Posted by: mulrickillion | November 8, 2011

Finance in Parrot Talk

By Anthony de Jasay, Library of Economics and Liberty, Nov 7, 2011 —

George Stigler, the 1982 Nobel laureate, was almost as great a humorist as he was an economist. His deadpan irony was devastating. In his The Economist as Preacher and Other Essays he speaks of "that most irresistible of all the weapons of scholarship, infinite repetition."1

I call "parrot talk" the loud and relentless repetition of some plausible fallacy that is first launched as an original and debatable notion by some minor authority or small group, often with an axe to grind, and then, by a mysterious process of perverse selection, is taken up and hammered home by public intellectuals and the media, triumphantly becoming a firmly established truth. When used as prophecy or forecast it is liable to be self-fulfilling. When used as explanation and diagnosis, it dictates the remedy. In either case, it is capable of causing deep and lasting damage in political thought and the public policy the thought tends to shape.

In the present column and the one next month I will be dealing with a few particularly insidious and dangerous subjects of parrot talk. I will first recall a few that I had identified in earlier writings. Then I will present some more recent untruths, such as the idea of "financial capitalism", the supposedly vital need, to stock up the banks with extra capital, monetisation of the debt, and the alleged vices of modern capitalism, such as speculations and short-termism.

Fundamental Fallacies2

Among my Collected Papers there is an essay entitled "Parrot Talk."3 It treats a member of fallacies in political philosophy that, looking plausible and pleasing to most people’s ears are being repeated on every possible occasion with an air of assured conviction. Each time they are declared, more academic parrots take them up and relay them in ever wider circles until they become ineradicable common knowledge that feeds prevailing political thought.

One of these fallacies, pilloried in "Parrot Talk," is the separateness of production and distribution. The gross national cake is first baked according to the laws of economics, and then sliced and distributed according to the collective decisions of society. It remains unsaid that the very reason why a cake of a certain size is baked at all (rather than a sweeter, bigger or smaller one or indeed none) is that its distribution will be of a certain kind and not a different one. Income is not a grabbed and redistributed with impunity without reacting back on production.

Another fallacy, often repeated to reassure the voter called "liberal" in English English that he has little to fear from the candidate called "liberal" in American English, is that it is possible to bring about equality of opportunity without enforcing equality of outcomes. It takes a minute of extra thought to realise that once preceding outcomes are allowed to be unequal, current opportunities cannot possible remain equal.4 But this extra minute of thought is suppressed by the rising noise of parrot talk. Finally, the essay notes that the most widely accepted modern theory of justice lays down, as its first principle, that everybody must have a right to the greatest possible liberty compatible with the same liberty for everybody else. One may ask why having a right to liberty is better, or different, than having liberty itself. Adding the "right to" should raise suspicious second thoughts, or perhaps it is just empty verbiage—but having a right always sounds nice, and passes well in parrot talk.

Must Safety-First Economics Prevail?

What the earlier "Parrot Talk" essay sought to do in political thought, the present one aims to do in the current language parrots use about finance. It is written by taking as read certain well-established theses of neo-classical economics that are basic to what in English English is called "liberalism".

Thanks to incessant repetition in the last few years, public opinion is now convinced that risk is a bad thing and ought to be purged from the economy as far as possible. Economics, on the contrary, teaches that some risk is inevitable because the future is not predictable, and necessary for efficiency. The size and severity of risk and its price should and under a regime of free contract would adjust to each other. The wish to avoid risk by paying the market to bear it (e.g. by hedging, forward dealing or insurance) would, in equilibrium, be equal to the willingness of the market to assume that risk. This situation is an optimum, because neither the marginal risk-avoider nor the marginal risk-bearer can expect to do better by moving away from it. The spectacular stock and bond market losses of 2008-2009 showed that the expectations of large operators, such as the insurer as AIG, may occasionally be spectacularly wrong (especially if biased by existing regulations and Fannie Mae activities, as was the case in the U.S. residential mortgage market), but they did not invalidate the theorem. The losses were the outcomes of zero-sum games and as far as one can tell, they involved no destruction of tangible value. As Milton Friedman would say, for every loser, their was a gainer. Damage did occur due to massive mismanagement of the shock waves, but not because risk was allocated by price in the first place. After all the ensuing parrot talk, the received truth now is that risk is bad and almost reprehensible and should be purged from the system. Poor system! Risklessly, it would be heading for an unpromising future. . . .

Anthony de Jasay, Finance in Parrot Talk | Library of Economics and Liberty

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