**ARNOLD KLING’S EULOGY: GENERAL EQUILIBRIUM AND THE ASH HEAP OF HISTORY** April

**ARNOLD KLING’S EULOGY: GENERAL EQUILIBRIUM AND THE ASH HEAP OF HISTORY**

April 6th, 2009

From Arnold Kling’s recent post on an Outline for a Talk on Financial Regulation:

“…. dynamic stochastic general equilibrium models, and most of what macroeconomists have done since World War II will find its way to the ash heap of history.”

Finally. Unfortunately, those of us who have been fighting this battle for years cannot take any comfort from the fact that this falsification has been so painful, and that the pain will likely continue for some time.

Maybe I can describe the phoenix that, at least hopefully, may rise from the ashes:

1) All economic activity is described by fractal, not equilibrial mathematics. (Human existence is evolutionary, not equilibrial.)

2) The underlying geometry consists of a set of properties determined by the properties of memory: in particular, forgetting-curves (events, severity and frequency), the information available to people, and the time to production of resources (property).

3) The purpose of policy will be (if we learn from the past) to exploit all possible opportunities at the lowest cost, rather than to achieve an equilibrium efficiently.

I would recommend as well that, in order to make possible the transformation of society from rural to urban worldwide, we need to change our idea of the very nature and purpose of government. Because it is not only general equilibrium that failed us. Most of the primary levers by which we govern have failed us, or are also failing.

1) Policy: Since we are permanently committed to fiat money and credit money, then the state (the people) are the insurance policy for losses, and therefore the state (the people) should be the recipients of rewards from the issue of credit. We need to convert from the law-and-tax state to the credit-and-interest state.

2) Government: While this is unlikely to be possible in the US without a revolution, we should promote the Federal Reserve to the third House of Congress and force all “appropriations” to come from interest collected by the Fed. The House of Commons then should dispense social services, and the Senate return to its role of regulating commerce. I would prefer we also return to a hereditary monarchy with veto power, assumed assent, and the ability to dissolve government and call for elections. I say this not because I believe it will occur here, only because I would recommend that any new state adopt this policy. The age of taxation is dead. It should have been dead two thousand years ago. I will have to work on it longer, but it’s entirely possible that the credit state may have resulted in a very different period after the failure of imperial Rome.

3) Religion: Weber was actually wrong. We may need myths for pedagogical reasons, simply to teach children to visualize ideals in time and space and history. We may need myths to teach them the relationship between processes and the invariant nature of the human animal, where the narrative can accomplish what disciplined, symbolic systems cannot. Religions are not, however, terribly important. Credit is granular enough that we do not have to have a state built on punishments (laws) or a cheap imitation of punishments in the form of threats (hell and damnation). We need the myths, and the rituals that perpetuate the myths, and they need to be resistant to fashion, but this can be accomplished by requiring that teachers simply be grandparents.

It is not only our concept of equilibrium that needs to be discarded on the ash heap of history, but the concepts of general equality, law, and taxation, which should have been discarded along with slavery. They are tools we invented to organize people into slavery, and pseudo-slavery when we developed farming.

It is the credit-and-interest state that we have fitfully been trying to bring to birth for the past few hundred years. Without that birth I am fairly sure that the urban state will be still born, if only for epistemic reasons (because there is no means of governance that can function in the urban state).

Unfortunately, we may have to violently kill off the tax-and-law state to do it. Lawyers are not bankers, and public service that is paid for by interest earned, rather than taxes stolen, requires a person of knowledge and talent rather than a person of popularity and conviction.