Mr White's warnings are ominous. He acquired great authority in his long years at the BIS arguing that global central banks were falling into a trap by holding real rates too low in the 1990s, effectively stealing growth from the future through "intertemporal" effects.He argues that this created a treacherous dynamic. The authorities kept having to push rates lower with the trough of each cycle, building up ever greater imbalances, in an ineluctable descent to the "zero bound", where monetary levers stop working properly.
The most significant problem of our time for economists to solve is this: an experienced and highly respected economist like Mr White thinks -- passionately -- as he thinks of the contemporary economy. At the same time we have many experienced and highly respected economists who do not agree with him at all.
We see signs of this same underlying problem almost daily, although it might be somewhat disguised. It can take the form of a shouting match between two economists: monetary stimulus or not; fiscal stimulus or not; stimulus or austerity; more debt or less debt. Sometimes there are two schools of economic thought against each other in similar arguments. Or Paul Krugman vs. the Bank for International Settlements. Eventually, whole nations get pulled in. It can be "Germany vs. the rest", like this article by Martin Wolf of Financial Times shows. What is so sad about this is that the two sides to the argument often end up thinking the other side "idiots". As a consequence, they drive each other mad. They cannot understand each other. This smells very much like "incommensurability", a term Thomas Kuhn popularized in the 1960s.
Paul Krugman says -- in his blog post I linked to above -- that BIS people have, instead of a method, a certain attitude that guides their thinking. If we were struggling with incommensurability, this would be a typical thing to say if you are an adherent of a prevailing theory. In our case, BIS people are the ones challenging this theory. They are saying: "If you like your inadequate theory, you can keep it. We move bravely on."
What we must be witnessing here is a huge gap in our common knowledge, mutual understanding. Nothing else could cause this seemingly hopeless disagreement. There could hardly be any clearer wake-up call for economists who consider themselves true scientists. We need to fill this gap, instead of arguing endlessly and often childishly for either "stimulus" or "austerity".We can let the scientists who consider themselves already having earned their place in the history books argue about silly things. They have done their science. For us mere mortals, there are much more important things to do.
How does one solve significant problems? Here I would follow the advice from a quote attributed to Albert Einstein:
The significant problems of our time cannot be solved by the same level of thinking that created them.
As a strong believer in this piece of wisdom, I've been happy to witness the emergence of groups like Post-Crash Economics Society, Rethinking Economics and The Institute for New Economic Thinking. I am not aware of everything they believe in, but the pressing need to find a new level of thinking is obviously present in all these and many other groups I fail to remember right now. It has also been delightful to see that intelligent and experienced people like Adair Turner, George Soros and Andy Haldane, to name a few, are giving their moral and financial support, and/or brain power to this cause. Whether they are fully aware of it or not, many of these people have identified the most pressing problem in economics. A problem that must have been there always, but which has become more and more obvious, and almost unbearable, during our latest financial crisis.
Here is the problem in its simplest form: We do not understand well enough how the monetary system works.
Money is an enigma. All who have studied it know that money is tightly connected to credit. During the last 200 years, we have had a "monetary theory of credit" and "a credit theory of money". These and some other monetary theories still live side by side and the fundamental problems remain unsolved. I have full understanding for the economists who have given up working on this issue. But luckily we have also people who are "crazy" enough to try. Even when they know that J. M. Keynes, Joseph Schumpeter, Irving Fisher, Henry Simons, Ludwig von Mises and all the other big names of the first half of the 20th century also tried. And failed.
I have tried too. I'm mainly self-educated, both in economics and in life. My only degree is in accounting (master's). I have come to believe I'm a fairly rare type, "a crazy accountant", or "an accountant with imagination (and dry humor)". If I have some advantage, I think it lies mainly there. It might also lie in my questioning attitude towards any received wisdom. My brain just doesn't receive it. Therefore the fact that I enjoy reading Nassim Taleb should not come as a surprise. That I do not view even Nassim Taleb as an "authority" should also be self-evident. Having now tried to prepare you, I hope what I am going to say next will not be taken as impudent or arrogant. It is just how I see things at the moment. It is my truth.
I believe I have succeeded in solving our problem. How I have done it is by unlearning, painfully, what I thought money was, and finally, by divorcing money completely from credit. What I now sit with is a very simple theory with a huge explanatory power. Of course there is a "catch", and I already stated it. It is difficult to forget what one for a long time has considered true. In his preface to The General Theory of Employment, Interest and Money (1936), John Maynard Keynes put it like this:
The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
My hope is that someone will have the curiosity to follow my thought, criticize it and/or build on it. I do not want anyone to believe what I say. Do not believe me. Criticize. Find out why I am wrong, as I must be. If we follow this way, I am 100 % sure that we will learn a lot. I can see that there are many people who are working on this problem and some of them seem to be on their way to solve it ("thinking in terms of purchasing power" may ring a bell). It is a matter of time. But the sooner the better, as the problem seems to be becoming very, very pressing again (see, for instance, William White).
In case I have managed to arouse even a little bit of curiosity: I would be happy to work with someone on the subject. I have worked on it alone for long enough. (Don't get me wrong: I am full of enthusiasm and will keep on working alone for another year or ten, if need be.) Send an email or contact me on Twitter. There are already many people who I view as like-minded, and I would like to work with this kind of people. If you find yourself somewhat in agreement (not to be confused with "believing"; neither do I suggest that these people would agree with each other) with people like John K. Galbraith, Hyman Minsky, William White, Claudio Borio, Raghuram Rajan, Stanley Druckenmiller, Bill Gross, Steve Keen or George Cooper, or even the Germans, then you probably fit my definition of like-mindedness. My goal is to prove the world that many of these people have been mostly right when it comes to the "big picture", or at least that they have "gone nuts" for a good reason -- the latter being, perhaps, another side of the same coin.
UPDATE 1: I read an interesting article from Steve Keen in Forbes and found myself surprisingly in full disagreement with his main thesis. I guess I should write a post about this...
UPDATE 2: To be more precise, I don't agree with the Modern Monetary Theory (MMT) view Mr Keen seems to take in the article I linked to above. MMT is the most flawed monetary theory, except for all the other theories we have. But I do agree, most of the time, with Mr Keen's overall view of the economy as it concerns credit growth and all the "bubbles" it has created. If he finds himself on the same page -- as I think he does -- with Hyman Minsky and William White, then I think we can sort this out :-)