Chapter 22 - The Terrible Simplifers: Common Origins of Financial Crises and Persistent Poverty in Economic Theory and the New ‘1848 Moment’

Summary

One element explaining the financial crisis is what Hyman Minsky called ‘destabilizing stability’: long periods of stability lead to increasing vulnerability. This chapter argues that similar mechanisms are at work inside economics: long periods of economic progress in the core countries lead to increasingly abstract and irrelevant economic theories (‘terrible simplifications’). This leads to turning points towards more relevant economic theories, referred to as ‘1848 moments’. The chapter further outlines the key variables that need to be re-introduced into economic theory in order to furnish poor countries with the type of productive structures that makes it possible to eliminate poverty.

‘.. .soon or late, it is ideas, not vested interests,

which are dangerous for good or evil.’

John Maynard Keynes, closing words of The General Theory (1936).

The United Nations has announced that the number of chronically hungry people on the planet has exceeded the billion mark for the first time. It is extremely unlikely that any of them will ever hold a Swiss 1,000 franc banknote (worth more than 900 dollars), but if they did, they would see the portrait of a man who perceived the essence of the explanation as to why extreme poverty and extreme plenty coexist so naturally on this planet, and of the grim fate of the permanently starving – Swiss historian Jacob Burckhardt (1818–1897). Burckhardt, best known as a historian of the Italian Renaissance, coined the term ‘the terrible simplifiers’ to describe the demagogues who – in his dark vision of what the twentieth century would bring – would play central roles in the future (Dru 2001: 230). Events amply fulfilled Burckhardt's predictions of a cataclysmic twentieth century, of the rule of terrible simplifiers, men whom Burckhardt's colleague at the University of Basel, Friedrich Nietzsche, called power-maniacs (Gewaltmenschen), and John Maynard Keynes referred to in 1936 as ‘madmen in authority’.

A key common element in persistent world poverty and in the financial and (real) economic crisis is the ‘terrible simplification’ – a theoretical overshooting into irrelevant abstractions – that has taken place in economic theory after World War II. As unlikely as it may initially sound, I shall endeavour to explain in this chapter how – in spite of its apparent sophistication – equilibrium economics became ‘mathematized demagoguery’ based on an extremely simplistic world view.