Showing posts with label fear. Show all posts
Showing posts with label fear. Show all posts

Monday, 22 October 2012

Reflections on fear

I've been writing a lot about fear recently, because it seems to me that much of what is happening in the world at the moment is driven by fear.

There is nothing new about this. Fear has been a primary driver of human activity for a very, very long time. In fact I would say that humans are innately a fear-driven species.

I know this seems odd, because we think of ourselves as successful, the dominant species on Planet Earth with no natural predators left. And indeed we are - now. But we have not always been so.

We think of ourselves as predators. And indeed, humans in groups are the most dangerous predators ever to walk the face of the earth. But at an individual level, humans are not particularly good predators: we are small, weak, slow and poorly armed. Nor do individual humans need to be large-scale predators. We are omnivores, not true carnivores: we are capable of gaining sustenance from an extraordinarily large range of foods, including - but most definitely not limited to - meat. An individual human living off the land does not need to kill large prey: he or she can live quite satisfactorily off small kills and foraging. For much of human history, humans have not been predators, or at least not on a large scale. No, for much of human history, humans have been PREY. And it is our history as prey that gives us our fear driver - and, in my opinion, our tendency to herd together in groups.

Fear is an essential survival characteristic of animals that are naturally prey. It is fear that gives them sensitivity to danger, and fear that enables them to react quickly and appropriately to threats. The classic "fight or flight" response to fear is an automatic reaction to a perceived threat: it suspends ordinary thinking processes and replaces them with a conditioned response depending on the nature of the threat, namely to run away or counter-attack. There is also a third response, which is more common in humans than I think people realise: that is the "freeze" response, where the individual under threat keeps very still and silent, even stopping breathing, in the hope that the predator will not realise they are there. Given that humans are not fast runners compared to their natural predators, and are (in their natural state) poorly armed, it would not surprise me to find that "freeze" is the most common human response to threat.

All this of course harks back to a time before there was human society, before there were weapons, before humans became significant predators. It seems likely to me that human society formed in the first instance when people started banding together to defend themselves against predators: leaders of these protective  groups would naturally be the biggest and strongest individuals, or possibly the most cunning individuals (after all, intelligence is a survival characteristic....). When weapons were invented, I suspect they were used in the first instance for defence, not for hunting. Hunting perhaps started when groups of armed humans realised they could seek out, attack and kill predators, thereby securing a territory, instead of waiting for the predator to attack. It is only a short step from groups of armed humans hunting down and killing predators to groups of armed humans hunting down and killing large herbivores for food. In both cases, the animal hunted would be much larger and more dangerous than anything an individual human could take on. Forming into groups both provided protection from predators and provided access to a wider range of food. To this day, we regard the primary purpose of a government as being to "secure the borders" - i.e. protect the group from predators. But these days the predators are not wolves or bears. They are something else entirely.

Once humans had established dominance as a species through their group hunting activity, their range of natural predators declined catastrophically. Even other animals that hunt in groups, such as wolves, would not take on a human group. Humans became (and still are) the most feared predators on earth. But in their subconscious minds, humans are still prey. They are still driven by fear, still looking out for predators. And when a species that is expecting there to be predators finds there are none, it invents them. Humans have created two sorts of "imaginary" predator: hungry gods, who have to be placated with animal or human sacrifice (just as herd animals will relax once a predator has made a kill), and - most distressingly of all - other groups of humans. We are now our own predators.

Down the centuries, we have acted out our fear of predation through religious ritual. Christianity proclaims that predation is now ended because of the sacrifice of one very high-status individual. The hungry god has supposedly been satisfied for all time by being fed someone who was more than human. But that doesn't stop churches demanding offerings of money with threats of divine retribution if the faithful don't pay up. So perhaps the god isn't entirely satisfied after all. Sacrifice comes in many forms! Many other religions also rely on various forms of sacrifice or offering to keep the hungry predator at bay. This strikes me as a fairly harmless sublimation of the fear response (I know many atheists would disagree with me, but please bear with me while I follow this through) and even helpful if it prevents regression to the more dangerous form of predator-invention. Sadly, though, too often religions have actually encouraged the formation of other predator-substitutes - namely, groups of humans that have invented DIFFERENT hungry gods. And these groups have fought each other to the death over their conflicting beliefs.

The process of predator-invention leads humans to "dehumanize" other humans. Dehumanization of people who look different, behave differently or simply occupy land that we want allows us to justify all manner of barbaric treatment of them. But underneath it all is fear - fear that the other group will take our land, our food, our jobs, our children, our lives. In other words, we see the group that we dehumanize as a predator - and as humans have done for millenia, we attack it before it attacks us. Much of the rhetoric from extreme racists today contains fear-attack language.

When humans attack other humans that they see as potential or actual predators (and let's be completely clear here - a thief, or a rapist, or a murderer IS a predator), they often do so brutally. Our fear leads us not only to want to tear the other apart, but to disfigure, humiliate and demean them - to break their power over us, not only by killing them but by destroying the power of their image in our minds. The desire to humiliate and demean can even override the desire to destroy: slavery initially came about as a means of demeaning vanquished foes and breaking their power, though it later acquired a much more commercial objective.

Today, we see fear everywhere. And consequently we are seeing "dehumanization" of particular groups. "The rich" (unspecified) are castigated for greed and threatened with asset-stripping. "Bankers" are universally reviled as criminals who should be locked up or even (as I saw in a recent tweet) beheaded. And at the other end of the scale, sick & disabled people are demonized in the tabloid press as "scroungers". This last is particularly unpleasant, because strident calls for impoverishment of sick & disabled people have been heard by government, and it is therefore busy dismantling social provision for some of the most vulnerable in our society. I do not like the way this is going. One of the strengths of human society has been its willingness to care for those who can't care for themselves: it is an important part of the "glue" that holds human groups together. Once we start dehumanizing those whom we formerly loved and cared for, we lose much of our cohesiveness - and, I would argue, our humanity. The breakup of the former Yugoslavia was characterised by dehumanization of people from different races and religions; the result was brutalisation and murder of people who had previously been neighbours and friends.

But more insidiously, many of the fear-driven beliefs and practices of earlier ages are returning, dressed up in modern clothes. The government appears to be willing to sacrifice ordinary people and businesses on the altar of austerity to placate the hungry gods of the bond markets. But are the bond markets really predators - or are they just scared people terrified of losing their wealth? And the financial sector is very evidently looking after itself at the expense of the rest of the economy - and a scared government is openly helping it to do this. It is perhaps less like a predator than a parasite. But it, too, is made up of people - people who are losing their jobs by the thousand and are terrified of a complete meltdown of their industry. There are even more scared people in government, bond markets and banking than there are in the real economy. And that is the most terrifying thing of all.

Frightened humans are very, very dangerous to other humans. As I noted above, fear overrides normal rational thinking, replacing it with automated responses from a much earlier age. Those responses now are likely to be highly inappropriate. Fear leads people to do stupid things. A government full of frightened people does not bode well for good management of the economy, let alone compassionate treatment of the poorer and weaker members of society. And a financial sector full of frightened people could cause serious damage to the economy: people with wealth desperately trying to protect it, rather than using it productively to benefit both themselves and society as a whole, which is how investment normally works. There is a deep divide and antagonism developing between the financial sector and the real economy: ordinary people see the financial sector as parasitic, and the financial sector increasingly sees ordinary people as thieves. This is incredibly dangerous.

Let us remember that we are human. We can think - we do not have to be driven by instinctive drivers from an earlier age. We can love - we do not have to discard those who can't provide for themselves. And we can choose - we do not have to placate hungry gods (or bond markets). And above all, we can remember that humans owe their success to their ability to co-operate for mutual benefit. Fear drives wedges between people and ultimately destroys society. It is imperative that we learn to override our fear drivers and act rationally, even when apparently faced with extreme danger. For if we do not, our fears will become reality.

Saturday, 20 October 2012

Fear-driven economics

On Monday, I attended a fascinating debate on the Economics of Deficit Reduction at the House of Commons (audio link in this post). Essentially the debate was about the pros and cons of fiscal austerity versus stimulus. On the "stimulus" side were Prof. Paul Krugman and Jonathan Portes of NIESR: on the "austerity" side were Bridget Rosewell of Volterra Consulting and Stephen King, Chief Economist of HSBC.

The definitions of both "austerity" and "stimulus" were somewhat unclear. As far as I could tell none of the four were remotely in favour of the severe austerity measures being imposed on some members of the European Union. Furthermore, none of the four were in favour of extensive cuts to capital investment such as the current Coalition government and its Labour predecessor have already undertaken (and more are planned). In fact Rosewell, supposedly anti-stimulus, actually said she was in favour of increased government borrowing for capital investment projects. In her eyes, the debate was really about whether continued support for current consumption was an appropriate course of action at the present time, given the levels of public debt and the fact that the UK is running a significant fiscal deficit.

Except that it wasn't. The debate was about whether the government should continue its austerity programme (Rosewell and King) or change to a debt-financed stimulus programme to encourage growth (Krugman and Portes). Internally rebalancing the current austerity programme towards capital investment and away from supporting consumption wasn't discussed. Nor was the IMF's advice, which is to allow automatic stabilisers to operate freely but refrain from explicit debt-financed fiscal stimulus measures. There was also no discussion of the sort of balanced-budget stimulus measures suggested by Simon Wren-Lewis: this is something of a pity, because it means that the debate tended to become a discussion about whether or not the UK government could afford to borrow the extra money required, which isn't really the issue (as I shall explain later). It all made for great debate, but sadly no practical solutions to a difficult situation.

Krugman delivered a consistent and well-thought-through message, well-supported by Portes, who actually gave a figure (2-3% of GDP) for the amount of stimulus he thought the economy needed. But I was disappointed with Rosewell's presentation. My notes taken at the time comment on the inconsistency of her message, which appeared to be driven largely by her fear of a return to the financial markets' dislocation of 2008.

The trouble with fear is that it inhibits both thinking and action. As the Bene Gesserit in Frank Herbert's Dune have it, "Fear is the mind-killer". Fear is one of the biggest issues I deal with in my work. Once someone gives in to fear, they stop thinking, and something that they actually are perfectly capable of doing becomes an impossible task. (As an aside - perhaps my own difficulty with maths is because I fear it?) The Hitchhiker's Guide to the Galaxy famously had "Don't Panic" in large, friendly letters on its cover. I, too, have "Don't Panic" written in large (and I hope friendly) letters at the top of sight-reading exercises for my students.

Fear also inhibits appropriate action. People who are afraid may do nothing, like the rabbit caught in the headlights which stands and waits to be hit instead of legging it at top speed - or like a student who suddenly becomes incapable of singing a single note. Or they may do stupid things. My sight-reading students have a distressing tendency to invent the music instead of reading what is on the page. They are perfectly capable of reading the music when they aren't panicking, but when they are, they are incapable of reading the music at all, so they make it up.

I think fear is the cause of a large part of what is wrong with the world at the moment. People are either doing nothing, or they are doing stupid things - such as imposing severe austerity on fragile economies in the mistaken belief that sharply cutting public expenditure will somehow magically bring about economic recovery. And people who believe that it is only going to get worse are adjusting their behaviour in the expectation of future losses.  Ordinary people are paying off debt and saving like crazy because they fear cuts in their real income shortly. Businesses are not investing because they see no prospects for an improvement in customer demand. Investors are prepared to accept gradual erosion of capital through negative real interest rates because they are terrified that default and/or hyperinflation will wipe them out. So I am concerned that the thinking of an influential economist such as Rosewell is so influenced by fear.

Having said that, rather than dismissing her fears, we should consider whether they are justified. Like pain, fear is a warning: if we are afraid, we should examine that fear and consider whether it is rational, and if it is, what an appropriate rational response should be. Is there REALLY a risk that financial markets would seize up again? Rosewell correctly notes that we don't actually know what causes financial markets to freeze, and she appeals for the economics profession to develop models that better explain and predict the behaviour of the financial system. I absolutely endorse her remarks. Classical economic models have excluded the financial sector, effectively treating it as passively reactive to real economic forces. We now know that nothing could be further from the truth - it is clearly an active driver of economic change, and not always for the better. But we don't know enough about what does drive market behaviour. So further research is needed.

So yes, there is a risk that financial markets might freeze again. But Rosewell then goes on to make a priori judgements about what would cause that to happen. In effect she suggests that the UK government borrowing another 2-3% of GDP for capital investment and perhaps private debt relief or tax cuts might cause the sort of market panic we saw in 2008. I really can't follow her logic here. In what way would a responsible government borrowing a small percentage of its GDP to invest in the future of its economy equate to a catastrophe of the same order as the failure of Lehman Brothers? Krugman dismissed Rosewell's fears about the financial markets as "fantasy", and to be honest I am inclined to agree. I can't see that she is comparing like with like.

Having said that, the financial markets do seem to be behaving irrationally - if fear is irrational. It seems to me that fear is the principal driver behind most investment decisions at the moment: fear of default, fear of inflation, fear of collapse, fear of loss.......fear of the unknown. As Christopher Cole of Artemis Consulting puts it, we have a "bull market in fear". So I suppose that it is entirely possible that financial markets might respond very negatively indeed to an already-indebted government borrowing a bit more. The likely effect would be a significant increase in the yields on government debt and perhaps a cut in its credit rating (not that anyone takes much notice of credit ratings any more). But yields on government debt are currently well below inflation and being pushed down by QE. There is room for quite a considerable rise in yields without causing financial distress to the UK sovereign.

But even if the UK borrowing more did cause financial markets to reject its debt, the UK has other weapons up its sleeve, like forcing pension funds and banks to buy its debt - it has already done this to some extent - or even, as a last resort, monetizing the debt at the Bank of England. The UK is not going to suffer a debt crisis of the same order as Greece. It has a sovereign government and a central bank. Greece has neither.

What the UK could suffer as a consequence of increased borrowing, or rather monetization of increased borrowing, is currency collapse. I find it extraordinary that despite all her fears of financial market dislocation, Rosewell ignored this risk. Markets know that sovereign governments with central banks can always pay their debts. So if they don't like the behaviour of the government they reject the currency in which the debt would be paid, not the debt itself. The last time this happened in the UK was in 1976, when the government was forced to seek assistance from the IMF to choke off a run on sterling arising from loose fiscal and monetary policy.

But again, let's consider the risk. Is the UK government borrowing an additional 2% of GDP for investment in a stagnant economy really likely to cause a run on sterling? I doubt it. Financial markets may be irrational, but surely not that irrational. The inflation risk from that amount of borrowing in a stagnant economy is tiny. Implosion of the Eurozone and collapse of the Euro is a much bigger risk. Even if the UK Government borrowed more, I think investors would still see it as a safe haven from the Eurostorm.

So broadly, I don't think Rosewell's fear-driven analysis stacks up. And I am particularly concerned by the illogicality of her conclusion, which is that the Coalition government is "getting things about right". Even from her own analysis, it is getting things very wrong. She is in favour of borrowing for capital investment, whereas the Coalition government is cutting capital investment to the bone. Furthermore, she has not explained why she regards reducing public borrowing as more important than allowing the private sector to reduce its debt burden. Non-financial corporate and household debt of over 170% of GDP is surely a much larger brake on growth than public debt of under 80% of GDP. And as Krugman explained in his opening remarks, it isn't possible for both to deleverage at the same time without provoking what he calls "a depression, properly understood".

The trouble is, there are an awful lot of people who think like Rosewell. The world is on an austerity drive, with crippling effect on the real lives of ordinary people and businesses. And perhaps more importantly, in the UK (and I suspect other countries such as France) where there hasn't yet been much real austerity, the FEAR of austerity is driving people into self-protective behaviour that seriously reduces economic activity. We are frightening ourselves into a completely unnecessary depression.