The Evil/Power Equation, or Can The Realities of Banking Corrode the Conscience of a Liberal

Friday afternoon The Conscience of a Liberal illuminated its flashing neon sign requesting help on how the actual real-world banking system operates. Of course this is not what it thought it was doing. It thought it was insisting with bright adamance on an orthodoxy contrary to the obsessive delusions of Modern Monetary Mystics and other heterodox dust kickers in the blogosphere. It was clarifying a central tenet of neo-liberalism, the "loanable funds hypothesis". What makes this little shim central to the arch of orthodoxy is its implication that banks can't create money out of thin air: wedged firmly beneath the bottom right voussoir of the arc this shim stabilizes a neo-classical edifice in which while banks create assets and debits, they are constrained by the actual money supply in burdening the macro system with excessive obligations.

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Now I'm no economist, its been thirty odd years since I had a serious math class and I haven't seriously poured over anything mathematic, short of spread sheets, since I passed my exam to become an architect twenty five years ago. Herewith, none the less, my Evil/Power equation:

E=P(I)/H

In this formulation E is Evil, P is Power, I is Ignorance and H is Humility. Obviously I've some biases here: H can only temper the evil effects of I and P, it can't make them go away. This maps with my experience: I have seen excellent leaders do excellent things that as a value proposition I am certain are net positives for humanity, but even these have left in their wake damage, destruction and little eddies of evil (small e, but these currents never die and serve to float future P and I in their deleterious effects). The reductions necessary for the mathematical formulation, of course, make this much more Manichean than experience suggests is warranted, but I've done it to make a point about what economists do.

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I'm quite a fan of Dr. Krugman and generally approve what he tries to do with his Conscience on his NYT blog. None the less, the I with which he illuminated his flashing neon sign this Friday last, has hardly been helped by any significant factor for H. This drives me to post as a non-financial and non-economist kind of guy because the E effects of this kind of large I small H behavior amongst orthodox economists has created for those of us consigned to the margins of finance these last thirty years a real economy in which I pay entry level architects, with private school prepping and Ivy degrees, the same paltry sum I was paid when I got my BArch in 1986 as the Gipper was pulling the last fringe of the rug from beneath the Middle Class. 

Compared to where I was when I earned these wages, these kids are staggeringly more educated and the working capital of IT with which I provide them makes them exponentially more effective than I was with my T square and Magic Markers at the equivalent point in my career and yet the economics of my field leave no margin to improve their wages: I pay them no less well than do titans of my field. This condition is a result of policies built around the models of low H, high I economists who have elided the Macro vs Micro insights of the last three hundred years into reductivist mathematical models that simplify the real economy in staggeringly naive ways (of all things, they leave out banking, finance and money). 

Fortunately Scott Fullwiler and Steve Keen have provided the help Dr. Krugman has requested in pretty clear and succinct posts. So now we will find out if the realities of banking have corroded the conscience of a liberal or whether that conscience will go to work on its own ignorance to reduce its numerator while levering up its denominator to minimize the E it inflicts through its P on the larger world. So far, Dr. Krugman has been using Occam's Razor, like Dennis Dembly Bagley in "How to Get Ahead in Advertising", to slice off his head rather than his boil. Today he takes another slice at his own neck in defense of his ISLM take on reality, ignoring the Monetarist experiments of the 70s and 80s and suggesting that the Fed might opt for other tools without suggesting what those might be.