"Make everything as simple as possible, but not simpler."

I've discussed the first part of Einstein's famous phrase above in "Simple is Efficient" but the second part is just as important. If the recent meltdown of the financial markets is a guide to anything it's about how we search for ways to over-simplify something we truly don't understand, in order to make predictions that have no solid foundation. I'll use the dismal science as an example. I could have used engineering but that's too obvious: When a bridge falls down you are forced to do things better next time, but with economics they can just swap out one failed or untested theory with another.

The current economic dogmata owes much to the opposing Chicago School and Keynesian schools of thought. The Chicago school, of whom Milton Friedman is the most famous were a bunch of revisionists who reverted to a free market concept which they ascribed to the "invisible hand" metaphor of Adam Smith. Likely they hadn't even read Smith or they'd have known better. In truth Smith wasn't lecturing anyone, he was trying to understand the market and in several places he honestly admitted when he just didn't get it. The simplification made was that people are rational, markets work perfectly by themselves via the "invisible hand" and government regulation is therefore automatically bad. Of course the absurdity of the assumptions ridicule the conclusion - but only to a rational thinker. There's the rub; they thought they were rational people (rather than ivory-towered, hubristic chumps who couldn't run even a toffee shop) so their assumptions must perforce be correct.

Well the simple theory-confounding reality is that a truly free market is also free for the criminals. The only real test of the Chicago School theory was in Yeltsin's Russia, where all the economists straight from college suddenly became government advisors. Yeltsin naively assumed that what was being taught in US Universities was how America became rich. In truth America became rich thanks to staying out of the World War for long enough to sell vast amounts of arms and materiel to the combatants. No real secret there; but crucially the huge booms felt in the fifties in the West owed abolutely nothing to free market ideas either. It was Keynesianism apparently. But Keynes pretty much changed his mind all the time, so you might say it wasn't really his doctrine - it was his own savvy. Keynes of course knew how to run a business that made money and that is done by learning from mistakes, ie being adaptable, rather than sticking to ideas that have manifestly failed. Russia paid a heavy price for believing US academics by having a huge slump and being dominated by criminals. They only recovered when statism returned under Putin.

In the 70's Keynesianism, or rather the simplistic version of it invented by Samuelson, was blamed for the lack of growth and Friedman became the new guru. Thatcher then experimented with these Friedmanite free market ideas - basically changing taxation from income to consumption and removing state subsidies and regulations. Initially this lead to a massive recession in the UK but eventually - thanks to deregulation of the markets (and North Sea oil) the UK began to look lean and fit. It had certainly been shorn of much of it's manufacturing capability. But while the poorer 60% became poorer, the richer 40% became richer so it was all deemed a big success by the right-dominated newspapers. Everyone was in fact happy that the overly-powerful unions had been quietened, it was just a shame it took massive unemployment engendered* by a ruthless, bloody-minded, destructive and immoral harridan to achieve that end.

Reaganomics didn't really come from Reagan as he he didn't really bother himself much with government at all - or indeed with anything that required any thinking, or even with turning up for work. His puppeteers copied Thacherism, which in truth wasn't really like anything Friedman had advised (Thatcher had already abandoned monetarism as a proven failure) and renamed it the Washington Consensus. This doctrine was applied by the World Bank and IMF in a one-size-fits-all manner: Privatise everything, cut government spending, remove subsidies. The result - as reported by the economist Joseph Stiglitz and others - was a complete disaster for any country who asked for IMF or World Bank help. In effect these organisations who were supposed to be helping poor nations become less dependent on aid, had turned into tyrannical loan sharks, destroying economies for the profit of their friends on Wall street and various other corporate criminals based offshore.

Now Samuelson's Keynesianism is back but not in the manner Keynes would have liked. Keynes decried the idea of casino capitalism and that's almost exactly what is being tried now. There is no actual plan behind the massive spending except the vague idea that it worked before. But previously there had been the realization that to make money you have to add value to raw materials and sell the finished product at a profit. Somehow now, we have a strange mix of massive spending from that psuedo-Keynesianism combined with the sunny Chicago School optimism that markets, if left alone, will absorb this cash injection and magically produce economic growth. A double-whammy of stupidity! Only in the 3rd strand of economics; the Austrian school of Von Mises and Hayek, is there the realization that if too much debt caused the problem then more debt will make it worse. Of course the Austrian School followers have somewhat oversimplified beliefs too (stemming from Ayn Rand) but at least they were the ones who predicted this depression coming. Strangely this wasn't enough qualification to allow them to be employed by governments to fix the mess. Likely their fix - let the banks fail - was a bit too much for the revolving door mentality of politicos. After all that's their next job they'd be making disappear. Even Nouriel Roubini's softer ideas of mark-to-market mortgage reassessments were rejected. At any cost the huge mistakes made by the bankers seemingly had to be rewarded by the taxpayer. What are the chances then of this lot fixing anything? After all they are the same ones who broke it.

The point is that all strands of the original economic thought, have been over-simplified by others, removing all the important caveats and uncertainties of the originators, to the point where they do more harm than good. This is only one illustration of the process. One could mention the oversimplification of CO2 as the major climate driver, or of psychotherapists eager to blame parents for every misdeed done by their children, or indeed of  any number of other social sciences that ignore the wondrously unpredictably chaotic nature of life on Earth. Good grief they've even over-simplified natural chaos into a chaos theory. Isn't that an oxymoron? If you ever need an illustration of the real, natural chaos that confounds us then you'll see it the next time you pick up a cable that seems to have tied itself in knots all by itself after you had neatly stacked it away. Now that's an allegory worth remembering!

*It was the late Paul Foot's theory that Sir Keith Joseph and Maggie had deliberately conspired to increase unemployment so as to reduce inflation. The swingometer of high unemployment=low inflation was a trendy concept at that time so it's possible. Conservatives truthfully didn't give a rats arse about anyone who had to dirty his hands to work so it's plausible too. After all how can you not realize that if Asia and Europe subsidize their industries and you remove your subsidies then you will lose your industries. It's not a difficult concept! So it's either gross stupidity, which is also plausible, or downright evil or the blinding dogma of the free-marketeers (which to be fair also goes in the stupidity box).

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