the whole End of Empire thing. As we Brits know, it’s a long, slow, painful process that makes you do and say all sorts of dumb things. Ah, Suez… I have no idea how the Americans will handle a multi-polar world over the next few decades – no better than we did, I suspect. But as a word of advice, can I suggest that, every time an American president is tempted to say something especially fine and resonant, they stop and have a long think about it? It will probably turn out to be a lot of pretentious tosh that will just bore or exasperate the rest of us.

Source: We are ready to lead. Are you ready to join us? The Times. March 25, 2009.

What about asking us, Sir Nicholas?

In today's FT, Sir Nicholas Stern, who is currently Professor of Economics & Government at the London School of Economics and has served as Chief Economist at the EBRD and World Bank, argues for an independent authority to evaluate economic risk on behalf of the world.

Good idea. But his idea of independence is a bit limited - too independent, in fact. He rightly argues that it should, unlike the International Monetary Fund, the World Bank, the Financial Stability Forum or the Bank for International Settlements, be beyond the influence of big countries and should have no lending or policy responsibilities that would bias its perspective.

Yet his idea of independence seems to revert to a now-antiquated notion that 'the economy' should be treated as just this system that rolls on, with no need for anything much more than the occasional warning and adjustment to keep it on the rails.

For the lead author of the UK Government's 2006 Review of the Economics of Climate Change, this is a little odd. Any such body certainly should have policy goals. Stopping the planet boiling might be a good one, and one that Sir Nicholas is more aware of than most. He is also singularly well equipped to say what that means, at least among conventional economists.

But focusing on climate chaos - and ecological collapse and resource depletion and the population explosion - are all themselves only sensible economic goals because they represent (in a still very abstract way) what society needs out of the economy.

So one final question: if this risk assessment body should be independent of governments, does it then have to be 'independent' of the people whose interests these governments that are so singularly failing to represent? That is the real risk: that all the institutions - political as well as economic - are tainted with the same economistic obsessions, and will not see the wood until all the trees have been burned down.

Source: 'The world needs an unbiased risk assessor', Nicholas Stern, Financial Times, March 24 2009.

Fossil Fools Day protests

In case you're inclined to join in, here is a summary (kindly provided by the security people in a neighbouring City institution) of the protests planned for the end of the month.

G20 Meltdown - April 1st and 2nd
Anarchists and anti-capitalists intend to hold a 24 hr 'Reclaim the Streets' style event in the City, starting at 12:00 hrs at the Bank of England, Bank Junction. Intelligence also suggests climate related protests) and actions (this is also 'Fossil Fools Day) at RBS, 250 Bishopsgate and the European Carbon Exchange and Carbon Exchange Plc at 62 Bishopsgate. Attendance can be expected to be between 1,000-2,000, although this cannot be confirmed.

At 11:00 hrs, several gatherings will take place at the tube / train stations of Liverpool Street, London Bridge, Cannon Street and Moorgate. Each group will then snake their way to the Bank of England at 12:00 hrs, headed by the four horsemen of the apocalypse.

Representing:

• Climate Chaos - Green Horse - Liverpool Street Station
• Anti-war - Red Horse - Moorgate Station
• Job / savings / pensions losses - Silver Horse - London Bridge Station
• Home repossessions - Black Horse - Cannon Street Station

Intelligence suggests that:

• The Liverpool Street convergence will be in the form of a FlashMob to raise public awareness, stretch police resources and avoid police 'corralling' action.
• Some anarchists may attempt an incursion into the Bank of England, using force if necessary.
• An overnight vigil in the City with attendees bringing tents to sleep in.
• Early morning attendance at the LSE on 2nd April (07:00 hrs) with a view to disrupt trading.

Other autonomous actions against banks, financial institutions and those linked to the climate industry, in particular those that have recently benefited from the government bailout and mergers (Lloyds, RBS etc).

Historically, this type of action usually takes the form of a party-type atmosphere with sound systems playing. This sometimes turns confrontational and can result in a mass rush towards the entrances of locations that they are seeking to occupy or a break out of police lines. Anarchists in the past have committed acts of criminal damage by causing graffiti or smashing windows and, therefore, encouraging looting. This should be considered due to the proximity of the Royal Exchange. Popular targets are those with a particularly capitalist image, e.g. McDonalds, Starbucks, banks, or those with Israeli links due to the recent events in Gaza.

As many will remember, the G18 actions of 10 years ago resulted in mass disorder and conflict with police. Actions included climbs, banner drops, barricades, storming of several buildings and the setting alight the Mercedes garage. Although there is no intelligence to suggest a repeat of these events, the planned days of action do bear some resemblance to those of G18.

Other related events:

• 28th March : The TUC will be holding a march & rally from Embankment to Hyde Park from 11:00- 17:00 hours. It is anticipated that up to 30,000 people will attend this event.


• 2nd April : G20 Conference, ExCEL Centre - It is possible that activists will attempt some kind of blockade or incursion at the event. There will be a robust policing plan in place.

Why capitalism must expand - whatever the environmental consequences

I have suggested several times that capitalism’s destructive relationship with the environment is not a matter of greed. Nor is it natural to industrial systems. Rather, it inheres in the basic economic structure of capitalism itself – in the things that make it capitalism rather than any other kind of economy. But how is this so? One would never have drawn any such conclusions from economic theory as it is taught in our universities or the way most professional economists talk about their subject.

The key question is how investment works under the rules of a capitalist economy. These rules have evolved along with capitalism itself, but the basic cycle as it now operates is very simple. Imagine that you have a good deal of money available to invest, and choose a sector where a lot of ‘fixed’ capital is needed. That is, your business will need to pay for a lot of materials and facilities before it can even start doing business. This might mean almost anything – expensive tools, specialised equipment, vehicles, energy generation, storage, offices, changes to the terrain, and so on – all of which must be paid for before production can start and none of which will be paid off until you have been in business for a long time – certainly years, and quite possibly decades.

For example, a car or a cement factory can cost several hundred million dollars, almost all of which must be paid for before the first car or bag of cement comes off the production line. A nuclear power station can costs several billion dollars, yet will not generate one iota of revenue until long after its owners have had to start paying out to build it. To fund these enormous outlays, even the biggest company has to borrow equally enormous sums, all of which must be paid back, typically over a very long period.

The upshot of this is that there is a constant pressure on the owners to keep selling the product. That makes it extremely difficult to reduce sales of even the most environmentally destructive product, once the capital has been raised and the factories, roads and power plants are in place. On the contrary, there is bound to be a pressure to deal with any such problem far more economically, such as be simply denying its reality. Other stakeholders in this process – including the workers whose jobs are at risk and the governments whose loans and tax revenues are equally on the line – will frequently back them up, sometimes (as in the case of global warming and other environmental problems) beyond all reason. So it is no wonder that every successive environmental problem, from industrial accidents to global resource depletion to climate change, are routinely denied by big business: they know who will be expected to pay for the damage.

In fact, far from showing restraint, there is ample reason to believe that having a lot of fixed capital to pay off will not only encourage owners to look the other way when problems loom but actively encourage them to expand production as much as possible. The more any given piece of equipment or building or other facility can be used while the debt is outstanding, the more income it will generate to pay off the debt. For example, if a car production line is used for three shifts each day rather than one or two, then the part of the costs that goes towards paying for the factory building (or approach roads or office space or any number of other items) can be spread out over more cars. As a result, both the costs and the value of the output will go up, but because nothing extra is being paid to use the factory 24 hours each day, the cost per car goes down and the revenue available to pay off the debt goes up. So it always makes sense to look for new ways to intensify production, so that more revenue can be had for the same costs.

On the other hand, the value of your investment is constantly being eroded by competitors. If you plan for your investments to pay for themselves over many years, you can assume that three things will happen. Firstly, your equipment will wear out, while more recent entrants to your market will be using more up-to-date machinery that does the same job at lower costs. Secondly, notwithstanding all the laws of patents and intellectual property, you can expect any innovations you have made to be copied by others without them having to bear the research and development costs you had to pay for. And finally, the longer the term of your investment, the more likely it is that you will find the whole way your investment works radically undermined by a truly ‘destructive’ innovation that simply changes the way things are done in your industry. Thus, the car destroyed the horse and cart, the valve was all but eliminated by the transistor, the European and American car and electronics industries wilted before the Japanese quality revolution, supermarkets are destroying small retail businesses everywhere, and right now downloading is destroying CD and DVD businesses all around the world.

All these forces means the same thing: you need to exploit your capital as much and as quickly as you can, which ultimately means one thing: make and sell more. The environmental effect of this imperative may be mitigated by improvements in efficiency, but the likelihood is that any given business will also find easier but less desirable techniques for solving their economic problems, such as to manipulating customers, markets and suppliers. Obsolescence can be built into products in all sorts of ways. They may also be eased by protective governments (many of which have not hesitated to put the interests of business before those of their own people), by buying out competitors and by flagrant abuse and dishonesty of one kind or another.

A good deal needs to be added to the basic production process to make sure that all these extra goods and services are sold, of course, and it is no coincidence that mass production and mass marketing came into existence hand in hand, or that encouraging debt and consumerism has long since been a matter of government policy. The stability of our society relies on industrial systems that operate on a larger and larger scale, and under a capitalist economic system that means the ability of big businesses to repay the loans and bonds that have been used to finance all this. That in turn means profit, without which not only these investments would collapse but the entire system of employment and the entire tax system that underpins government would simply disappear.

Yet there is no economic necessity for our economy to work like this. Society is perfectly capable of identifying its own needs. We are perfectly capable of building factories and offices and communications and energy generation systems and all the rest without all the paraphernalia of big business. To claim that we need the profit motive to make people behave in an economically rational manner is not so much doubtful as absurd, given how irrational every bubble and collapse proves profit to be. Likewise the severely deceptive ‘price signals’ from mostly imagined ‘markets’ – they serve the purposes of a small elite that does so well out of these fictions, but the continual assertion that we are capable of nothing more intelligent surely requires more than the routine abstractions of discredited politicians, ivory-tower economists and toadies to big business itself.

And as the above argument I hope shows, any idea that capitalism can be the centrepiece of any attempt to deal with serious environmental problems is not so much absurd as grossly irresponsible, not to say terrifying. Capitalism is incapable of weaning itself off growth, because that is what the basic rules of investment demand. So where it has invested in selling physical goods, it must grow its output and so increase its physical impact; and where it is a non-physical service, it must intensify its use of the many physical resources even the most ‘dematerialised’ service employs. It is incapable of shutting down the most filthy factories or deliberately choosing a more expensive but environmentally more rational way of delivering our economic needs, unless this can also be proved to be the most profitable way of proceeding. That may sometimes be the case, but to rely on such a foolish assumption in the face of the worst threat to the planet in human history must surely be regarded as verging on insane.

Is Asian capitalism different?

What I hope is a last word on derivatives. Apparently in 2000 Gao Xiqing, an adviser to the then Chinese premier, said that:

if you look at every one of these [derivative] products, they make sense. But in aggregate, they are bullshit. They are crap. They serve to cheat people.

[Quoted in an article by Kishore Mahbubani in today's FT.]

On a somewhat wider stage, however, Mahbubani's piece claims - quite rightly for the moment, perhaps - that there are various distinctively Asian versions of capitalism, all of which are a good deal more conservative than the ‘western’ model. For example, Asian societies have much higher levels of savings, since the Asian financial crisis of 1997-98 have restored a degree of government regulation, they have learned to ignore the IMF’s market fantasies, and so on.

Which is very sensible indeed. But how sustainable is it? As Mahbubani notes, the high savings level is the product of centuries of economic and social uncertainty. But the same might be said of westerners, whose personal prudence in these matters was once legendary. Indeed, some economic historians have claimed that our high ‘propensity to save’ was one of the foundation stones for capitalism itself. Likewise for regulation: it is not so very long ago that no one in the West would have dreamed of deregulating our economies to anything like the extent that we have.

But things change. Once consumerism – rapidly emerging in the east as in the west – takes command, the vast marketing machines will make sure that savings are quickly eroded. There will come a time when Asian economists will recommend the deregulation of markets, and there will come a time when Asian governments will be so exposed to global economic pressures that they will be unable to resist. That’s how capitalismworks – not western capitalism or Asian capitalism - just capitalism. After all, what we have in the west is not a specifically western model at all – it is simply capitalism completely let off the leash. When it is let off the leash in Asia too, they can fully expect the same tribulations.

And plainly Asian capitalism can be fooled into playing along with the western model, because for a long while they did. In 1997-8 they learned better – but to what extent did even that happen because there are at least two major global players in Asia – India and China – neither of which has really been absorbed not the global capitalist network at every level of society? They are both heading – indeed, sprinting – that way, so why should we expect them not to succumb to the 'western' model?

There is an answer. It's a combination of peak oil, climate change and the ecological devastation that is already making itself felt all across Asia. But Asian capitalism? No, I doubt very much that that can resist effectively on its own. Why should it? 'Western' capitalism didn't, even though philosophers and historians and politicians and pundits of every stripe claimed the same virtues for the west as Mahbubani does for Asia.

Alternative histories

One of my minor enthusiasms is alternative histories. You know the sort of thing – what-ifs about the wrong side winning wars, Jesus not being crucified, and so on.

My personal favourite is what would have happened if Napoleon had not sold Louisiana to the United States in 1803. In those days, Louisiana was rather more than the present-day state – it included all of present-day Arkansas, Missouri, Iowa, Oklahoma, Kansas, Nebraska, plus much of Minnesota west of the Mississippi, most of both Dakotas, north-east New Mexico, all of Montana, Wyoming, and Colorado east of the Continental Divide, plus all of the modern state of Louisiana that lies to the west of the Mississippi River, including New Orleans. It’s more than 800,000 square miles or 2 million square kilometres. That’s about a quarter of the modern USA, and completely divides the east and west coasts. As Napoleon rightly said of the Purchase that ‘This accession of territory affirms forever the power of the United States, and I have given England a maritime rival who sooner or later will humble her pride.’

So what would have happened had the Louisiana Purchase not happened as it did in 1803 (at 3 cents an acre!)? Assuming that the USA had no later opportunity to buy this land, plainly the USA would have been a much lesser country – locked to the east coast, cut off from the Great Plains, Texas and California, with no interest in the Pacific, Hawaii or Alaska, and extremely unlikely to emerge as the Great Power sans pareil at the end of the 20th century.

And what about Napoleon? Assuming that he was still defeated in 1814, what if he had fled to a still-French New Orleans and been welcomed (or at least forced his acceptance) as ruler? It is not hard to envisage his subsequent career, with two basic themes: keeping Americans to the east of the Mississippi, and establishing a new French empire to the west. Imagine the results: all the familiar additions to the USA – Oregon, Texas, California, maybe even Hawaii and Alaska now go to a new French-speaking power. Mexico defeated and perhaps absorbed. New French conquests in central America and the Caribbean, perhaps. A great French naval power in the Pacific. Conflict with Britain over western Canada. All of the oil wealth in the hands of a new power.

But whenever I think about alternative histories, I never get very far before a quite different train of thought sets out. For how long would even such a great change have made a difference? A century later - certainly. A millennium? Well, less so, at least as far as the general shape of the world is concerned. And the longer you wait, the smaller the likely impact. Or at least so I would have thought. I really don’t know. There are countervailing arguments. Chaos theory, for example, seems to suggest that, for some phenomena at least a small perturbation in 1803 would change the future irreversibly.

But I am not convinced. I do not doubt that, at the level of, say, who is born and who dies, a great funnel of causality spreads out indefinitely, within which nothing is the same again. But in terms of the larger structures of society and history, two things occur to me. Firstly, are social systems sensitive like the weather? A butterfly may change the weather halfway around the world (though I have never seen a convincing proof of that idea!) but great systems such as capitalism or feudalism do not look quite so touchy. And secondly, what of all the things – the infinitely many more things - that do not change? Is their effect erased? Presumably not. For human (and intelligent) systems have two features that make this unlikely.

Firstly, like living systems, intelligent life does not react to things like a billiard ball- just bashed about willy-nilly. A living system assimilates the things it encounters (i.e., adjusts them to it own patterns of activity), or if it cannot, it accommodates to them in ways that are as specific to its own nature as they are to the thing to which it accommodates.

As for any intelligent system (e.g., a human being or society), not only do they (like all living things) respond only in ways that reflect their own structure, but they also - and in this they transcend non-intelligent organisms completely - include within themselves knowledge of the principles through which they do this. That is, they include within themselves their own values, goals, methods - any number of other more or less explicit, more or less deliberate structures that ensure that the randomness of the chaotic system is replaced by its very opposite.

So is the result an ever-widening funnel? Or a lens-shaped hole in history that widens and widens and widens – and then narrows and narrows and narrows again, until the point is reached where you can no longer tell whether or not the original trigger actually occurred? At that point, the effects of the initial cause have been so dissipated and diluted by the effects of all the events that were not changed that everything – or at least things of a more structural and functional level – are as they would have been anyway?

I suspect that the answer depends on the relative breadth of this causal ‘funnel’ at its widest and the historical ‘space’ into which it irrupts. Where the former exceeds the latter, it would seem that irreversible change is unavoidable. Even if it is smaller, there is presumably a kind of ‘critical mass’ of effects that set history on a radically new course. Hitler dies in the First World War? Climate change devastates civilisation? Nuclear winter kills every large animal and literally every bird and mammal (i.e., every potentially intelligent organism) on the planet? And planet Earth would otherwise have founded of a galaxy-wide society?

Or are there rules to the structure of human history that either are not affected by empirical events, or at least can force themselves back into control? As I have argued (implicitly) in my History of Human Reason, there are. If there is life, there will be intelligence. And if there is intelligence, there will be history and consciousness. And if there is history and consciousness, there will be something very like feudalism and capitalism and their successors - the still more advanced social systems we did not quite get up to.

London - Paris return: 10.9kg

I'm off the Paris tomorrow, to see my lovely daughter. So I thought I'd try to find out exactly how much CO2 I'm going to be emitting in the process. Starting from London, the answer is 10.9kg, Eurostar (the train company) tell me. All independently audited, etc.

Compare that with 122 kg - 11 times as much! - if I fly! And the door-to-door journey time is not noticeably different.

Two questions naturally spring to mind:

1. Why on earth would anyone prefer to have a truly wretched time traipsing out to Heathrow, hanging about and queuing for an age, and then being stuffed into a noisy, uncomfortable and (relatively) dangerous airplane?

2. Why is even still legal to do take the plane when the environmental difference is so vast?

No, the answer isn't freedom of choice. I don't have the freedom to shout in other people's ears in public places (though apparently advertisers do), so why should I have the freedom to pollute their air and endanger their planet? And the sooner we get used to that idea, the better for all of us. Especially for my daughter, her children and grandchildren.

Climate change: Back to the wrong drawing board

The head of the IPCC is reported today as saying that Barack Obama is unable to introduce the kind of carbon cuts EU countries are aiming at, lest he face social revolution. As a result, report the media, the new post-Kyoto climate deal is in jeopardy.

Tosh.

And the problem is, as with the perennial What about China? Conundrum, we have exactly the wrong approach to how climate agreements work. Look at it like this. Imagine that there are two hundred or so people – one for each country on the planet – standing in your neighbourhood park, evenly spread out, all wearing blindfolds and each carrying a gun. Every now and again they each fire in a random direction. Some, such as the ones representing the USA or China, fire more frequently than the ones who represent Somalia or Tanzania. Given how they are spread out, few bullets kill, but inevitably some do.

So what is the right solution to the rising death toll? To only stop firing when we all agree to stop? Or does it make sense for everyone to stop as soon as possible, regardless of what everyone else does? If I fire more slowly, I kill fewer people, and if I’m not firing at all, I don’t kill anyone. Why on Earth would I wait for anyone else to stop firing?

Likewise with climate agreements. If China and the USA and Australia and India and Russia go on putting carbon into the atmosphere – or depleting resources or encouraging population growth or allowing ecosystems damage - many will die. But regardless of what anyone else does, the rest of the world can minimise the casualties by slowing and then stopping the damage they are doing, and the USA and China and everyone else is more than welcome to join us - ASAP please.

More on atheism

A brief follow-up to my previous comments on the ‘Don’t worry, God probably doesn’t exist, so stop worrying and get on with life’ bus adverts and intelligent design.

An atheist isn’t just someone who does not think God exists. An atheist is someone who would not ‘believe in’ God even though they knew that he does exist. For to ‘believe in’ God entails a good deal more than simply acknowledging factual existence. It also requires (in its conventional gloss) that I worship my creator and obey his will without question.

I find this impossible to stomach – partly because it offends against the fact that I am – or so God tells me – a morally responsible being. If that is the case (and I like to think it is) then the mere fact that someone else tells me x or y is right does not make it so. There is no moral authority over a moral being other than their own moral judgement. I will – indeed, as a moral being, I must – make my own decision.

As for worshiping God – what on earth does that mean? To repeat the example used by William Paley about 170 years ago (and so beloved of theologians even now), if I found a pocket watch on the path, it would not take long to work out from its complexity that it had a designer. But even if this were true – and as the next 170 years of evolutionary thinking has demonstrated, it isn’t – I would not expect the watch to worship its creator. What a weird idea!

And even if it did, I would hardly say that God’s record to date suggests that he is worthy of such devotion. I have long thought that the Bible evidenced a severe lack of moral judgment on God's part. Of course, one has to sympathise with his predicament. It must be tough being divine in the face of modern technology. Imagine trying to manifest yourself over the phone, only to be put through to an answer machine. Imagine announcing the Second Coming by TV, only to have half the population video you instead and then record a soap opera over you without even bothering to watch.

But leaving such modern niceties aside, Creation doesn’t exactly reek of any deep concern for its inhabitants. At this very moment, a million children are crying with toothache. The state of the world, even on this small, quite non-cosmic level, would make Caligula blanch. If a camel is a horse designed by a committee, the Universe was surely designed by a committee of camels. (Actually, the conception of the universe as designed by a committee does solve one enduring theological conundrum - how the three persons of God could also be one.) Far from embodying divine wisdom, the universe is really the expression of perfect unwisdom, only made wise by humanity.

As for God himself, he exhibits the morality of the ultimate amoral bystander. How could he stand by and watch Auschwitz happen? Or as one eminent American critic of religious institutions has remarked:

Let’s get serious: God knows what he’s doing, he wrote this Book here, and
the Book says he made us all to be just like him. So if we’re dumb, then God is
dumb, and maybe even a little ugly on the side...

Chorus: Dumb all over... A little ugly on the side... Dumb all over...
(Frank Zappa)

It’s lucky that God no more has free will than the rest of us; heaven only knows what he might have got up to. Cataracts, indeed. Nor is he much more effective on the social and historical planes: any religion that has still only acquired a minority holding in humanity’s conscience after 2,000 years of sustained marketing by some of history's finest fanatics and delivers human happiness with the efficiency of the Plague is surely due for an overhaul.

All in all, there is no reason to worship God just because he is omnipotent, because he is our creator, etc. It may be Calvin’s opinion that one cannot help but worship one’s creator -

How can the idea of God enter your mind without instantly giving rise to the
thought that since you are his workmanship, you are bound, by the very law of
creation, to submit to his authority? (From his The Institutes of the Christian Religion.)

- but as i say, that is surely to deny our integrity as responsible beings. After all, that’s how God made us - if we were made in the 'image' of God, surely it was in his moral image. (Or if it was in his physical image, why was he so susceptible to in-growing toenails?) But in that case, we are as responsible for our acts as God is for his. What then is there to worship? By the same token, how can our sins be taken from us?

In summary: God does not exist, but even if he did, there would be no reason to ‘believe’ in Him. And even if he were worthy of belief, that would be no reason to worship him. I believe in democracy but I don’t worship it. And even if he were worthy of worship, there is no reason to think he is a Christian. After all, no one else is. Finally, even if He did exist, were a Christian and were worthy of belief and worship, then the entirety of human history cries out that he really is an Almighty Shit.

Unfortunately Richard Dawkins barely exists either

A belated reaction to the splendid ‘Don’t worry, God probably doesn’t exist, so stop worrying and get on with life’ bus adverts going around London a while back. Excellent – I’m only sorry that there aren’t more.

How about ‘God was just Jesus’ imaginary friend’, or perhaps ‘God’s only excuse is that he doesn’t exist’ over a picture of a small child in Auschwitz? I’ve always wondered what excuse God will come up with over that one. If I had stood by and done nothing when I could have ended all that suffering in an instant, can you imagine what the world would have thought of me? So why think otherwise of God?

But despite the rightness of the sentiment, Richard Dawkins (who I believe a hand in these advertisements) is far from having a credible answer to the problem religion is trying to solve. His response to religion seems to be, in brief, that it is scientifically incorrect, and so should be disregarded. The first part is right enough, although I doubt that the Pope or the Archbishop of Canterbury would consider it much of a criticism. But I am sure that they would respond – equally correctly, I’m afraid - that religion isn’t about empirical truth anyway. And when they start getting onto what religion is about, their solutions may be completely fanciful but they are also solutions to perfectly real problems before which science (at least in the guise Dawkins favours) is as helpless as a baby.

Religion is about meaning – about what life means, about where we come from and where we are going to, about our relationship with one another, with ourselves, and with the world. The religious response to all these questions is God, which is where I, like Dawkins, get off. But they are all perfectly valid questions: without a sense that life has any meaning, not much is left but boredom, horror and ashes. Yet this is precisely what Dawkins is committed to. Not only is his general (very conventional) account of science absolutely incapable of posing, let alone answering, questions of meaning, but the specific theories to which he is committed – above all natural selection – is completely opposed to the idea that life has any meaning at all. In this he finds himself in good, if uncongenial company, for Stephen Jay Gould, who seems to have disagreed mightily with Dawkins about the very Darwinism to which they were jointly committed, once wrote a sad little book about the place of the individual in evolution, and could only conclude that individuals were empty, futile, accidental things.

In both Gould and Dawkins’ versions of Darwinism, there is no way out: not only does life have no intrinsic significance (true) but it is quite unthinkable that we should have the capacity to construct a meaningful reality (profoundly false). In their conventional forms, random variation and natural selection allow no space for meaning over and above being programmed to seek out and respond to things that enhance our reproductive fitness. Above that level there may be all manner of meaning-like things, but that is where they all lead. But if meaning is really just code for reproductive fitness (or making a lot of money, or any other contemporary cultural shibboleth) then it is resting on its own antithesis. Like existentialism and a dozen other philosophies, the only advice it can offer is to look the other way, and then die. Meaning is essential if the scientific view of life is not to be turned into a tragedy, but if the best we can hope for is Dawkins/Gould/Dennett’s narrow reading of Darwinism and scientistic undermining of meaning, the only possible outcome is the mutually assured destruction of science and happiness.

It is clear from their writings that not that either Dawkins or Gould is comfortable in this position. Who would be? This is their lives we are talking about too – according to their own theories, meaningless accidents. Yet when they try to get out of this bind – as when Dawkins appeals to our big brains to fight back against the worst excesses of our genes or Daniel Dennett (another member of this charmless circle) asserts that real freedom just ‘evolved’ because it was selectively advantageous that it should - they just sound stupid. Were they – and we – not so blinded by the authority of this rather trite interpretation of natural selection, we would all be shouting that the emperor has no clothes. Or rather, that he may be fully dressed, but he is not emperor.

And it is all so unnecessary. Natural selection is completely compatible with the idea that intelligent beings are capable of constructing a meaningful reality, and we don’t have to be constantly undermining ourselves by sneaking back and claiming that it’s all really about reproductive fitness after all. The crucial thing to understand is that, just as there are things that precede evolution and cannot be sensibly explained in such terms – the whole of physics and chemistry, for example – so there may be things that are every bit a material as bodies and genes and nervous systems, but which are also post-biological. That is, they rely entirely on the existence of a functional biological ‘platform’, but once that platform is assured, their interests are as far removed from those of life in general as life in general is from a chemical reaction. The differences are qualitative, fundamental, and include a huge range of novelties – consciousness, history, culture, technology, and so on.

This layer is intelligence. And I cannot emphasise too strongly that this is not simply as intelligence considered as just another faculty of the brain. Rather, the relationship between intelligence and life in general is much the same as that between life in general and chemistry or chemistry and physics – a radical reorganisation leading to both the resolution of key problems biology by itself finds insuperable and the introduction of new problems that our biology finds unintelligible.

The former includes the objectivity (as expressed in science, technology, industry, and the possibilities of radical environmental management) that allows intelligence to ‘see’ random variation and natural selection in a completely different (i.e., objective) light from any non-intelligent creature, and so to grasp its logic and the solutions it requires in ways that completely circumvent evolution itself. The second is this very problem of meaning, which spins form the very same source – the objectivity that tells us not only our place in evolution but also questions our place in the universe and in our own existences. Sometimes intelligence comes up with blindingly incorrect answers of which religion is only the longest running. But that does not mean that it cannot come up with something better. Darwinism, for example.

So if Richard Dawkins - and the late Stephen Jay Gould and all the other biologists – cannot even imagine this possibility, it is not because Darwinism precludes it (see my Birth of Reason) but because they are unable to grasp that Darwinism describes only one step, and by no means the last, in existence. And intelligence is the next.

How much your government cares about your children

If you have children and expect to have grandchildren, you might like to know just how little your government is thinking about them. The following table (data from the Financial Times) sets out the national 'economic stimulus' packages for dealing with the current economic crisis and the fraction – typically pretty small - that goes to green programmes.



Even the green investments are rather illusory. Most of them are only partially credible (especially in China), and many are bound up with very ungreen initiatives. For example, the Italian, French and German figures all include programmes to encourage car owners to buy newer, greener vehicles. But not only is this of doubtful environmental value (because of the 'embedded carbon' put into the environment by building new cars) but thsi approach simply perpetuates the car culture that is half of the current problem.

Nor are things that are not in these packages exactly helping. For example, Canada will spend $150 million on low-carbon energy in this package. Very nice. What a pity is also plans to invest billions and billions in digging up the environmentally catastrophic tar shales in Alberta. It’s as though they have decided to take an aspirin before chopping their leg off.

I think I’ll move to South Korea.

Overdosing on Dr Li’s Magic Formula

One persistent theme in my experience of business over the last quarter-century is how wrong-headed it is to rely on what suits business to determine the direction of the economy as a whole. A second is that intellectual narrow-mindedness can make otherwise apparently clever people do some very dumb things.

It is not that most business people aren’t clever or that they don’t understand economics; rather, it does not matter how clever they are or what they do or don’t understand, because once business is allowed its head, the natural tendency of markets toward monopoly, bubbles and assorted other economic irrationality and social disaster is inherent in business itself.

The basic principles of investment ensure that, even for a democratically minded investor, a financial return – a profit - must be extracted sooner or later, while the equally basic rules of risk management mean that the shorter the term over which that profit is made, the greater the chance of not losing it to serendipity, market vagaries or the other guy being smarter/meaner/luckier than you. Add to that the extent to which most companies – and certainly all economically significant ones – rely on investment and re-investment from bodies such as investment banks, pension funds and insurance companies, whose sole interest lies in maximising the returns on their investments, and no sooner do you leave business to its own devices than they all start rushing towards the cliff.

For allowing business to have its head is rather like shouting Fire! in a theatre: everyone rushes in the same direction, because that is where survival – which is to say, the profit - lies. And when people all start running in the same direction, two things happen. Firstly, things start to get distorted. And secondly, people start to notice that they can rely on people running that way, even though there is no obvious reason way they are. Hence bubbles: things start to rise, then people start to buy not because they can see intrinsic value in what they are buying but because they have confidence that other people will soon be willing to pay even more for what they have just bought, and they will make a tidy profit selling it to them.

Add to that the extent to which market economics became an all-conquering ideology from the 1980s onwards, and it soon became inconceivable that the interests of business and the plans of its leaders could be wrong for society as a whole. In reality, it turns out, they were completely opposed. Follies such as the Private Finance Initiative or rail privatisation should have been enough to convince any disinterested onlooker, but as far as deregulating markets was concerned, nothing was too much. So regulators had spent half a decade mouthing oxymorons such as ‘light-touch regulation’ and declining to be firm with whole industries because ‘business wouldn’t like it’.

This could only happen because the free market fantasy went right to the top. Thatcher, Reagan, Clinton, Blair, Bush and Brown all expressed a quasi-religious passion, and did not the upright Senator Phillip Gramm say, ‘Some people look at sub-prime lending and see evil. I look at sub-prime lending and I see the American Dream in action’. Indeed - where but in a dream could anyone couple human happiness with unbridled market capitalism with an untroubled mind? Or how about, ‘When I am on Wall St and I realise that that’s the very nerve centre of American capitalism and I realise what capitalism has done for the working people of American, to me that’s a holy place’. I trust someone has engraved such fine words on Senator Gramm’s retinas for future reference.

Where did all this lead to? Inevitably, right into the heart of (cliché alert!) the perfect market storm.

The absurdity of this situation is illustrated by the enthusiasm with which markets adopted David X. Li’s now-notorious equation for calculating just how risky buying and selling really were. This (somewhat medical-sounding) ‘Gaussian copula function’ in fact allowed them to work out the probability that a borrower would default on their payments. Once you have a simple answer to this question, it becomes much more profitable to lend to them (or at least, lend to a whole class of borrowers of the same kind), because you know exactly how much you can risk. You certainly don’t have to understand or pay regard to the underlying economic situation. With that, the market is reduced to a casino – from the individual punter’s point of view, most people lose their shirt, but from the house’s perspective, it’s almost impossible not to clean up.

Or at least so it seemed once Li had performed the seeming miracle of replacing all that intractably complex analysis of interacting variables and erratically fluctuating intangibles with a single neat number. This number was extremely easy to understand – a little too easy, it turned out – and allowed bankers and their minions to create a complete parallel universe populated with exotic beasts such as ‘collateralised debt obligations’ and ‘credit default swaps’. And rather like the real universe, it grew by a fantastic process of inflation that defied mere time and space, with the derivatives market quintupling in size from $100 trillion in 2002 to $500 trillion – that’s $500,000,000,000,000 - in 2007. George Soros might admit that he didn’t understand these fancy new kind of derivative and Warren Buffett might call them ‘financial weapons of mass destruction’, but the really smart guys weren’t fazed: what the hell – there was money – lots and lots of money – to be made.

But, like unicorns, CDO’s and CDS’s – not to mention still more mysterious animals of the genus ‘CDO-squared’ - turned out to be beautiful, magical and mostly fictional. There was something there, but once the lights came up, they turned out to be little more than dead donkeys. What is more, the vast sums these true believers made were conjured up not, as it seemed both to City and Wall Street financiers and to their political accomplices, by the magic of the market, but by those very same bankers allowing a combination of ignorance and greed to create a market treadmill it was all but impossible to get off. With that, they broke all connection between business and the economy, to the point where the two became fundamentally opposed.

Hence both the illusory nature and the market triumph of David Li’s formula and the hypnotically simple ‘correlation’ it generated. For this clever tool offered to replace with a single, precise, eminently intelligible number any kind of analysis of the connection between a product’s price and the complex and imprecise underlying economic realities that gave it material value. The mere fact that the result was simply a single number should have started the alarm bells ringing – it is completely unbelievable that anything of economic significance could be meaningfully defined in such simple terms. But then the markets aren’t trying to manage the economy - they are looking for safe, swift and above all spectacular profits.

Which is what they got, for a while at least. But what was David Li’s magic number really based on? Two things: short-term thinking and the market feeding on itself. Not that David Li's model was unusual in that respect. The Bank of England director for financial stability, Andrew Haldane, has commented that 'With hindsight, the stress-tests required by the authorities over the past few years were too heavily influenced by behaviour during the golden decade' (i.e., 1998-2007). Not very smart, given how exceptional everyone knew this period really was.

Yet Li's model took this process to its extreme, by taking into account only right now.Underlying Li’s equation is the assumption that, far from trying to understand the value of an investment – which is to say, its true economic value – it is only necessary to know how much the market is currently pricing it at. Once you know that, you can estimate the risk you are taking when you buy or sell it. But such an approach can only work while the market is buying or selling in unison and is either completely static or continuously changing in the same direction. The former is almost unheard of in recent decades, while the latter can only endure while the market is in bubble-mode, and people are buying and selling at silly prices primarily because other people can be relied on to sell and buy at sillier prices still.

Eventually, however, the strains this creates are too much even for these florid times. Eventually, investors start to realise that a) they no longer have any idea what anything is really worth, b) whatever it is, it is a lot less than what the market is saying right now, so c) the prices of their assets makes no sense at all. With that, Li’s reassuringly singular equation starts point firmly downwards, and everyone starts shouting Fire! And heads for the exits. The market burns down with most people still inside, and the central mechanism for manage truly huge swathes of the entire global economy goes up in smoke.

This is yet another instance of the notorious ‘mark to market’ strategy, of course – of valuing something solely by current price rather than taking into account any notion of material (social, economic, etc.) value that might sustain its price. As the current crisis has amply demonstrated, this has the disastrous effect of exaggerating a company’s value enormously when a bull market is in progress and asset prices are all going up. This in turn allows that company to borrow far more than they would have been allowed in less bullish conditions, even though the economic value of the company has not changed. Conversely, as soon as the market turns, the company’s assets are worth less and less, its credit collapses and all those loans are called in. What has changed in the economy? Nothing. What has changed in the market? Everything. So what then happens to the economy, at whose heart these unfettered markets sit? Disaster.

And all this is epitomised in Li’s formula. It’s timescale is not so much short-term as instantaneous, so any rapid market shift can bring on a catastrophe. By reducing everything to a single index it demonstrates that its sole purpose is to price risk and feed short-term speculation, rather than calculate realistically complex economic values, and so support true investment. Its simplicity concealed far more than it revealed, to the point where 30% of the US mortgage market could be made up of sub-prime mortgages and no one noticed. By being nice and simple, it seduced mathematically illiterate managers into believing they could do magic. Which, like the sorcerer’s apprentice, they could – they sprinkled Dr Li’s fairy dust over the financial sector, and it disappeared. Finally, it values risk based solely on what the market says it is worth, which (like all speculation) is both economically trivial and completely circular. So as soon as it starts to be widely used it is almost designed to generate a bubble, and the very nature of bubbles is that they take make everyone believe that they can defy economic gravity – just like they could with the dot.com boom, the supposedly ever-expanding ‘knowledge economy’ and a host of other booms and busts. The fate of bubbles was Economics 101 then and it is Economics 101 now.

But it would be quite wrong to blame David Li and his equation. Many experts warned against taking it seriously. So did David Li - though that didn’t stop him making his fortune out of it. In fact it makes more sense to ask not how the Li formula destroyed the financial markets, but how the financial markets, with their superficiality, their collective egoism, their indifference to long-term consequences and their power to strong-arm anyone caught up in them to play economically and socially insane games, created an audience for Li’s formula.

But what about all those clever business people who declined to heed the many warnings? The regulators who endorsed its use, even though one Standard + Poor analyst remarked ‘Let’s hope we are all wealthy and retired by the time this house of cards falters’? The politicians who gave business the ‘light-touch regulation’ it wanted? All those clever free-market acolytes from the Wall St Journal, the FT and the Economist? Yes, I think we can blame them. Not that I blame them for being wrong; but I do blame them for being so utterly uncritical, so deaf and blind, so patronising to those who questioned their shallow fantasies and so cowardly when the end was in sight. Unlike explorers searching for Eldorado, they had every reason to know exactly where we were heading.

They just preferred not to notice until it was too late – for all of us.