This post was prompted by the Buttonwood columnist in The Economist.
Sometimes it seems that some economists come up with ridiculous theories to explain the economic crisis. These theories divert our attention from basic issues and allow some people, including columnists, to ignore the obvious and maintain their faith that the world will soon return to its golden age of prosperity.
When I studied economics the professors would draw on the blackboard an x shaped graph. Sometimes the lines would be labelled to represent the financial side of the economy and the physical side of the economy . This is an important distinction but it is forgotten as soon as we leave the blackboard. This could be because it is easier to measure the physical side of the economy in financial terms.
Both sides of this graph have the potential to cause economic chaos.
On the financial side the way in which money is created is so complex and convoluted that even bankers won’t believe it. Not only is it complex but interest is charged on the money created making it into a sort of Ponzi scheme
On the physical side we have been using resources at such a rate that those which are left require a lot of energy to extract. It’s hardly surprising that “of 34 advanced economies, 28 had lower GDP per head in 2011 than they did in 2007. ”
To deal. with the economic crisis, rather than thinking up theories which blame it on some scapegoats, we need to look at the basics and do some sour searching regarding our own lifestyles.