Today our Alternative Economics Society at Strathclyde had their Welcome Meeting for the academic year. They screened the documentary Boom Bust Boom largely motivated by the global financial crisis of 2008 and the corresponding failure of standard economic theory. It is an attempt to explain the economics underlying booms and busts to a wider audience. In doing so, it features an impressive line-up of contributors from Macroeconomist Paul Krugman to Behavioral Economist Dan Ariely. It also features psychologist Daniel Kahneman and economists Steve Keen, Perry Mehrling and Robert J Shiller among others.
This documentary is by any means not the standard documentary I would have mind. It makes extensive use of animation, puppetry and songs coupled with expert insights and a good amount of sarcasm to explain why crashes keep happening and why our economic system is inherently unstable. The documentary starts off with a history of financial crashes. It revisits the Tulip Mania, South Sea and Railway Bubble, and the 1929 Crash. All four examples illustrate the common features of bubbles. A bubble has something magical or new inducing people to think that “this time it is different”. It is argued that people always find a reason to abandon their rational behaviour. In doing so there is a general tendency for periods of euphoria and pessimism with bubbles being of the self-fulfilling type.
The documentary also revisits the Great Depression after the Wall Street crash on the 29th of October 1929. It argues that the bubble preceding the Great Depression was different from other bubbles because it combined euphoria with excessive borrowing which is said to be the “most toxic combination in capitalism”. When the practice of buying on the margin, i.e. borrowing money to buy stocks, shot back, fear spread and the bubble eventually had to burst.
At some point after the 1929 Crash and the Great Depression, however, people’s memories started to fade. As the older generations died the younger generations made the same mistakes all over again. Similar to the reasons for the 1929 crash, the starting point was the creation of too much debt in the private sector. Exactly this is where the documentary introduces the work of Hyman Minsky which I referred to in earlier posts. Minsky essentially argued that stability leads to instability. In his today well-known financial instability hypothesis, he recognised that after an economic downturn government would pass stricter financial regulation. However, this would be followed by a prolonged period of stability which would make people overconfident and optimistic. The recovery from the last recession would subsequently turn into euphoria, followed by deregulation and the next bubble. Despite Minsky’s prediction of a major financial crisis 25 years before it actually happened he was largely disregarded in the Economics profession. Yet our society would have benefited greatly from Minsky’s insights; the documentary stresses that “anyone who read Minsky could have seen it coming”.
The lesson from Minsky is that capitalism is inherently unstable. Yet neoclassical economic models with the assumptions of rationality and a general equilibrium do not allow for instability and bubbles in the first place. The documentary rightly points out that models are at the core of economics and they do serve their purpose if their features resemble the real world in some meaningful way. Yet Steve Keen points toward the problem that neoclassical economists ignore banks, debt and money. Omitting these features from the economic model is what made it depart from the real-world economic system.
Another pillar in the documentary is free market ideology. In seeing the market as collectively rational with optimal allocation and distribution of wealth, deregulation followed and markets were left to their own devices. Yet free market ideology misses the importance of human behaviour in economics. The documentary goes back to the work of both Daniel Kahneman and Laurie Santos highlighting human tendency for irrationality. A major implication is to admit people’s biases in Economics and the documentary advocates for better policy-making around human biases. It uses the banking system as a major example for designing a banking system for humans instead of a system of fragility and systemic instability.
Lastly, the documentary addresses the need for a new Economics education. The experience of the financial crisis has led students to enquire about the mechanisms and reasons behind it. Yet standard Economics has little to offer to explain deviations from the general equilibrium model. The documentary calls for a more active debate in economics which is currently dominated by the mainstream. Its solution is to adopt a different approach in economics: (1) make it a piece of history and social thought and (2) make it something done together.
The documentary concludes with the lesson that people have learnt nothing from history. They tend to forget because it is in our human nature. Yet this sets us up for the emergence of future booms and busts and it is the Economics profession’s turn now to act and embrace its duty.
Overall, the documentary is great for getting the bigger picture of the global financial crisis and the importance of human behavior in macroeconomics. It revisits booms and busts from both a Keynesian and Behavioral Economics perspective. Sometimes I miss more diversity in explanations and solutions. Yet I think it does balance clarity through the use of animations and puppetry with rigor and economic theory. Being intended for a wider audience it serves its purpose in my opinion. Hopefully it is a wake-up call that Economics matters and that it matters to everyone in society. So if you want to hear more on the financial crisis of 2008 in a non-technical fashion and you like the ‘Muppets’, then this is clearly the right documentary for you.
Many thanks for reading,
Boom Bust Boom (2015). Documentary, Brainstorm Media, London. Directed by Terry Jones, Bill Jones, and Ben Timlett.