The Worshippers of Ergod and the omnipresent `Axiomat’{Part 1}

Like many, I was raised on a hardy diet of popular and well-seasoned axioms. A favourite was `no pain, no gain’, which obliged me to throw myself fearlessly and often hopelessly against opposition packs on the sports field. From my usual position on the side-line stretcher, I must surely have noticed my team-mates that left the field unaided, but so blinding was my core belief that this fact did not register. That is, until my eccentric English teacher introduced me to a Mr. Socrates, who gave me the means by which to question this and other beliefs. I am grateful to both teachers, who saved me from further humiliation and quite possibly, a future destined to abusive relationships.

Pain and humiliation, like a red light on a car`s dashboard, is a diagnostic to aid our search for cause. The problem in questioning axioms however is that they are by definition, matters of faith and by extension, something beyond the need of proof or evidence-base. Those who question them tend to be called heretics.

The pain caused by this global financial crisis, should be sufficient enough to test the premises on which our precedent economic beliefs have been built. The fact that it is the worst since the Great Depression, should justify the scrutiny, but will this happen to a satisfactory level?

The Economist recently reviewed three books that sought to explain the nature of the crisis and recommended one that went as far as to offer some solutions. Titled The Keynes Solution, The Economist`s review omits the most startling thesis in the whole book. Written by the foremost expert on Keynes (John Maynard Keynes 1883-1946) economic theory), Professor Paul Davidson (Emeritus at the University of Tennessee) asserts that lying at the basis of neo-liberal theory, one he charges is repackaged 19 Century Classical theory, is the Ergodic axiom. It is a mathematical axiom which holds that: `data samples from the past are equivalent to data samples from the future’. According to the theory that flows from it, humans each day make decisions based on a perfect knowledge of future events. It is from this axiom that economics has been allowed to enter the realm of hard sciences. Unfortunately for the entire world, it was applied to that less than hard science explaining human behaviour.

It follows from this central axiom that all future events, like data, are predetermined and consequently there is nothing anyone can do about it, least of all governments. Sounds familiar? This then would lie at the heart of the faithful neo-liberal free-marketer, who cries `blasphemy` at any talk of government intervention and yet has been obliged to ask for just that.

Where does belief in pre-determination and economic theory find its nexus? And what happens to the belief and its followers, when their most fundamental premise has been proved false? Surely the fact that the crash was not predicted and we have seen the most prodigious interventions of government, should challenge this axiom and the theories that flow from it? But will this challenge come and from where?

The author has claimed, without challenge thus far, that it was blind faith in this axiom, one that did not require empirical evidence base or measure of objective reality that led to the crisis.

Moreover, this blind faith found a rational basis in complex mathematical probability models. It was a seduction of minds at the expense of broader reason and judgement that created the conditions leading to this catastrophe. Of course these complex mathematical models took no account of those ageless assassins in the form of Mr. Greed and Mr.Irresponsility. A view offered by Oxford mathematician Jerome Ravitz (i)

If the Ergodic Axiom does have any predictive quality, it comes in the fact that the macro conditions that caused the crash before the Great Depression were the same as those in 2008. Namely, increased bank underwriting and the banking sector`s promotion of securities to individual investors, as was determined by the 1932 US Senate Commission on Banking and Currency. It was the commission`s recommendations that helped form the Glass Steagall Act of 1933 (ii), prohibiting retail lending banks from underwriting and promoting securities (investment banking). Ironically and tragically, this Act was repealed in 1999, which allowed banks to behave in a similar manner to those prior to 1929.

It stands to reason that same causes provoke the same effects.

How is it possible for students of economic theory to ignore such profound and relatively recent history? How is it possible to forget the great work done by the government of Franklin Delano Roosevelt and his `New Deal`, two-pronged strategy of public spending and regulatory frameworks that produced the enormous post-WW11 prosperity that followed. The New Deal also saw the creation of the SEC and US social security system that has been decimated during the last thirty years by neo-liberal policy. A policy focused on reducing government expenditure, regulatory frameworks and maintaining unemployment as a means of inflation control.

This is despite the fact that the US budget deficit during FDR`s time reached 119% of GDP, achieving a low unemployment rate of 2% that quickly paid off this debt. These facts run in contrast to neo-liberal theory and have somehow been ignored. Despite this knowledge, we have been constantly harangued by politicians and business leaders on the long-term, inter-generational threat of budget deficits. John Maynard Keynes had argued successfully that the key to economic prosperity was a focus on reducing unemployment. He observed during the Depression that when the US government stopped spending, unemployment rose and the economy contracted.
How is it that we are unable to question such anomalies within the arena of public debate?

One theory put forward by the author is that what was peddled as post-war Keynesian theory was in fact, a corruption that varied little from classical theory. It held that unemployment was caused by `rigid high wages’ (unions, workers not accepting market wages). It followed that if such was the cause, the solution may be to weaken the unions and prevent the government from legislating minimum wages.

In fact, Keynes’s view was opposite and one derived from studying the data, showing unemployment greatly increasing during depressions. Therefore, it could not be the worker`s truculence that caused unemployment. Keynes argued, upon the facts, that it was uncertainty in financial markets, leading to increased savings and decreased consumption that led to unemployment. We have seen evidence of this within the current crisis.

It is not clear what the academics of the time were doing to defend Keynes or prevent such a perversion of his theories. Post-war McArthism would not have helped the cause of Keynes, who emerges as a socialist and champion of the worker, who is victim, not felon. His central thesis based on `co-operative agreements between governments and private enterprise to produce a truly civilised society for our children and all future generations’ does not fit the neo-liberal world view. It clearly runs against the prevailing policy of the last 30 years and we thus discover a neo-liberal interpretation of Keynes that is aligned closely with their own.

If this is so, then there is no real alternative policy and a world view greatly narrowed, indeed opposite to what was the observed reality emanating from the Great Depression.

As FDR`s plan was rolling out, Keynes successfully urged the President to stick to the strategy of public spending and financial market regulations, until unemployment was significantly reduced. He prophetically wrote to the president, warning that if the New Deal failed, the future would be left to a battle between classical theory and Marxism.

Keynes theories that addressed unemployment and the inequitable distribution of wealth, as the intrinsic weaknesses in the capitalist model, incredulously have not survived intact to challenge our world view.

If the `Axiomats’ do have a point, it is that we do need a shared premise from which to build arguments and from which we derive the necessary social cohesion to form a civilised society. The problem occurs when such beliefs cannot be challenged and especially when we raise no question, when the observed reality suggests we should.

The classical Mayas, at the peak of their civilisation, also believed in an Erodic process. The mathematics they discovered, predicted future astronomical events. They deduced from this and their belief in an integrated cosmology, a pre-destined future that entirely shaped their perception of reality. Unfortunately, it also blinded them from the objective reality of their deteriorating environment and the imperialistic ambitions of their various invaders.

They would not have had the public forum, or the processes needed to challenge such beliefs. Those who were gifted with this ability were likely to have been born on days not bestowed to philosophers, or sacrificed for their heresy. They were thus unlikely to have had a Socrates within their agora or cultivating critical minds in their schools. But then again, despite all such teaching and all such painful lessons, do we?

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i. ``Mathematics first provided an enabling technology with computers, then with a plausible theorem it offered legitimation for runaway speculation and finally, with models of their value, risk and quality, it framed the quantitative specification of its fantasized products. Mathematics thereby became uniquely toxic, what Warren Buffet has called ``weapons of mass destruction``- Jerome Ravitz, Oxford Magazine

ii. The 1932 Senate Commission of Banking and Currency set up to investigate the cause of the stock market crash.