Reexamining our Economic Theories by Allen Laudenslager and Bryan Neva

These are very strange economic times we’re living in with one of the slowest recoveries ever seen.  We are seeing more people out of work or only able to find jobs at a fraction of their previous salaries or working below the skill level of their previous jobs or training.  The official unemployment rate of 5% doesn’t account for the millions of discouraged workers who’ve left the labor force, or the millions of people who are underemployed.

Professional economists were asleep at the switch when the economic meltdown of 2008 occurred.  Even Allen Greenspan, one of the most esteemed economists, didn’t see the economic crisis coming. Following their best training and the collective wisdom of their profession, a lot of well-trained, very smart people made decisions that seemed quite rational at the time.  Since those decisions led directly to the current economic crisis, we really need to understand what happened and why so we can try to prevent this kind of economic crisis in the future.

Each of these experts, having tens of thousands of hours of academic and on-the-job training in economics, all made the same fundamental mistake: they all believed that unregulated, free market capitalism would behave rationally.  It was a fundamental misunderstanding of how things work in the real world and too much reliance on theoretical models that didn’t account for all the factors; the biggest factor being that humans don’t always behave rationally, wisely, or altruistically.  In fact, the history of the world teaches otherwise: humans in general are irrational, greedy, self-centered, and foolish.  It's the exception to the rule they'll behave otherwise, which is why we need to regulate capitalism.

It would make more sense if only a few of these experts had made this mistake.  But that’s not what happened as far too many of these experts, suffering from groupthink, came to the same erroneous conclusions.  So which seems more likely that economists all over the world made the same mistake, or their academic training was flawed?  We believe the latter to be the case.  The 2008 economic meltdown was an example of a flawed plan that was brilliantly executed and the result was a total disaster.  

The famous American psychologist, Dr. Abraham Maslow, Ph.D., once said, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”  This concept is known as the Golden Hammer Rule, and it’s simply an over-reliance on a familiar tool.  Medical doctors, for example, epitomize the Golden Hammer Rule with all the various medical specialties.  In the case of economists, they only have one Golden Hammer in their tool bag to make sense of the economic challenges we face.    

For anyone to buy anything they must have money.  To have money, they must have jobs that pay enough to buy stuff.  So any economic theory that does not hold as its keystone the availability of jobs and the income level of those jobs is fundamentally flawed. Yes, the economic measures and theories do include jobs, but only peripherally and not as the central measure of economic health.  This may seem simplistic to someone trained in “classic” economic theory, but a layperson in their simplicity and innocence recognizes the principle of good paying jobs as the key to a healthy economy.

The definition of insanity is doing the same thing the same way and expecting different results!  We've gotten where we are by following our current economic theories.  The only way to reverse our current economic morass is by reexamining our economic theories and chart a course to a more prosperous future. 

Why Economists Failed to Predict the 2008 Financial Crisis

This article was first published in May 2009  from the Wharton School of Business found at this link.  But I think it's still relevant today and worth your time to read.  I've highlight some of the salient passages.
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There is a long list of professions that failed to see the financial crisis brewing. Wall Street bankers and deal-makers top it, but banking regulators are on it as well, along with the Federal Reserve. Politicians and journalists have shared the blame, as have mortgage lenders and even real estate agents.

But what about economists? Of all the experts, weren’t they the best equipped to see around the corners and warn of impending disaster?

Indeed, a sense that they missed the call has led to soul searching among many economists. While some did warn that home prices were forming a bubble, others confess to a widespread failure to foresee the damage the bubble would cause when it burst. Some economists are harsher, arguing that a free-market bias in the profession, coupled with outmoded and simplistic analytical tools, blinded many of their colleagues to the danger.

“It’s not just that they missed it, they positively denied that it would happen,” says Wharton finance professor Franklin Allen, arguing that many economists used mathematical models that failed to account for the critical roles that banks and other financial institutions play in the economy. “Even a lot of the central banks in the world use these models,” Allen said. “That’s a large part of the issue. They simply didn’t believe the banks were important.”

Over the past 30 years or so, economics has been dominated by an “academic orthodoxy” which says economic cycles are driven by players in the “real economy” — producers and consumers of goods and services — while banks and other financial institutions have been assigned little importance, Allen says. “In many of the major economics departments, graduate students wouldn’t learn anything about banking in any of the courses.”

But it was the financial institutions that fomented the current crisis, by creating risky products, encouraging excessive borrowing among consumers and engaging in high-risk behavior themselves, like amassing huge positions in mortgage-backed securities, Allen says.

As computers have grown more powerful, academics have come to rely on mathematical models to figure how various economic forces will interact. But many of those models simply dispense with certain variables that stand in the way of clear conclusions, says Wharton management professor Sidney G. Winter. Commonly missing are hard-to-measure factors like human psychology and people’s expectations about the future, he notes.

Among the most damning examples of the blind spot this created, Winter says, was the failure by many economists and business people to acknowledge the common-sense fact that home prices could not continue rising faster than household incomes.

Says Winter: “The most remarkable fact is that serious people were willing to commit, both intellectually and financially, to the idea that housing prices would rise indefinitely, a really bizarre idea.”

Although many economists did spot the housing bubble, they failed to fully understand the implications, says Richard J. Herring, professor of international banking at Wharton. Among those were dangers building in the repo market, where securities backed by mortgages and other assets are used as collateral for loans. Because of the collateralization, these loans were thought to be safe, but the securities turned out to be riskier than borrowers and lenders had thought.

The Dahlem Report

In a highly critical paper titled, “The Financial Crisis and the Systemic Failure of Academic Economists,” eight American and European economists argue that academic economists were too disconnected from the real world to see the crisis forming. The authors are David Colander, Middlebury College; Hans Follmer, Humboldt University; Armin Haas, Potsdam Institute for Climate Impact Research; Michael Goldberg, University of New Hampshire; Katarina Juselius, University of Copenhagen; Alan Kirman, University d’Aix-Marseille; Thomas Lux, University of Kiel; and Brigitte Sloth, University of Southern Denmark.

“The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold,” they write. “In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real world markets.”

The paper, generally referred to as the Dahlem report, condemns a growing reliance over the past three decades on mathematical models that improperly assume markets and economies are inherently stable, and which disregard influences like differences in the way various economic players make decisions, revise their forecasting methods and are influenced by social factors. Standard analysis also failed, in part, because of the widespread use of new financial products that were poorly understood, and because economists did not firmly grasp the workings of the increasingly interconnected global financial system, the authors say.

One result of this, argues Winter, who is not one of the authors but agrees with much of what they say, is to build into models an assumption that all market participants — bankers, lenders, borrowers and consumers — behave rationally at all times, as if they were economists making the most financially favorable choices. Clearly, he says, rational behavior is not that dependable, or else people would not do self-destructive things like taking out mortgages they could not afford, a key factor in the financial crisis. Nor would completely rational executives at financial firms invest in securities backed by those risky mortgages, which they did.

By relying so heavily on the view of humans as rational, the paper’s authors argue, economists ignore evidence of irrational behavior that is well documented in other disciplines like psychology and sociology. Even if an individual does act rationally, economists are wrong to assume that large groups of people will react to given conditions as an individual would, because they often do not. “Economic modeling has to be compatible with insights from other branches of science on human behavior,” they write. “It is highly problematic to insist on a specific view of humans in economic settings that is irreconcilable with evidence.”

The authors say economists badly underestimated the risks of new types of derivatives, which are financial instruments whose value fluctuates, often to extremes, according to the changing values of underlying securities. Traditional derivatives such as stock options and commodities futures are well understood. But exotic derivatives devised in recent years, including securities built upon pools of mortgages, turned out to be poorly understood, the authors say. Credit default swaps, a form of derivative used to insure against a borrower’s failure to repay a loan, played a key role in the collapse of American International Group.

Rather than accurately analyzing the risks posed by new derivatives, many economists simply fell back on faith that creating new financial products is good, the authors write. According to this belief, which was promoted by former Federal Reserve chairman Alan Greenspan, a wider variety of financial products allows market participants to place ever more refined bets, so the markets as a whole better reflect the combined wisdom of all the players. But because there was not enough historical data to put into models used to price these new derivatives, risk and return assessments turned out to be wrong, the authors argue. These securities are now the “toxic assets” polluting the balance sheets of the nation’s largest banks.

“While the economic argument in favor of ever new derivatives is more one of persuasion rather than evidence, important negative effects have been neglected,” they write. “The idea that the system was made less risky with the development of more derivatives led to financial actors taking positions with extreme degrees of leverage, and the danger of this has not been emphasized enough.”

‘Control Illusion’

When certain price and risk models came into widespread use, they led many players to place the same kinds of bets, the authors continue. The market thus lost the benefit of having many participants, since there was no longer a variety of views offsetting one another. The same effect, the authors say, occurs if one player becomes dominant in one aspect of the market. The problem is exacerbated by the “control illusion,” an unjustified confidence based on the model’s apparent mathematical precision, the authors say. This problem is especially acute among people who use models they have not developed themselves, as they may be unaware of the models’ flaws, like reliance on uncertain assumptions.

Much of the financial crisis can be blamed on an overreliance on ratings agencies, which gave complex securities a seal of approval, says Wharton finance professor Marshall E. Blume. “The ratings agencies, of course, use models” which “grossly underestimated” risks.

“Any model is an abstraction of the world,” Blume adds. “The value of a model is to provide the essence of what is happening with a limited number of variables. If you think a variable is important, you include it, but you can’t have every variable in the world…. The models may not have had the right variables.”

The false security created by asset-pricing models led banks and hedge funds to use excessive leverage, borrowing money so they could make bigger bets, and laying the groundwork for bigger losses when bets went bad, according to the Dahlem report authors.

At the time, few people knew that major financial institutions had become so heavily leveraged in real estate-related assets, says Wharton finance professor Jeremy J. Siegel. “Had they not been in that situation, we would not have had the crisis,” he says. “We may not even have had a recession…. Macro economists really hadn’t talked about it because these structured financial products were relatively new,” he adds, arguing that economists will have to scrutinize the balance sheets of major financial institutions more closely to detect mushrooming risks.

Lessons Not Learned

Prior to the latest crisis, there were two well-known occasions when exotic bets, leverage and inadequate modeling combined to create crises, the paper’s authors say, arguing that economists should therefore have known what could happen. The first case, the stock market crash of 1987, began with a small drop in prices which triggered an avalanche of sell orders in computerized trading programs, causing a further price decline that triggered more automatic sales.

The second case was the 1998 collapse of the Long-Term Capital Management (LTCM) hedge fund. It had built up a huge position in government bonds from the U.S. and other countries, and was forced into a wave of selling after a Russian government bond default knocked bond prices down.

“When there’s a default in one kind of bond, it causes reassessment of all the risks,” says Wharton economics professor Richard Marston. “I don’t think we have really fully learned from the LTCM crisis, or from other crises, the extent to which things are illiquid.” These crises have shown that market participants can rely too heavily on the belief they can quickly unload securities that decline in price, he says. In fact, the downward spiral can be so rapid that it leaves investors with losses far larger than they had thought possible.

In the current crisis, he says, economists “should get blamed for the overall unwillingness to take into account liquidity risk. And I think it’s going to force us to reassess that.”

Academics also are beginning to reassess business-school curricula. Wharton management professor Stephen J. Kobrin recently moderated a faculty panel that talked about a wide range of possible responses to the crisis. Among the issues discussed, he says, was whether Wharton’s curriculum should include more on regulation and risk management, as well as executive education programs for regulators and other government officials.

Kobrin said he believes many academics share “an ideological fixation with free markets and lack of regulation” that should be reexamined. “Obviously, people missed the boat on a lot of the risks that a lot of financial instruments entailed,” he says. “We need to think about what changes are needed in the curriculum.”

Interview with God

There is no such thing as a free market by Dr. Ha Joon Chang

Thing 1

There is no such thing as a free market

by

Dr. Ha Joon Chang

(Book Excerpt from 23 Things They Don't Tell You About Capitalism) 

What they tell you

Markets need to be free. When the government interferes to dictate what market participants can or cannot do,resources cannot flow to their most efficient use. If people cannot do the things that they find most profitable, they lose the incentive to invest and innovate. Thus, if the government puts a cap on house rents, landlords lose the incentive to maintain their properties or build new ones. Or, if the government restricts the kinds of financial products that can be sold, two contracting parties that may both have benefited from innovative transactions that fulfil their idiosyncratic needs cannot reap the potential gains of free contract. People must be left ‘free to choose’, as the title of free-market visionary Milton Friedman’s famous book goes.

What they don’t tell you

The free market doesn’t exist. Every market has some rules and boundaries that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How ‘free’ a market is cannot be objectively defined. It is a political definition. The usual claim by free-market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved and those free-marketeers are as politically motivated as anyone. Overcoming the myth that there is such a thing as an objectively defined ‘free market’ is the first step towards understanding capitalism.

Labour ought to be free

In 1819 new legislation to regulate child labour, the Cotton Factories Regulation Act, was tabled in the British Parliament. The proposed regulation was incredibly ‘light touch’ by modern standards. It would ban the employment of young children – that is, those under the age of nine. Older children (aged between ten and sixteen) would still be allowed to work, but with their working hours restricted to twelve per day (yes, they were really going soft on those kids). The new rules applied only to cotton factories, which were recognized to be exceptionally hazardous to workers’ health. The proposal caused huge controversy. Opponents saw it as undermining the sanctity of freedom of contract and thus destroying the very foundation of the free market. In debating this legislation, some members of the House of Lords objected to it on the grounds that ‘labour ought to be free’. Their argument said: the children want (and need) to work, and the factory owners want to employ them; what is the problem? Today, even the most ardent free-market proponents in Britain or other rich countries would not think of bringing child labour back as part of the market liberalization package that they so want. However, until the late nineteenth or the early twentieth century, when the first serious child labour regulations were introduced in Europe and North America, many respectable people judged child labour regulation to be against the principles of the free market. Thus seen, the ‘freedom’ of a market is, like beauty, in the eyes of the beholder. If you believe that the right of children not to have to work is more important than the right of factory owners to be able to hire whoever they find most profitable, you will not see a ban on child labour as an infringement on the freedom of the labour market. If you believe the opposite, you will see an ‘unfree’ market, shackled by a misguided government regulation. We don’t have to go back two centuries to see regulations we take for granted (and accept as the ‘ambient noise’ within the free market) that were seriously challenged as undermining the free market, when first introduced. When environmental regulations (e.g., regulations on car and factory emissions) appeared a few decades ago, they were opposed by many as serious infringements on our freedom to choose. Their opponents asked: if people want to drive in more polluting cars or if factories find more polluting production methods more profitable, why should the government prevent them from making such choices? Today, most people accept these regulations as ‘natural’. They believe that actions that harm others, however unintentionally (such as pollution), need to be restricted. They also understand that it is sensible to make careful use of our energy resources, when many of them are non renewable. They may believe that reducing human impact on climate change makes sense too. If the same market can be perceived to have varying degrees of freedom by different people, there is really no objective way to define how free that market is. In other words, the free market is an illusion. If some markets look free, it is only because we so totally accept the regulations that are propping them up that they become invisible.

Piano wires and kungfu masters

Like many people, as a child I was fascinated by all those gravity-defying kungfu masters in Hong Kong movies. Like many kids, I suspect, I was bitterly disappointed when I learned that those masters were actually hanging on piano wires. The free market is a bit like that. We accept the legitimacy of certain regulations so totally that we don’t see them. More carefully examined, markets are revealed to be propped up by rules – and many of them. To begin with, there is a huge range of restrictions on what can be traded; and not just bans on ‘obvious’ things such as narcotic drugs or human organs. Electoral votes, government jobs and legal decisions are not for sale, at least openly, in modern economies, although they were in most countries in the past. University places may not usually be sold, although in some nations money can buy them – either through (illegally) paying the selectors or (legally) donating money to the university. Many countries ban trading in firearms or alcohol. Usually medicines have to be explicitly licensed by the government, upon the proof of their safety, before they can be marketed. All these regulations are potentially controversial – just as the ban on selling human beings (the slave trade) was one and a half centuries ago. There are also restrictions on who can participate in markets. Child labour regulation now bans the entry of children into the labour market. Licences are required for professions that have significant impacts on human life, such as medical doctors or lawyers (which may sometimes be issued by professional associations rather than by the government). Many countries allow only companies with more than a certain amount of capital to set up banks. Even the stock market, whose under-regulation has been a cause of the 2008 global recession, has regulations on who can trade. You can’t just turn up in the New York Stock Exchange (NYSE) with a bag of shares and sell them. Companies must fulfil listing requirements, meeting stringent auditing standards over a certain number of years, before they can offer their shares for trading. Trading of shares is only conducted by licensed brokers and traders. Conditions of trade are specified too. One of the things that surprised me when I first moved to Britain in the mid 1980s was that one could demand a full refund for a product one didn’t like, even if it wasn’t faulty. At the time, you just couldn’t do that in Korea, except in the most exclusive department stores. In Britain, the consumer’s right to change her mind was considered more important than the right of the seller to avoid the cost involved in returning unwanted (yet functional) products to the manufacturer. There are many other rules regulating various aspects of the exchange process: product liability, failure in delivery, loan default, and so on. In many countries, there are also necessary permissions for the location of sales outlets – such as restrictions on street-vending or zoning laws that ban commercial activities in residential areas. Then there are price regulations. I am not talking here just about those highly visible phenomena such as rent controls or minimum wages that free-market economists love to hate. Wages in rich countries are determined more by immigration control than anything else, including any minimum wage legislation. How is the immigration maximum determined? Not by the ‘free’ labour market, which, if left alone, will end up replacing 80–90 per cent of native workers with cheaper, and often more productive, immigrants. Immigration is largely settled by politics. So, if you have any residual doubt about the massive role that the government plays in the economy’s free market, then pause to reflect that all our wages are, at root, politically determined (see Thing 3). Following the 2008 financial crisis, the prices of loans (if you can get one or if you already have a variable rate loan) have become a lot lower in many countries thanks to the continuous slashing of interest rates. Was that because suddenly people didn’t want loans and the banks needed to lower their prices to shift them? No, it was the result of political decisions to boost demand by cutting interest rates. Even in normal times, interest rates are set in most countries by the central bank, which means that political considerations creep in. In other words, interest rates are also determined by politics. If wages and interest rates are (to a significant extent) politically determined, then all the other prices are politically determined, as they affect all other prices.

Is free trade fair?

We see a regulation when we don’t endorse the moral values behind it. The nineteenth-century high-tariff restriction on free trade by the US federal government outraged slave-owners, who at the same time saw nothing wrong with trading people in a free market. To those who believed that people can be owned, banning trade in slaves was objectionable in the same way as restricting trade in manufactured goods. Korean shopkeepers of the 1980s would probably have thought the requirement for ‘unconditional return’ to be an unfairly burdensome government regulation restricting market freedom. This clash of values also lies behind the contemporary debate on free trade vs. fair trade. Many Americans believe that China is engaged in international trade that may be free but is not fair. In their view, by paying workers unacceptably low wages and making them work in inhumane conditions, China competes unfairly. The Chinese, in turn, can riposte that it is unacceptable that rich countries, while advocating free trade, try to impose artificial barriers to China’s exports by attempting to restrict the import of ‘sweatshop’ products. They find it unjust to be prevented from exploiting the only

resource they have in greatest abundance – cheap labour. Of course, the difficulty here is that there is no objective way to define ‘unacceptably low wages’ or ‘inhumane working conditions’. With the huge international gaps that exist in the level of economic development and living standards, it is natural that what is a starvation wage in the US is a handsome wage in China (the average being 10 per cent that of the US) and a fortune in India (the average being 2 per cent that of the US). Indeed, most fair-trademinded Americans would not have bought things made by their own grandfathers, who worked extremely long hours under inhumane conditions. Until the beginning of the twentieth century, the average work week in the US was around sixty hours. At the time (in 1905, to be more precise), it was a country in which the Supreme Court declared unconstitutional a New York state law limiting the working days of bakers to ten hours, on the grounds that it ‘deprived the baker of the liberty of working as long as he wished’. Thus seen, the debate about fair trade is essentially about moral values and political decisions, and not economics in the usual sense. Even though it is about an economic issue, it is not something economists with their technical tool kits are particularly well equipped to rule on. All this does not mean that we need to take a relativist position and fail to criticize anyone because anything goes. We can (and I do) have a view on the acceptability of prevailing labour standards in China (or any other country, for that matter) and try to do something about it, without believing that those who have a different view are wrong in some absolute sense. Even though China cannot afford American wages or Swedish working conditions, it certainly can improve the wages and the working conditions of its workers. Indeed, many Chinese don’t accept the prevailing conditions and demand tougher regulations. But economic theory (at least free-market economics) cannot tell us what the ‘right’ wages and working conditions should be in China.

I don’t think we are in France any more

In July 2008, with the country’s financial system in meltdown, the US government poured $200 billion into Fannie Mae and Freddie Mac, the mortgage lenders, and nationalized them. On witnessing this, the Republican Senator Jim Bunning of Kentucky famously denounced the action as something that could only happen in a ‘socialist’ country like France. France was bad enough, but on 19 September 2008, Senator Bunning’s beloved country was turned into the Evil Empire itself by his own party leader. According to the plan announced that day by President George W. Bush and subsequently named TARP (Troubled Asset Relief Program), the US  government was to use at least $700 billion of taxpayers’ money to buy up the ‘toxic assets’ choking up the financial system. President Bush, however, did not see things quite that way. He argued that, rather than being ‘socialist’, the plan was simply a continuation of the American system of free enterprise, which ‘rests on the conviction that the federal government should interfere in the market place only when necessary’. Only that, in his view, nationalizing a huge chunk of the financial sector was just one of those necessary things. Mr Bush’s statement is, of course, an ultimate example of political double-speak – one of the biggest state interventions in human history is dressed up as another workaday market process. However, through these words Mr Bush exposed the flimsy foundation on which the myth of the free market stands. As the statement so clearly reveals, what is a necessary state intervention consistent with free-market capitalism is really a matter of opinion. There is no scientifically defined boundary for free market. If there is nothing sacred about any particular market boundaries that happen to exist, an attempt to change them is as legitimate as the attempt to defend them. Indeed, the history of capitalism has been a constant struggle over the boundaries of the market. A lot of the things that are outside the market today have been removed by political decision, rather than the market process itself – human beings, government jobs, electoral votes, legal decisions, university places or uncertified medicines. There are still attempts to buy at least some of these things illegally (bribing government officials, judges or voters) or legally (using expensive lawyers to win a lawsuit, donations to political parties, etc.), but, even though there have been movements in both directions, the trend has been towards less marketization. For goods that are still traded, more regulations have been introduced over time. Compared even to a few decades ago, now we have much more stringent regulations on who can produce what (e.g., certificates for organic or fair-trade producers), how they can be produced (e.g., restrictions on pollution or carbon emissions), and how they can be sold (e.g., rules on product labelling and on refunds). Furthermore, reflecting its political nature, the process of re-drawing the boundaries of the market has sometimes been marked by violent conflicts. The Americans fought a civil war over free trade in slaves (although free trade in goods – or the tariffs issue – was also an important issue).1 The British government fought the Opium War against China to realize a free trade in opium. Regulations on free market in child labour were implemented only because of the struggles by social reformers, as I discussed earlier. Making free markets in government jobs or votes illegal has been met with stiff resistance by political parties who bought votes and dished out government jobs to reward loyalists. These practices came to an end only through a combination of political activism, electoral reforms and changes in the rules regarding government hiring. Recognizing that the boundaries of the market are ambiguous and cannot be determined in an objective way lets us realize that economics is not a science like physics or chemistry, but a political exercise. Free-market economists may want you to believe that the correct boundaries of the market can be scientifically determined, but this is incorrect. If the boundaries of what you are studying cannot be scientifically determined, what you are doing is not a science. Thus seen, opposing a new regulation is saying that the status quo, however unjust from some people’s point of view, should not be changed. Saying that an existing regulation should be abolished is saying that the domain of the market should be expanded, which means that those who have money should be given more power in that area, as the market is run on one-dollar-one-vote principle. So, when free-market economists say that a certain regulation should not be introduced because it would restrict the ‘freedom’ of a certain market, they are merely expressing a political opinion that they reject the rights that are to be defended by the proposed law. Their ideological cloak is to pretend that their politics is not really political, but rather is an objective economic truth, while other people’s politics i s political. However, they are as politically motivated as their opponents. Breaking away from the illusion of market objectivity is the first step towards understanding capitalism.

From Butterflies to Blackbirds by Brian Shul

There were a lot of things we couldn't do in an SR-71, but we were the fastest guys on the block and loved reminding our fellow aviators of this fact. People often asked us if, because of this fact, it was fun to fly the jet. Fun would not be the first word I would use to describe flying this plane. Intense, maybe. Even cerebral. But there was one day in our Sled experience when we would have to say that it was pure fun to be the fastest guys out there, at least for a moment.

It occurred when Walt and I were flying our final training sortie. We needed 100 hours in the jet to complete our training and attain Mission Ready status. Somewhere over Colorado we had passed the century mark. We had made the turn in Arizona and the jet was performing flawlessly. My gauges were wired in the front seat and we were starting to feel pretty good about ourselves, not only because we would soon be flying real missions but because we had gained a great deal of confidence in the plane in the past ten months. Ripping across the barren deserts 80,000 feet below us, I could already see the coast of California from the Arizona border. I was, finally, after many humbling months of simulators and study, ahead of the jet.

I was beginning to feel a bit sorry for Walter in the back seat. There he was, with no really good view of the incredible sights before us, tasked with monitoring four different radios. This was good practice for him for when we began flying real missions, when a priority transmission from headquarters could be vital. It had been difficult, too, for me to relinquish control of the radios, as during my entire flying career I had controlled my own transmissions. But it was part of the division of duties in this plane and I had adjusted to it. I still insisted on talking on the radio while we were on the ground, however. Walt was so good at many things, but he couldn't match my expertise at sounding smooth on the radios, a skill that had been honed sharply with years in fighter squadrons where the slightest radio miscue was grounds for beheading. He understood that and allowed me that luxury.

Just to get a sense of what Walt had to contend with, I pulled the radio toggle switches and monitored the frequencies along with him. The predominant radio chatter was from Los Angeles Center, far below us, controlling daily traffic in their sector. While they had us on their scope (albeit briefly), we were in uncontrolled airspace and normally would not talk to them unless we needed to descend into their airspace.

We listened as the shaky voice of a lone Cessna pilot asked Center for a readout of his ground speed. Center replied: "November Charlie 175, I'm showing you at ninety knots on the ground."

Now the thing to understand about Center controllers, was that whether they were talking to a rookie pilot in a Cessna, or to Air Force One, they always spoke in the exact same, calm, deep, professional, tone that made one feel important. I referred to it as the " Houston Center voice." I have always felt that after years of seeing documentaries on this country's space program and listening to the calm and distinct voice of the Houston controllers, that all other controllers since then wanted to sound like that, and that they basically did. And it didn't matter what sector of the country we would be flying in, it always seemed like the same guy was talking. Over the years that tone of voice had become somewhat of a comforting sound to pilots everywhere. Conversely, over the years, pilots always wanted to ensure that, when transmitting, they sounded like Chuck Yeager, or at least like John Wayne. Better to die than sound bad on the radios.

Just moments after the Cessna's inquiry, a Twin Beech piped up on frequency, in a rather superior tone, asking for his ground speed. "I have you at one hundred and twenty-five knots of ground speed." Boy, I thought, the Beechcraft really must think he is dazzling his Cessna brethren. Then out of the blue, a navy F-18 pilot out of NAS Lemoore came up on frequency. You knew right away it was a Navy jock because he sounded very cool on the radios. "Center, Dusty 52 ground speed check". Before Center could reply, I'm thinking to myself, hey, Dusty 52 has a ground speed indicator in that million-dollar cockpit, so why is he asking Center for a readout? Then I got it, ol' Dusty here is making sure that every bug smasher from Mount Whitney to the Mojave knows what true speed is. He's the fastest dude in the valley today, and he just wants everyone to know how much fun he is having in his new Hornet. And the reply, always with that same, calm, voice, with more distinct alliteration than emotion: "Dusty 52, Center, we have you at 620 on the ground."

And I thought to myself, is this a ripe situation, or what? As my hand instinctively reached for the mic button, I had to remind myself that Walt was in control of the radios. Still, I thought, it must be done - in mere seconds we'll be out of the sector and the opportunity will be lost. That Hornet must die, and die now. I thought about all of our Sim training and how important it was that we developed well as a crew and knew that to jump in on the radios now would destroy the integrity of all that we had worked toward becoming. I was torn.

Somewhere, 13 miles above Arizona, there was a pilot screaming inside his space helmet. Then, I heard it. The click of the mic button from the back seat. That was the very moment that I knew Walter and I had become a crew. Very professionally, and with no emotion, Walter spoke: "Los Angeles Center, Aspen 20, can you give us a ground speed check?" There was no hesitation, and the replay came as if was an everyday request. "Aspen 20, I show you at one thousand eight hundred and forty-two knots, across the ground."

I think it was the forty-two knots that I liked the best, so accurate and proud was Center to deliver that information without hesitation, and you just knew he was smiling. But the precise point at which I knew that Walt and I were going to be really good friends for a long time was when he keyed the mic once again to say, in his most fighter-pilot-like voice: "Ah, Center, much thanks, we're showing closer to nineteen hundred on the money."

For a moment Walter was a god. And we finally heard a little crack in the armor of the Houston Center voice, when L.A.came back with, "Roger that Aspen, Your equipment is probably more accurate than ours. You boys have a good one."

It all had lasted for just moments, but in that short, memorable sprint across the southwest, the Navy had been flamed, all mortal airplanes on freq were forced to bow before the King of Speed, and more importantly, Walter and I had crossed the threshold of being a crew. A fine day's work. We never heard another transmission on that frequency all the way to the coast.

For just one day, it truly was fun being the fastest guys out there.

Going Back to the Drawing Board

Going Back to the Drawing Board
 by Bryan J. Neva, Sr.

“The significant problems we face today cannot be solved at the same level of thinking we were at when we created them.” —Albert Einstein

As an engineer, I smile whenever I hear someone use the cliché "go back to the drawing board."  This phrase literal means that when design errors are discovered in production or manufacturing one would need to return to a mechanical drawing or drafting board to revise the engineering drawings, but figuratively the phrase means to rethink our paradigms or opinions about something altogether.  

As we age many of our paradigms and opinions of things change over the years because of our experiences, observations, perceptions, and learning.  In other words, we don’t look at the world the same way we did when we were younger.

As we consider the issues and problems we face today in our world, country, states, and cities, I’m reminded of the famous quote by Albert Einstein, “The significant problems we face today cannot be solved at the same level of thinking we were at when we created them.”  For the most part, we all pretty much agree on the issues and problems we face; what we disagree on is the importance of the issues and problems and how best to solve them.

Ideologues on the left and the right are totally married to their solutions, and it’s hard for them to admit that their solutions have failed to solve our significant problems.  This is understandable.  No one wants to admit when they’re wrong.  But what we’ve been doing over the past 40 to 50 years to solve our political, social, economic, national security, and general welfare problems is no longer working today and many people, especially the poor and middle class, are systematically being disenfranchised politically and economically.

Our constitution, democracy, republic, political system, economic system, trade agreements, tax laws, bankruptcy laws, criminal laws, and social welfare system have all been seriously abused.  Crony capitalism runs rampant; special interest groups have gained disproportionate power; free markets are a fallacy; and fair markets are a pipe dream.  We should look to the past at what has and hasn’t worked; we should look around the world to learn best practices; and we shouldn’t be beholden to political and economic ideologies.

Like a failed engineering design, our country needs to go back to the drawing board and rethink our paradigms and opinions about how best to solve the significant problems we face today.  Otherwise, nothing is going to get better and it may take another economic disaster like we experienced in 2008 to wake people up to the need for reform.

The Stop Sign Theory of Civilization by Allen Laudenslager

What is the goal of a society? It's simply to make civil life possible. We make life civil and fair by making and enforcing rules that we all have to live by. Essentially it's the stop sign theory of civilization. By this I mean that if we ALL stop for every stop sign whether or not there's a policeman nearby then each of us gets through our days with fewer accidents and tickets. Yes, it'll take each of us a bit longer for each trip, but it works out better for ALL of us over our lifetimes.

The same is true for things like taxes. We may have a bit smaller amount of spending money after each payday, but the improvements to our society make ALL our lives better. Think of our Interstate Highway system. We all chip in and we all benefit. Or think of the Tennessee Valley Authority (TVA) that built the dams in the south. We took tax money from the richer northern states and diverted it to the poorer southern states to build dual purpose dams for flood control and hydroelectric power generation. That capacity helped the people in those poor areas become more productive. Factories were built and farms that used to flood are now more productive.

The problem today is that some people have figured out how to manipulate the political system in order to get special dispensations from paying their fair share of taxes. Using the stop sign theory they got a dispensation to not have to stop for stop signs! The problem with stop sign dispensations is that we may be driving through that intersection when the guy with the dispensation blows right through and hits us! With the kind of economic privilege that tax breaks confer the damage to society is not as obvious to the bystanders as the remains of wrecked cars in the intersection.

For example, a corporation may want to build a plant in a community that will add jobs and tax revenue, and it might benefit the community enough to give the corporation tax breaks to attract them to their location. But the community may give away too much so that the gains of having the corporation locate there are diminished by the overall costs to the community. When the corporation doesn't pay their fair share of taxes the rest of us have to make up the difference in higher taxes.

In the eyes of the law corporations are people with the same civil right that you and I enjoy. But corporations can't go to prison if they commit crimes. Our society only charges individuals with crimes and may sentence them to prison if they're convicted. Essentially corporations have been granted a dispensation from criminal prosecution and imprisonment if they break the law. The most they'll get is a fine. But given the huge amount of revenue corporations earn, fines to them are like a moving violation to us if we rolled through a stop sign.

Here are some simple changes we should consider. How about passing a law or constitutional amendment revoking corporate personhood. Corporations are not people; rather they're a business and as such all their speech is advertising which is only protected by the rules of business and not the more expanded rules that protect individual free speech.  

Second, corporations can’t support political candidates PERIOD! Any money found to have come from a corporation to a political candidate is fined by a multiple of 10 to 100 (for every $1 a corporation illegally gives to a politician they'll be fined $10 to $100). And, the political candidate will be required to give that donation to the government; if the candidate knowingly accepted the donation, they'll be disqualified from running in that election.

Third, corporate officers should be held criminally liable for illegal activity or negligence done by the corporation. In making their managerial decisions, did they do the things that a reasonable and prudent person would do? On a snowy road a reasonable and prudent person might drop their driving speed from the legal limit of 55 MPH to a more prudent speed of 35 MPH. The person driving 55 MPH and causes an accident might be charged with reckless driving. It should be the same with corporate decisions.  

Someone might argue that no one would want to become a corporate manager if they could be charged for bad decisions; that is a valid point, but I believe there will always be people who want to be managers, and the fear of being charged criminally will constrain their decision making in exactly the same way that the fear of an accident or moving violation constrains most drivers to stop at stop signs.