You could be forgiven for thinking that the patients have taken over the asylum of the economy and the financial system in recent years.
The patients, in this case, have been the bankers and economists whose psychological ailments, inter alia, have included absolute belief in rational markets. In their psychopathic world, the hydra of public debt and deficits had been slain and its disciples of public expenditure sold into bondage.
You could be forgiven for thinking that the economy had turned into a Harry Potter novel as the great evil of the financial crash cast a long shadow over the land. The forces of reaction (governments) had to step in and bail out the financial system using public money: the clinicians had apparently restored order to the asylum.
Or had they?
The late post-Keynesian economist Hyman Minsky developed a five-stage model of financial crises, to which two stages could be added.
The final one can be termed revisionism in which the view is held by financial markets that crises are caused by big government, so that a return to “business as usual” is all that is required.
A Parisian shop closed for an extended holiday: could this be the solution to the Euro's woes?
Yet like the election of Barak Obama we were told that “this time it would be different” and that the world’s economies would be re-balanced and financial system re-regulated, so it couldn’t happen again.
Yet less than one year after the start of the process of recovery, the world’s largest economic zone, the European Union, is in crisis with attendant risks of contagion to the rest of the world economy.
Fiscal crises follow financial crises as public money bails out the failures of the financial system, consequently public debt and deficits rise as tax revenues decline as a result of the initial crisis.
The two crises have the same causes: imbalances in the economic flows of surplus and deficit; creditor and debtor nations.
A linguistic explanation of these crises would focus on hubris and schadenfreude.
The former is a Greek word meaning overbearing pride or arrogance, whilst the latter is a German one meaning taking malicious enjoyment in the misfortunes of others.
In recent economic history, the game of hubris and schadenfreude has been played out between China and America; Germany and Greece. At the heart of this game is how ignorance economics is now turning into hubristic economics, with the banal understanding of debts and deficits at the heart of this dark transition.
One of the tenets of ignorance economics is that public debt is like that of a household or a firm. It isn’t: governments can roll-over debt; issue different maturities (the term structure of interest rates) and not compensate investors for inflation.
Moreover, government debt in the form of three-month Treasury bills provides the risk-free asset datum for private investment portfolios.
The current crisis in Europe is a function of a fatal flaw in the design of the eurozone system: the lack of a fiscal re-distribution between richer and poorer economies.
The hubris of the eurozone institutions suggesting that is not necessary to deal with external risks is more than surprising. But, the impact of an asymmetrical external shock (the financial crisis) has nearly brought euro house down, much to the schadenfreude delight of its critics.
This is the fundamental point of the economist Robert Mundell in his theory of optimal currency areas (OCAs) on which the European single currency is based.
Without fiscal re-distribution, an external shock may lead to the failure of an OCA. The fiscal rules that the EU put in place for managing the eurozone of a maxima of 3% of GDP for budget deficits and 60% for public debt were described by the economist Willem Buiter as “economic nonsense”, based on politics rather than on any economic theory.
In the hubristic attempt to make the euro like the Deutschmark, a schadenfreude bias was built into the system by the more developed northern EU economies against the emerging southern ones.
The essential issue is the ideology that the public sector is unproductive and the private sector is productive, so that any increase in government debt and deficits will be detrimental to growth and stability of the economy. Perhaps we need downtime from this misinformation and the misapprehensions associated with it.
The global Internet company, Google, includes 20% downtime in the conditions of service of their staff as a chance to re-charge emotional batteries. Downtime also occurs when production or information systems close down due to maintenance or network failure.
In an era when so much of business is based on information systems to produce and deliver goods and services, systemic downtime presents a serious threat, Perhaps it represents an opportunity for Europe to experience a Google-type downtime to reflect on its current condition.
In his surreal book Milk, Sulphate, and Alby Starvation, Martin Millar describes a northern European economy run by machines, with its inhabitants living in the sunny south, only to re-visit their homelands to check on the machines.
This is not such a bizarre idea and if used could create a beneficial bottom line. If the citizens of Northern Europe took downtime in the all the summer months around the Agean and Mediterranean, then the surpluses and deficits would be reversed as large sums of money would be spent, boosting local economies and resolving the crisis at a stroke.
The development of downtime economics to replace the current hubristic kind could create new kinds of investment activities. Hedge funds could set up stalls on the beach taking short and long positions on renting windsurfing equipment and sun beds depending on forecasts of wind and temperature.
Far-fetched? Not as far-fetched as not liberating the asylum that treats the conventional economic ignorance as normal.