09.04.2010
The Sum of Crises
№1 2010 January/March

Getting an insight into the ongoing crisis is rather
difficult because we have a mix of several crises. The crisis of
the financial system launched a crisis of globalized productions.
These two highlighted a crisis of the dollar as a world currency.
The anti-crisis measures had little effect due to a crisis of
national and international institutions. Embedded within this
“matryoshka” is a crisis of obsolete, yet quite popular world
outlooks. Consequently, the scope of what is happening is much
greater than the depth of its comprehension, and it influences the
adequacy of responses.

CRISIS No.1: THE WORLD FINANCIAL SYSTEM

By the summer of 2008, the value of the aggregate sum
of financial contracts (i.e. the world financial system) was
estimated at around one quadrillion dollars, or 15 to 17 world
Gross Domestic Products. This system was comprised of two unequal
parts: primary instruments and derivatives. The primary instruments
(bonds, bank loans, stock) accounted for 150 to 200 trillion
dollars, while the derivatives were worth about 750 trillion
dollars in nominal value (excluding the derivates from currencies,
precious metals and raw materials in exchange trade). The mass of
derivative contracts exceeded that of primary ones by at least
four-fold, making up some 80 percent of the overall value: 77
trillion dollars that changed hands on exchanges and another 684
trillion dollars in non-exchange trade.

The world financial system has grown at least 20-fold
in the past two decades, largely outside the exchange floors or
balances monitored by regulators. Its growth was accompanied by a
sharp increase in concentration: five commercial U.S. banks
accounted for 26 percent of non-exchange derivatives, while the
market leader, J.P. Morgan Chase, with a capital of 133 billion
dollars, held 90.4 trillion dollars of derivative contracts, i.e.
more than 10 percent of the world’s total.

Surprisingly, no one is trying to analyze the world
financial system as one single whole.

First, its size. No one knows for sure how big it
really is. There is no system in registration or the
inventory-taking of instruments. All the data are approximations,
as are the margins of error. Second, its structure. The world
financial system comprises a smaller zone which has been studied
and is regulated, and a greater, little known zone. Third,
dynamics: The larger the price fluctuations of primary instruments,
the higher the prices of their derivatives, which skyrocket in the
times of market instability. And since more than 80 percent of the
world financial system consists of derivatives, it “breathes” with
a much higher amplitude.

This raises the issue of sufficient liquidity and
capital.

As for liquidity, each dollar the financial
authorities turn out ”multiplies” at the first stage, turning into
several dollars of credit, and then derivatives have a free hand in
further bloating this sum. At the ascending, euphoric stage of the
cycle, a relatively small amount of liquidity boosts the aggregate
volume of financial contracts to a considerable extent, in a
possible proportion of 1:50 or more. When upward trends are
reversed, the turnover of money slows down, while the mass of
payments on all contracts keeps growing, so the mass of liquidity
needed to service transactions increases dramatically. Now the
required volume of liquidity should make up 1/15 of all assets,
i.e. three times as much, but it is unavailable. The financial
system thus comes to a dead halt, and the world generally assumes
that a massive injection of liquidity would be the panacea for the
crisis.

Now about capital. Derivatives are either off-balance
assets, where capital supply norms are missing by definition (in
the above example, J.P. Morgan would have lost its entire capital
in case of a 0.15 percent shift in its positions), or they are
placed on the balance sheet at their historical cost. In both
cases, there is no complete picture of the real obligations under
derivatives as of the moment of redemption. One might argue about
the amount of the required backup capital, but its size would be
considerable in any case. For example, with the Basel norms of 8
percent, the world financial system would require at least 12 to 16
trillion dollars of capital to back up primary instruments.
Applying a 2 percent norm to derivatives, we need another 15
trillion dollars, so the figure doubles to some 30 trillion
dollars, or 60 percent of the world’s GDP.

The volume of risky trade, which does not lead to the
re-location of capital, has exceeded the volume of capital movement
by several times, with the markets of capitals turning into markets
of risks. Eighty percent of the world financial system is unseen
and unregulated. It performs its primary function of channeling
savings into investments only as a second priority, focusing
instead on capitalizing on money flows within itself. This kind of
financial system is more interdependent and less diversified than
two decades ago. Its requirements for capital would match the
world’s GDP, but its available capital is unspecified, and it has
no clear fund-raising sources to compensate for major losses. Such
a system creates excessive demand for liquidity and, in downward
trends, it can absorb all of it.

The present-day financial system has outgrown the
real economy and competes with it for liquidity and capital, which
are the same the world over in all industries and sectors. This
rivalry leaves a narrow corridor for balance, within which
liquidity is not excessive for the manufacturing economy and does
not generate inflation. At the same time, it is sufficient for the
financial sector, and does not cause “blood clots.” Outside this
corridor, the available liquidity and capital are still sufficient
for the manufacturing economy, but not for the financial system,
which is fraught with the risk of collapse. If the financial sector
has enough liquidity and capital, prices in other sectors start
bubbling up. In the autumn of 2008, we witnessed this state
transition.

Consider the following example: suppose gluttony has
fattened your liver to 800 kilograms, ten times your weight. That
it is bigger than your bed and that your body has assumed an odd
size and shape is just one problem; more importantly, you require
much more blood – five liters for the body and another fifty liters
for your liver. A healthy liver circulates blood like a powerful
pump, with pulse at 200, pressure 400 x 350, and vigorous pulses
throbbing even at hair tips. When the liver ails, it draws more
blood, increasing the intake by a “mere” five percent and leaving
hardly two liters for the rest of the body. The symptoms would be a
slow and thready pulse, a semi-conscious state, asthenia, and lack
of appetite.

The reason behind the acute financial crisis is more
trivial, simpler and deeper than hedge-funds’ speculations or
offshore schemes: it had grown beyond all limits. One of the
crucial tasks of the regulators is to reshape it to a reasonable
and optimal size. But no one is setting this task or even trying to
find out its precise dimensions.

No breakthroughs have occurred since anti-crisis
measures were launched two years ago.

1. The financial system has swallowed up all the
liquidity provided by governments; this money flowed onto the
markets of assets but never reached the manufacturing sectors
anywhere in the world;

2. The amount of capital within the financial system
after write-offs and injections remains unknown;

3. No obstacles have been put up to the uncontrolled
growth of the financial system;

4. The financial system has not become any more
transparent; neither its size nor structure has become any
clearer;

5. Toxic assets have remained, and their value is
unknown.

Two dangers have emerged. First, the crisis may
continue indefinitely, despite the massive injections by
governments. If, at one point, the amount of toxic assets exceeds
the bailout sum for the financial sector – regardless of how big
this sum is – things will get much worse. Second, massive
injections can undermine money circulation and money per se as an
institution.

These two dangers raise an unpleasant question: What
if the sum, required for the full-fledged re-capitalization of the
world financial system, proves big enough to destroy confidence in
money as an economic and social phenomenon?

The world needs entirely different anti- and
post-crisis approaches.

Balances should be rid of toxic assets without
recourse to money: for example, by directly exchanging problematic
primary – and only primary – assets (citizens’ mortgage loans,
credit card debts, etc.) for new obligations of specially created
state-run collector agencies to pay out a share of collected debts.
The payment should be due only after debts have been collected: it
is important that these obligations are not exploited in derivative
trade, or for securitization, as this would create a new market,
with new demand for liquidity and capital. The normalization of
primary assets will rebuild confidence and optimize the prices of
all their derivatives.

The key measure is to determine the exact size of the
financial system and then scale it down. All the players must
report to the regulators within a short term about the available
financial instruments at their disposal and on- and off-balance
contracts. It is necessary to introduce a rule for the players to
disclose all their off-balance contracts and obligations when
presenting their balance sheets. This will enable the world to see
the whole financial system in real time.

Another measure is to prevent the possibility of an
uncontrolled increase in the mass of derivatives. This goal is
attainable if each released instrument or contract is registered,
as every car, ship or plane is registered, and backed up by
capital. The security requirements should increase progressively,
to make derivatives, starting from third, fourth and subsequent
tiers, prohibitively expensive for the holder. The idea is to make
the ownership of derivatives senseless when their expansion creates
a system risk.

It is not necessary to set up new agencies to fulfill
these tasks: the existing regulators are more than enough in all
countries, but they must take concerted actions and pursue the same
goals, approaches and standards, i.e. they must unite into a
network. Thus they will be able to overhaul the financial
system.

CRISIS No.2: GLOBALIZED COMMODITY MARKETS

The objective of the globalization is to finalize the
division of labor. Ideally, each country would specialize in and
focus on the production of goods that give it a competitive edge,
and everybody would trade in one market, where an invisible hand
would keep everything right. As a result, expenses would be
minimized, while effectiveness and profits would reach the maximum
level. Adam Smith is rightfully regarded as the minstrel of such
harmony.

In practice, however, there is no balance between the
structures of supply and demand in each participating country. This
imbalance increases as world trade grows. In other words, in the
globalized economy, supply and demand are only balanced at the
global level, and never at the national one.

The degree of disparity between supply and demand in
an “average” country is indicated by a ratio of the world trade
turnover to the world’s GDP. In 2008, world trade turnover reached
64 percent of the world’s GDP, versus 42 percent in 1980. For the
G-7 and Russia, these indicators are much lower, 47 percent and 45
percent, respectively. For the new industrialized countries in
Asia, this ratio stands at a staggering 184 percent! Assuming that
the share of added value in the cost of all produced goods in the
world reaches 70 percent, 45 percent of goods on average (in
current dollar prices) are consumed outside of the countries of
origin.

Such globalized commodity markets can stably exist
and grow in a reliable multilevel system that balances supply and
demand in the world at any given moment. The present world system
is insufficient and unstable.

Globalization undermines the potential of anti-crisis
maneuvers by national governments. Each country has a specific
threshold value of specialization beyond which its government
(especially if it has limited money issuing capabilities) – when
the world’s demand for national goods is shrinking – can no longer
compensate for the loss by artificially boosting domestic demand.
There are no stimuli capable of boosting the demand for oil in
Russia, the demand for electric appliances in Malaysia or the
demand for financial services in Britain to offset a slump in the
demand for these goods on international markets. Objectives like
these require long-term strategies, national programs, planning and
other measures that would differ from strategies of the world’s
energy-, electronic- or financial superpowers. Otherwise, a
national government will be unable to ensure a “soft landing” of
its economy in case of the international system’s breakdown.

In the age of globalization, effective anti-crisis
measures by governments increasingly often exceed national
boundaries and reach the international level, where no agency would
take responsibility for them. That is why sporadic instinctive
protectionism grows during all crises – and the worse the crisis,
the higher the protectionism. In 2009, the World Trade Organization
predicted a 9 percent decrease in world exports, the maximum
decline in the past 60 years. (Regional trade blocs ease the
situation a little, acting as anti-globalization buffers: in a
trade bloc, the gap in the structure of supply and demand is lower
than in its members taken separately by the value of trade turnover
within the bloc.)

The cause behind the severity of crisis No 2 is that
the increased country specialization and the permanent imbalance
between national supplies and demands were not accompanied by the
expansion of either inter-country systemity or anti-crisis
capabilities of national governments. And the reason behind the
particular acuteness of the global commodity crisis is that the
hypertrophied financial system takes away liquidity and capital
from the rest of the economy precisely at a time when they are
needed most of all.

To secure greater stability of the national economy,
it must be less dependent on the world market, or there should be
more systemity in the world. The following conditions are
required:

  • permanent structural balance of the national
    economy within the world economy;
  • participation in a large trade bloc, whose members
    account for a substantial portion of trade (this option is
    preferable);
  • large-scale coordinated reaction by national and
    international institutions at the time of recession.

Every responsible government must give honest answers
to the following questions:

What size of the gap between supply and demand, i.e.
share of the trade turnover, is admissible from the point of view
of national security, taking into account the de facto existing
(rather than imaginary or desirable) level of systemity in the
world? This is a matter of the degree of a country’s participation
in globalization, which would not make it highly vulnerable during
global recessions;

Who should strengthen the world’s systemity and how?
And what portion of its sovereignty should a country be prepared to
forfeit for its predictable and reliable (rather than desirable or
possible) growth, which would enable it to enjoy the fruits of
globalization and remain secure from its harmful consequences? It
is a risky investment decision, where sovereignty is exchanged for
a possible but not guaranteed growth of stability in the
future.

Answers to these questions should be prompt and
non-contradictory: one cannot advocate an open economy while
refusing to delegate one’s sovereignty – it is like driving with
acceleration under increasingly vague rules or almost without any
rules.

An adequate stimulation of the world’s demand
requires 5 to 8 percent of the GDP, or three to five trillion
dollars, reasonably divided among countries and industries. Of this
sum, 3 to 5 percent can be obtained in the form of national budget
deficits, and another 2 to 3 percent should be provided at the
international level. To this end, the world would require a global
treasury, sort of a global Finance Ministry to pursue a
counter-cycle policy: to create reserves by means of deductions
from the participating countries and loans in fat years, and spend
them in lean years. Its regional branches should perform the same
functions at the level of regional trade blocs. Simultaneously, it
is necessary to encourage any regional integration initiative, be
it in Asia in general, in the Gulf region, the Commonwealth of
Independent States or the Shanghai Cooperation Organization. It is
only regional integration organizations that can fill part of the
vacuum between the growing impotence of national governments and
the unpreparedness of international institutions.

CRISIS No.3: WORLD CURRENCY

The third crisis is the failure of the unsecured
paper money issued by one country to safely serve the world
economy. It is also the crisis of the dollar as a world
currency.

Unsecured money is nothing more than a public accord.
But this accord is not committed to paper. No restrictions are
placed on the issuer and it has a free hand in its actions. It
prints currency for its own needs in the first place and only then,
possibly, for the rest of the world. The Federal Reserve System is
not obliged to secure or regulate the international money supply,
and hence there are neither stimuli nor instruments for that.

The lack of both security and restrictions implies
the beginning of an era of absolute financial relativity. Tons of
money is exchanged for tons of assets, and the value of either is
set depending on their ratio to each other. It is evident from the
example of the dollar-oil fluctuations in recent years. Meanwhile,
the nature of money and assets is not the same. There occurs an
attractive exchange of the limited quantity of material values of
all kinds for an unlimited quantity of paper money.

The key feature of this exchange is the possibility
(and hence the inevitability, sooner or later) of deriving issue
income. In the period from 2000 to 2007, the aggregate currency
reserves in the world increased from 2 trillion to 7.5 trillion
dollars. The increment of reserves over these seven fat years
exceeded all the reserves the mankind had saved before 2000 by two
times! The dollar-denominated reserves accounted for over 70
percent of this sum. This means that dollar reserves were growing
by 500 billion dollars a year, on average. This is the U.S. issue
income, or “victory dividend,” as the Americans would call it. In
the 2000s, this income made up some 4 percent of the U.S. GDP and
exceeded its real growth. Substantively, the issue income is a kind
of tax the U.S. imposes on other countries: the more reserves they
build, the higher the tax. The consumption of the issue income in
the U.S., as was noted above, artificially boosted demand in the
world and led to an excessive supply of capacities.

The issue income worsens the conflict of interests
between numerous groups within the issuer country, who draw
financial benefit from it, and the issuer’s unwritten obligations
with respect to the outside world concerning the provision of
international money supply and the stability of exchange rates. The
conflict is always resolved in favor of the domestic agenda, as
there is no disciplinary pressure of voters on the U.S.
administration in the outside world. It is the U.S. national
interests therefore that determine the supply of world
currency.

This is the essence of the crisis of the dollar as
the world currency, and it cannot be remedied. The U.S. Treasury
planned to borrow two trillion dollars in 2009. It has already
spent 700 billion dollars to bail out the banking system and
another 787 billion dollars on tax incentives. The Federal Reserve
meanwhile should buy out 1.5 trillion dollars of Fannie Mae and
Freddie Mac’s debts. This makes up five trillion dollars, or more
than one third of the U.S. GDP. The world is nearly stuffed with
dollars, but there is not enough of them to meet U.S. needs. This
means the dollar’s volatility will enter a new level soon.

In a longer term, unsecured money is vulnerable from
the most unexpected side – energy. For the modern money system, the
main and tremendous threat is the inevitable and forthcoming
passage of the peak of oil extraction in the world. Pessimists
expect this to happen in 2010, and optimists in 2040. The world
will witness unprecedented developments then: the demand for oil in
industries will continue to grow, while the supply, limited by
natural factors, will keep decreasing regardless of the amount of
investment or expenditure. Given this different-vectored movement
of demand and supply, the amplitude of oil price fluctuations will
have no limits. Sudden and frequent fluctuations of the price of
the key source of energy, measured by unsecured money, are a mirror
image of the fluctuations of the value of this unsecured money.
This will send the paper money system into a spin.

This situation was rehearsed in the first half of the
1970s, when the U.S. unpegged the dollar from gold and OPEC
immediately quadrupled oil prices. After this blow, the world
currency system only regained its balance by the middle of the
1980s, after two economic crises, the devastation of Latin America
and the bringing of half of the world to the edge of bankruptcy.
Passing the peak of oil production will have more serious
consequences for the dynamics of oil prices and the value of money
than OPEC’s actions in the 1970s, because there was no shortage of
oil at that time, unlike at present.

Aside from the volatility of the prices of
commodities and assets, the world currency crisis increases the
volatility of their indicators, thus enhancing the general
volatility of everything the world over. The dollar fluctuates
against the euro by 20 to 30 percent a year and by over 100 percent
a year against oil, which, at best, means a ±12 to 15 percent
margin of error in dollar value measurement, versus the
profitability in many sectors at less than 10 percent. This money
cannot be either the yardstick of value or effectiveness, or a
reliable reserve. Nevertheless, the United States and the world at
large have become hostages to the role of the dollar, and it is
unlikely that they will wish to change it. Two thirds of cash
dollars are outside the United States, and in case this currency
stops performing its role, they cannot return home en masse without
generating hyperinflation there, which is unacceptable. The dollar
will remain the world currency for a long time, because the
outright refusal to use it as such would be more expensive than the
cost of maintaining the status quo over an indefinite period of
time. How can this problem be solved?

There is just one solution: namely, the monetary
authorities must reach an accord and adopt self-restrictions and
self-discipline.

There are several alternatives:

  • returning to real, fully secured money, i.e. gold
    or its analogue;
  • reaching an agreement on the dollar;
  • reaching an agreement on an unsecured alternative
    to the dollar;
  • reaching an agreement on synthetic supranational
    money, such as Special Drawing Rights (SDR).

None of the alternatives is ideal, but any of them is
better than nothing. The only practical and ready-to-use option is
the euro. The 16-nation currency, as an idea and movement, has its
origin in the previous system crisis after the gold default of the
dollar in 1971, when there emerged a need to respond to the sharply
increased instability of money, coupled with an oil shock. The main
virtue of the euro is that it is an established currency that does
not require fine-tuning: it has functioned for almost two decades,
so it seems the Maastricht criteria have proven adequate.

The countries that agreed in Maastricht in 1992 on
membership in a European Monetary Union undertook five voluntary
restrictions. These are restrictions of state budget deficit,
national debt, inflation and interest rates on government bonds
plus a two-year trial period. The Maastricht Treaty fixes the
difference between the euro and the dollar: the euro has its
limitations spelled out, while dollar regulation wholly depends on
U.S. national interests.

The euro’s turning into a full-fledged world currency
would be of benefit in every way. It is an insurance against a
possible collapse of the dollar; in addition, it will put
competitive pressure on the dollar and will induce the U.S. to
practice self-restriction in its monetary policy. The euro, as the
second full-fledged world currency, can put the money system on
both feet, which would make it certainly more stable than when it
stands on one foot. This decision does not require a world
consensus (like gold or SDR) and can be taken by states gradually,
as they become ready. There are no other quick variants with the
same merits.

This alternative could be followed up with euro-like
agreements within other trade blocs or regional monetary unions,
and with interaction between their central banks. The Bank for
International Settlements, or its analogue, could be responsible
for the “fine-tuning” and ultimate money supply-and-demand
regulation. To this end, it should acquire the functions of issuer.
Such a “union” of major regional currencies, interlinked by a
package of agreements and daily interaction between monetary
authorities, would be the most stable and flexible system of world
currency for a long term.

CRISIS No.4: INSTITUTIONS

The unparalleled depth and globality of the on-going
crisis were caused by unprecedented imbalances and critical gaps
between the commodity, financial and monetary systems of the world,
which had been growing over the past 30 years. The commodity system
is truly and evenly global; the financial system is global too,
albeit hypertrophied and concentrated; while the monetary system is
actually national and, far from linking the first two systems, it
only pulls them further apart. Eliminating these imbalances would
signal a victory over the crisis.

It is clear what should be done and how: it is
necessary to restore structural proportions between the commodity,
financial and monetary systems of the world economy and within each
of them.

The world financial system must shrink and become
more secured by capital. All the instruments must be registered and
all standards made uniform, while the capacity of each participant
to issue financial instruments must be limited.

The world commodity markets should become more
liberal, and regional trade unions – broader and more profound. The
world economy requires global and regional counter-cyclic “finance
ministries” capable of stimulating a demand of 3 percent of the
world’s GDP in case of shrinking.

The world currency supply should be more disciplined
and geographically distributed. The world needs an international
bank to coordinate the activity of central banks and balance the
demand for and supply of money in the world, which would also be
able to issue money for correcting imbalances.

Who will handle this issue and how?

Separately, national governments are unable to cope
with this task. Their size and resources are smaller than the
phenomena they want to harness. They are always late. They are
ideologized, immersed in conflicts and political and corporate
interests, and compete with each other.

Bringing national governments together can complicate
things rather than help. Some states will gain from a change of the
status quo and therefore they are actively demanding these changes,
while others seek to retain the status quo because they stand to
lose from changes. Most governments do not influence anything and
only seek to show their significance in one way or another. But a
minority of countries do have influence and want to capitalize on
it. Each proceeds from his own world outlook, which often does not
match others’.

The transfer of macro-regulation from the national
level to the international one is absolutely inevitable, provided
all the trends of the past few decades are not reversed, as was the
case in the 1930s. The Yalta and Bretton Woods institutions will be
unable to cope with these tasks. The United Nations is crushed, the
International Monetary Fund and the World Bank were created for
other times, when those who are now on the defensive, were forging
ahead. To attain new objectives, these institutions need such a
serious overhaul that its implementation is doubtful. It is better
to create new institutions from scratch than try to reanimate the
old ones from less than scratch.

In other words, there is little confidence that
repair work within the framework of the current political process
and modern culture will be effective. Since no other process or
culture are available, new ones should be created.

How should a nation state – an invention of the Duke
of Richelieu – mutate in order to meet the present-day realities?
How much sovereignty can it delegate without losing its essence?
What institutions are needed to keep the globalizing world stable?
How should all these hypothetical agencies interact after they are
created? To whom will the new bureaucracy be accountable and who
will discipline it? What levers should be used to balance the
emergence of the new bureaucracy with a reduction of national
regulation and national bureaucracies and to prevent their growth
and conflicts with them? Would it be tantamount to a world
government, opposed and feared by many – and for good reason?

The year that has passed since the beginning of the
global crisis has not brought any answers. The world needs a new
level of understanding of fundamental processes and a common
working platform that would help find compromises, make decisions
and implement them. “Problems that we face cannot be solved at the
same level of thinking we were at when we created them” – these
words by Albert Einstein have become a clich?, yet they are
relevant today as never before. The lack of an adequate frame of
reference, common for all, while there is a need for democratic
consensus, turns any practical issue into an issue of outlook. This
situation is well illustrated in the classical tale of The Three
Little Pigs whose characters had different ideas of the nature and
scope of possible challenges and built their strategies
accordingly. As a result, they ended up with different chances for
further existence and quality of life.

CRISIS No.5: THEORIES AND VIEWS

Since World War II and since Wassily Leontief and
John Keynes, economic science has said nothing basically new.
Marxists have been arguing with classics for 150 years about which
is more important – labor or capital. For 70 years, Keynesians have
been locked in a dispute with classics over whether market
equilibrium restores itself or whether it should be assisted. For
30 years, monetarists and Keynesians have been at odds over which
is more important – money supply or demand for goods.

The prevailing evaluations are much simpler – if not
more primitive – than the increasingly complex reality that they
are trying to reflect. There are at least two reasons: the subject
which the economy describes, and the method it employs to this
end.

About the subject: over the past 50 years, the world
economy and the variety of ties within it have outpaced the
development of economic science. All the basic economic
“scriptures” – classical, Marxist or Keynesian ones – describe a
world where production and consumption are primary, and trade and
finance are subordinate/secondary in terms of size and function and
are intended to serve production and consumption. The national
economy is the main object in this world, while the world economy
is a derived complement. In addition, money in this world is firm
and stable.

It was the world of our grandfathers, but it no
longer exists. Instead, we now have a developed and mature global
capitalism, where huge capital markets, based on “elastic” money,
seek capital gains; where industrial profit is not the only and not
the main source of development; and which has nowhere to expand.
Economic science prefers not to notice these changes.

Things are no better with the method used to describe
the economy: the modern system of economic views is based on
assumptions that have not been revised since the Enlightenment.
They are maxims accepted without proof by default.

It is assumed that all economic relations stem from
barter. Everything has one root. While looking into how a plough
can be swapped for millet, one can easily understand how the
computer components market works or problems of the World Trade
Organization.

Man, homo economicus, is the basic element of the
economy; he always acts rationally, seeking to maximize his
monetary and other gains.

The purpose of economic activity is economic
progress, which means profit-making at micro-level, and GDP growth
at macro-level. Everyone’s efforts to get maximum personal profit
automatically lead to the maximum overall result.

Money is inviolable; it enables rational economic
agents to make objective and comparable evaluations.

Markets are effective; information is spread all over
the world evenly and simultaneously, allowing for the most rational
use of resources.

Man is negligibly small compared to Nature. The
Man-Nature system is open: Man can extract resources from Nature at
the cost of extraction and dump waste at zero cost ad
infinitum.

None of the above maxims finds proof today. The
establishment of market relations in their present shape never
proceeded by itself and was a very cruel process everywhere.
Geopolitical rent, monopolies, arbitration, and outright robbery
turned out to be as good for capital accumulation as a free
exchange of the fruits of one’s labor. Man, after a certain degree
of satiety, becomes much less rational and more sophisticated than
a mere economic channel for resources.

Economic and other decisions have long been made and
implemented not by individual people but by groups devoid of
reason; they “think” and “behave” differently than “ordinary
people” of whom they consist. The ideas these people and
collectives have about what is going on are extremely flexible and
subject to manipulation, but they determine their actions and are
the same factors of “progress” as the so-called objective
reasons.

The miraculous effectiveness of the “invisible hand”
of the market is still just a beautiful metaphor, as it was at its
birth 200 years ago, but not a proven theorem. Once every decade,
for two centuries already, an economic crisis rocks the world,
during which no one ever gives any chance to the “invisible hand”
to put everything right. It is rather the opposite. Nor has anyone
proven the assertion that maximum personal profits lead to a
maximum aggregate result. The absence of money backed by gold has
resulted in the absence of an objective yardstick, which is
unlikely to appear any time soon. In a majority of countries,
national accounts remain unbalanced for decades. The economy is
global, and it is reasonable to suspect that it has been so in all
times. Mankind has become a factor of Nature and affects it with
comparable force. Natural resources are shrinking and becoming ever
more expensive, while mankind’s waste is assuming tremendous
proportions and becoming more and more expensive as well.

This divergence between reality and axioms generates
chimerical categories, unrealistic in life, such as the “free
market economy,” “rational economic agents” or the “state of
balance.” These are hypothetical abstractions at best, but more
often they are propaganda clich?s. They are not found in nature and
therefore are useless in practice. Economists try to mend the
increasing gap between science and life with more and more
complicated mathematical models, but it is unclear what physical
reality they describe. Attempts to directly use models for the
purpose of gaining profit have repeatedly resulted in direct
losses.

Given such a frame of mind, discussions of economic
problems – within the framework of the G20 or other formats – are
nothing more than an exchange of illusions, with general
conclusions about the usefulness of economic freedoms, the pooling
of efforts, and the need for a further search for solutions. This
is dangerous because it may lead to destabilizing solutions, such
as actions of the Federal Reserve in late 2007-early 2008.

The world needs a science of a different level of
complexity and uniformity, which would view the world as one single
whole, which would study qualitative differences within phenomena,
processes and societies that appear similar, which would take into
account the finiteness of natural resources and the full cost of
their use and restoration, which would tie the economy with energy
and thermodynamics into a non-contradictory system, and which would
understand the essence and dynamics of human capital in its
diversity and inconsistency. In short, the world needs a science
that would not be at variance with the reality surrounding us.

One can say that theories have become obsolete or
that the world has become more complex, but the essence of these
statements is the same. Yet this is not what should be said. We
must honestly say what we know for sure, what we know
approximately, and what we do not know at all – and try to get more
knowledge.