Epicaricacy and the Economy

Human beings are funny creatures.  Complex, unpredictable, often irritating and yet endlessly creative.  One of our strangest attributes is the warm glow, joy even, which we can derive from the misfortunes of others.  We know it in its German form, Schadenfreude.  But thanks to the wonderful power of Wikipedia I have now found out that ‘epicaricacy’ means the same.

 

And as we consider what is happening, particularly over the last 2 to 3 days, in world markets (including our very own FTSE100) it occurred to me that Schadenfreude is exactly what the likes of Stiglitz, Wolf  et al might be feeling  as it looks increasingly like the recent US Federal Reserve base rate rise from 0.5% to 0.75% was ill judged –  possible spectacularly so.  True, hindsight is always (annoyingly!) 20:20.  But there were many who, at the time, regarded a rate rise as being in the interests of ‘Wall St’ and not ‘Main St’ –  ie the large financial institutions and banks as opposed to the ‘real’ US economy.  Yet another example to add to the many which suggest to some that the financial services sector, and in particular the multinational banks and financial businesses are able to  exercise un-democratic levels of political influence in the US and elsewhere –  but that’s for another blog (lawyers permitting!).

 

Let me be clear, this blog piece is not offering financial advice to any of its (I suspect very limited number of) readers.

With plumetting oil and commodities prices it is deflation which now looks a far greater risk than inflation across ours and other western economies; and as Keynes noted many decades ago if deflation ‘sets in’ then that is not a good place for an economy to be as it effectively smothers the risk taking behaviour of entrepreneurs, current and would be.  Few would disagree that a vibrant mixed economy needs, amongst other things, such entrepreneurial energy.

 

It seems to many that the UK government, and others, have failed to use the policy space which was open to them in the aftermath of the 2008-09 crash to take measures which would have limited the power of the financial services sector  of the economy to cause / magnify economic downturns.  To borrow a phrase, they may well have ‘failed to fix the roof whilst the sun was shining’……

 

And so now we are perhaps seeing the consequences of such a failure to act effectively and decisively.  As of this morning (21st January 2016) the FTSE 100 was at 5674.  Now. you are right, this is just an index and perhaps a somewhat meaningless one in many respects –  apart from one very significant one, that is.  It does seem to have an impact upon sentiment and emotions which in turn colour and direct our economic actions.

 
Now classical neo-liberal economic theory would say that this should not, does not, happen. We are, according that dogma, ‘rational economic men and women’.  Our judgements on whether to buy that new car (or, more likely acquire it on a  personal lease plan with no intention of ever actually owning the thing) or splash out on a new pair of jeans or a meal out are meant to be driven by a cold hearted assessment of whether the ‘utility’ (ie benefit –  I know, it is rather circular) of such spending outweighs the financial cost.  So we should not enter into herding behaviour when it comes to financial decisions (ie whether to invest in the market or run for the hills with only a large supply of baked beans and a survival knife for company).

 

But the fact is we do. Because we are human. Because the caricature of a rational economic man is precisely that –  a caricature. It does not exist outside of a series of thought experiments and cod-mathematical equations beloved of some academic economists (who are usually long deceased).

 

That is the principal reason why, according to Classic fm this morning, today is ‘National Hug Day’ across the UK.  Yes,  a hug can be an effective (ie rational) way for one human to warm up the core body temperature of another (as an aside I recall seeing a documentary some time ago which said that an effective way to help someone with frostbite –  or was it hypothermia? –  was for them to lie naked in a sleeping bag next to someone who was healthy.  This was because the healthy body would gradually and safely warm up the person with frostbite.  This blog does not provide survival advice either).  But for most (all?) people in the UK a hug is something else. It is an expression of affection, friendship, community, togetherness.  All of which are immensely important to humans –  yet all of which have no place in the theory of rational economic men and women (“REMW”) .  I don’t think National Hug Day would exist if we were all REMWs –  do you?

 

And we should be mindful of this when we read the headlines regarding bear markets / returns to 2008 / collapse etc etc.

 

My crystal ball is as murky as anyone else’s and who knows what the economic  future might hold, both locally, nationally and internationally (although of course, all of these are now utterly interconnected thanks to the dismantling of many of the economic policy checks and balances which operated so effectively between 1945 and the mid 1970s to prevent contagions from arising and then spreading –  again, another blog at some point).

 

But what has constantly struck me over the last year or so is that those who confidently cheered the UK’s quarterly GDP statistics and falling unemployment rates as evidence of the UK’s robust recovery were overegging the pudding ( – a lot!).

 
I hope and suspect, that those who are now proclaiming that the economic sky might be about to fall in are similarly falling prey to an excess of sentiment over sense.

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