I’ve been thinking quite a bit over the past few days as to why the people in charge and the leading economic “thinkers” consistently fail to see the real, fundamental causes of the current crisis. The guys in charge are smart people – they wouldn’t be where they are if they hadn’t proved that. I think the reason lies somewhere deeper than that, that it must lie in their failure to reject the axiom of "government exists to serve the people," and therefore by deduction legal plunder by government is justified for the good of society. If they were to reject this axiom, then the blame would begin to be apportioned to the right people and this is a risk that governments aren’t willing to take. As Mises said,

"It is impossible to invalidate the economists demonstration that all privileges hurt the interests of the rest of the nation or at least a great part of it."

Indeed, it is impossible to refute these demonstrations, unless you maintain the above – and incorrect – axiom. For if you believe that government, by forcefully "helping" a few people is justified in their impoverishment of the rest of the nation, then your entire idea of what is “valid” takes on a different definition as well. Any decision is automatically justified when this axiom is upheld; if you create 100 jobs for troubled teens by robbing a few wealthy farmers, the decision is “justified” and “proof” that government is a necessary evil. Even if the economist can demonstrate that while the money taken has created 100 jobs, it has likely cost 150 other jobs (government created jobs are always less-optimal than private created jobs and thus there is a deadweight loss to society) from ever being created, they will still vote for the policy anyway (well, everyone except for the farmers!). In their minds they have done the right thing, when in reality they have wasted resources and prevented 50 people from obtaining productive work. As Thomas Woods said (cited in Jeffrey Tucker here), “the reason people miss fundamental truths about economics is that economic thinking usually requires at least two steps of logic to arrive at truth, whereas the common man is only willing to take one step at most.” But this doesn’t explain why professional economists, highly intelligent and very well paid, fail to take this second step; they fail to move beyond the axiom of government and therefore miss the real economic truths.

So perhaps this is the reason why they come up with endless cock-and-bull theories of economics to try and explain something that is so obvious. There “must” be a better way they say; there “must” be a way government can fix all of the woes of society, when the real culprit is staring them in the face. They don’t even consider that the axiom they start every thought process with is incorrect. Take this recent example, a speech given by Luci Ellis, head of the RBA’s “Financial Stability Department” (what an amusing name!), where she spouts fallacy after fallacy, trying to find the real cause, because she simply can’t even comprehend that the real cause is in fact herself and her fellow government officials across the globe:

"Perhaps the most basic underlying driver of the crisis was the inherent cycle of human psychology around risk perceptions."

It’s fair enough that people will lose confidence once they realise they've been duped into believing the pool of capital was larger than it actually was but it's hardly the "driver" of the crisis. So she assumes that human psychology operates in "cycles" and this must be the cause of economic fluctuations!

"But there is also recognition in many quarters that low interest rates were not – and shouldn’t be – enough to cause such a crisis on their own."

In other words, the central bankers of the world have decided that they're not to blame (of course lots of other factors were involved, but this was the main culprit).

"A lack of appropriate financial regulation in some countries is widely regarded as one of the important causes of the crisis."

Sure, you undertake "quasi-deregulation" but stay heavily involved in market manipulation, maintain control of rating agencies and so on. She concludes that we obviously need more regulation rather than less government tinkering!

"Perhaps most crucially, many internationally active banks failed to perceive, or appropriately manage, the risks involved in certain financial products and markets, and regulators did not make them do better on this front."

When there's massive credit expansion, no risk of a bank run, no personal repercussions for the people in charge, obscene cases of moral hazard...she wonders why risk is priced cheaply? Of course, as above, the solution is better regulation. If only the right people were in charge!

"In this environment, banks’ perceptions of risk increased, and they started to tighten lending standards. A feedback loop started to develop. Banks were becoming more risk-averse, but so were their customers, who started to pull back on spending. The major industrialised economies of the United States, euro area and Japan were already experiencing economic contractions by the first half of 2008."

Yes, so banks and consumers alike realised that they were living a lie, they found out they had been duped by the central banks and government of the world and, gasp, started to accumulate capital in an attempt to restore the wealth that was destroyed in the boom?

"However, it appears that good quality borrowers can still obtain and roll over credit."

As they should be able to...it's the marginal borrowers who were only able to stay in business because of the low interest rates that need to fail for economic health to be restored.

Her "countermeasures" are too long to list here...but they basically involve bailing out the entire financial sector to restore "confidence". She wants to "de-risk" everything. Finally, she wants to increase regulation across the board...because now they're so much wiser, they won't possibly get it wrong again.

I think she honestly believes that the only reason we had this crisis was because people decided they'd had enough which triggered the vicious "feedback cycle". Then to fix it, simply restore confidence and you'll get a "reverse-feedback cycle" and we can start another "cycle of human psychology?" It sounds fantastic doesn’t it; it’s so simple, and allows her to step back, wipe her hands clean, and get a good night sleep now that her conscience is clear.

Personally, I can't support a system of economics that operates with the above axiom, that "hurts the interests of the rest of the nation" to support certain interest groups. I believe that economics should seek to identify actions that can "benefit the interests of the whole nation." To me, economics is therefore one and the same with individual freedom, justice and liberty. What is it going to take for the people who maintain the “government” axiom to take the second step of logic? I honestly don’t know, and even if they do, most are paid far too handsomely (in the case of economists) or already rely far too much on the welfare state and productive labour of others to start doing something about it now.