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Policy Assault On Democracy And Economic Psywar

Politics / Social Issues Jul 07, 2013 - 12:37 PM GMT

By: Andrew_McKillop


Egypt's Gamal Abdul Nasser is claimed to have said this about American strategy towards Egypt:

             The genius of you Americans is that you never make clear-cut stupid moves, only complicated stupid moves which make the rest of us wonder at the possibility that we might be missing something.
~Abdul Nasser

Economic psywar uses the same double-blind to “mau mau” opponents, but when it is increasingly used inside – as well as between – competing belligerant powers, the results can surprise and unhinge the psywar's designers, strategists and promoters.

Economic psywar as an accompanying or extending format for conventional economic warfare now operates on a 24/7 basis both inside and between all major economic powers. Examples include industrial espionage and sabotage, trade wars, currency wars, and the present China-versus-the-Rest gold war, where China buys real, physical gold hand over fist as the price of paper gold falls. Later, it will have major backing for the RMB and no longer have massive quantities of “chaff dollars”, which can be devalued by the US whenever it wants, dominating its FX hoard.

Usually not acknowledged or actively rejected by economic psywar strategists, both internationally and at domestic level, economic psywar is usually a total loss gambit. Easily comparable with the US Afghan war – which started as a conventional military conflict but morphed into a psychological war, lost any sense it originally had, and became unwinnable - economic psywar inside and between the major economic powers also makes no sense. The usual outcome is loss for all players. The longer they prolong the game, the worse are the losses.

The tight-knit groups of economic policy strategists who perpetrate economic psywar deny they cause major damage to society – as well as the economy - and ignore the fact that the range and intensity of its social impacts can and will only result in domestic political revolt. In some cases, for example Mohamed Morsi's ouster in Egypt, the psywar strategy of “playing for time” both incited mass street protest, and was unhinged and thrown out by mass street protest.

What is called “classic liberal economics”, personified by Adam Smith, was above all two things. It concerned micro-scale economics, of individual behavior, and was closely linked to psychology. Adam Smith himself wrote books other than his famous 'The Wealth of Nations', with titles such as 'The Theory of Moral Sentiment'. In it he proposed an 18th century psychological explanation of individual behavior, especially the human desire for fairness and justice.

From the late 18th century, what we call neo-classical economics always includes a psychological underpinning.

The 18th century approach was ground-up, going up from the individual person – not top down from society to the individual. The main goal for this budding 'natural science' was to come up with an explanation why and how 'economic agents' make decisions. Being the 18th century and the Age of Enlightenment, the dawning of science, it started with the assumption that individual economic agents are fundamentally rational. This was a massive fundamental error, and led to unforeseen errors on a cumulative basis, mainly due to the simple fact that human beings, whether economic agents or not, act socially for a host of reasons including completely non-egoist and “irrational” motives.

Taking only the “bird and bush paradox”, or the preference for having one bird in the hand rather than many potential birds in the bush – similar to liquidity preference, for example – this paradox is turned totally upside down in the special world of the casino economy and its “high frequency trading”. For the cartoon cutout cocaine-fueled trader, any faraway bush crammed with birds makes for a better game. Inventing more birds, and crafting additional bushes through arcanely complex “special assets and vehicles” like credit derivatives and the SIVs is a specialty of today's global finance “industry”.

This multiplies the gaming potentials and the profit-and-loss potentials, with the losses for taxpayers and society, and the profits for the banksters and gamesters.

The one-word term for the permanent and large non-logical streak in all economic behavior is the principle of Heuristics, or the human desire to make decisions on a rule of thumb basis, not strict logic, always inventing a range of rationales or “smokescreens” to hide this basic fact. More complicated terms for this principle include cognitive bias and restricted or bounded rationality.

These subjects – bias and rationality – are mainstream subjects in economics research today, but the literature shows us that “anecdotes and stereotypes” are always present, filtering out rationality, and ensuring that when or if the economic agents are suicidal, euphoric, depressive, and so on, they will tend to act out and complete their psychological trajectory. The big surprise, perhaps, is that fairness and cooperation are constant motives and drivers of social economic behavior. They draw from the same motivational bases as the desire for democracy and the rule of law.

In a now classic 1999 study published by the US Quarterly Journal of Economics, Ernst Fehr and Klaus Schmidt under the title 'A Theory of Fairness, Competition and Cooperation', examined why the 18th century notions of “purely rational” egoist behavior are so wrong.

Fehr and Schmidt argued that human economic behavior and psychology is often what a theoretically neutral outside observer – who cannot exist – would call 'plain schizophrenia'. They explained this is due to many factors, one of which is the effect of unfair or non-cooperative action by one single person or a small group, which 'tilts' the behavior of the entire society. They said: “under certain competitive conditions a single purely selfish player can induce a large number of extremely inequity-averse players to behave in a completely selfish manner, too”.  They also found that society is 'hard wired' to this behavior. In Adam Smith “Invisible Hand” style, unconsciously and instinctively for the most part, society compensates for and adjusts to “Alpha Male” greed-is-good players in the economy.

Knowing these purely selfish, purely competitive individuals exist, society reinforces its welfare function by reinforcing the social desire for fairness and cooperation. The Alpha Male's action is used by society to spur production, improve wage bargaining conditions, trigger new financial or economic  regulations, enact new laws punishing fraud and theft, and so on.

The 18th century idea that all humans act rationally is easy to criticize as irrational itself. The main cause of this error is the microeconomics bias – only looking at the individual. Looking at society and its economic functions however does need a microeconomics bias when we take policy making.

Policies are made by one or a few persons acting as a tight-knit group. Their cognitive bias and restricted reality are, as we know, often special and very perverse. When they engage in economic psywar against their own societies – which is what we have today – the consequences are violent.

What Fehr and Schmidt found among economic agents also applies to economic policy makers.

Heuristics applies with all its force as a major principle. Socially deviant policy makers and deciders know that in the social market system, for as long as there is at least one significant group – for example minorities, non-nationals, the aged and young persons, low income earners, unemployeds - who accept everything, this will entrain or incite even very inequity-averse fairness-seeking groups to make attempts at turning this apparently unavoidable inequality to their own advantage. Applying economic psywar inside society, the overall result of this aggression is a downward spiral in expectations or demands on society and the acceptance of lower and lower offers, for everything ranging from product quality, to housing, jobs, wages, social services and the environment.

The propaganda slogan for this is “increased competitiveness”.

Economic policy, certainly since the 2008 crisis in developed countries now openly uses psy-war methods against society itself. The key policy theme is “the competitive market”, including the so- called restoration of competitiveness by increasing social inequality and injustice - but this runs right against the fundamental basic social desire for democracy and the rule of law. The term “democratic economics” does not exist and the term used is “social economics”, but the acquisition of democracy is a powerful human goal, higher-placed than economic goals.

Put another way, although society is tolerant – too tolerant – of economic psywar, threats to removing democracy and installing an outright junta or dictatorship would be rejected by mass street protest, and civil war if needed, even in the post-2008 crisis-wracked, inert societies of the developed world.

Installing a form of dictatorship – the reign of casino finance – by the backdoor of psychological warfare, through installing unfairness and economic inequality where it doesn't exist, or increasing it where it does exist, is becoming understood for what it is - anti-democratic and purely aggressive. To be sure, most citizens are only instinctively aware that they are victims of an anti-democratic coup operated by and for rogue finance, but their awareness is rapidly building.

In the post-2008 economic ruin of the developed economies, the use of delaying tactics and fake attempts at “improving” the economy through increasing inequality and injustice inside society are the rule, everywhere. At the same time, the tight-knit group of deciders who operate this psywar action are reducing total economic output and welfare at an accelerated pace in many austerity-wracked countries, raising national debt which will have to be paid by future generations, ensuring generational inequality, and increasing their attack on any social groups identified as “marginal”.

This psywar can and will produce unexpected results, which start with the economic failure of these “bounded reality”, politically biased, anti-democratic and aggressively anti-social policies.

What we are witnessing is the tail end of the economic psywar process which, even where it starts with solely economic goals, inevitably morphs into an assault on democracy. Possibly unknown or under-appreciated by its instigators and its small crony capitalist band of profiteers, economic psychological warfare inside society is at least as aggressive and destructive in its results, as military-type psywar applied against enemy powers. In a return to the 18th century foundings of “liberal economics”, symbolized by the Marie Antoinette one-liner “let them eat cake”, the massed street protestors will respond to this cynical arrogance and contempt with the violence it merits.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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