The entire world sometimes seems to run on surface level analysis by (rightly) placing a lot of premium on common sense! This works because it's practitioners are the majority and also because most problems we face honestly do not need to be pondered over to a great level of depth.
So person X is someone with modest wealth and common sense dictates that he's gotta learn to live with his means, right ?!
The correct answer is -not necessarily-, but that isn't a part of the choice presented normally...
The real issue is when Common Sense is applied to large systemic problems and the chances of failure increase exponentially. This is because systemic problems are by nature complex and have multiple interacting entities who's decisions are prone to regular change and consequently redefine the outcome of the system.
In such cases, a deeper understanding is required and from this understanding emerges a view that can be potentially different or even opposite to the conventional view. Although the word intuition has a connotation of 'the instinct', counter intuitive views invariably arise from deep analysis!
And When counter intuition trumps common sense, I'd like to think of it as genius!
So, In a way it appears to me that genius is just the ability to analyze complexity and weed out a better solution!
Post 2008, the developed world faced a huge systemic problem -
Having run up huge debts over 100% of their GDP for reasons as varied as - profligacy to "because they could".., the cost of borrowing began to literally hit the ceiling.
What this meant was that if their debts had reached a level wherein their payments would end up financing the interest payments alone as opposed to the principal..
It would be the equivalent of what happens to us average Raman, Raj and Joe in the first half of a housing loan EMI cycle. For most of the loan tenure, the monthly payments that we make would go towards the interest and only in the last few years would they go towards the actual borrowed amount!
Now imagine if we earned X and made borrowings that stretched our EMI's to the range of 20X. Incredibly bold or stupid or both!
What would you do when the loan man comes knocking ?
The ramification of a household borrowing beyond means would mean defaults leading to loss of face, jail time - the works!
For countries it means something simpler but a lot graver - End of Borrowing -
Borrowing forms a huge part of a country's growth, in an oversimplification of sorts - countries generate revenue by taxing their inhabitants, which would preclude a high level of employment for a thriving economy. Governments create jobs or simulate job creations partly by ear marking a part of the tax revenue for public sector projects, giving tax benefits and by borrowing!
You see where this is going, don't you : End of Borrowing means less money available for Job creation and so on and so forth...
So when sovereigns are faced with the problem of reducing debts - like they did in 2008/09, it really came down to 2 choices :
Most of the euro countries chose the former and the predictions of the Keynesians have come to bear!
The Euro (with the exception of Germany and France) and the UK are regressing and their debt levels are not coming down either which sorta beats the point of austerity in the first place!
On the other hand - Keynesians like Paul Krugman and Robert Skidelsky have been crying coarse to ignore inflation (which is the risk of excessive spending) and imploring governments to spend and create jobs...
If the proof of the medicine is in the bitterness, then at this point in time it's Round 1 to the Keynesians...
To loop back to the prelude of this post - counter intuition has trumped common sense - pure genius :)
Epilogue :
There have been a lot of economists squabbles on the subject over the past few years not least the one's between Robert Skidelsky (Keynesian) and Niall Ferguson the Harvard historian on the austerity camp
The latest of the debates happened a week back on Fareed Zakaria's GPS show :
Take a listen -
http://itunes.apple.com/in/podcast/fareed-zakaria-gps/id377785090
(GPS June 17th)
So person X is someone with modest wealth and common sense dictates that he's gotta learn to live with his means, right ?!
The correct answer is -not necessarily-, but that isn't a part of the choice presented normally...
The real issue is when Common Sense is applied to large systemic problems and the chances of failure increase exponentially. This is because systemic problems are by nature complex and have multiple interacting entities who's decisions are prone to regular change and consequently redefine the outcome of the system.
In such cases, a deeper understanding is required and from this understanding emerges a view that can be potentially different or even opposite to the conventional view. Although the word intuition has a connotation of 'the instinct', counter intuitive views invariably arise from deep analysis!
And When counter intuition trumps common sense, I'd like to think of it as genius!
So, In a way it appears to me that genius is just the ability to analyze complexity and weed out a better solution!
Post 2008, the developed world faced a huge systemic problem -
Having run up huge debts over 100% of their GDP for reasons as varied as - profligacy to "because they could".., the cost of borrowing began to literally hit the ceiling.
What this meant was that if their debts had reached a level wherein their payments would end up financing the interest payments alone as opposed to the principal..
It would be the equivalent of what happens to us average Raman, Raj and Joe in the first half of a housing loan EMI cycle. For most of the loan tenure, the monthly payments that we make would go towards the interest and only in the last few years would they go towards the actual borrowed amount!
Now imagine if we earned X and made borrowings that stretched our EMI's to the range of 20X. Incredibly bold or stupid or both!
What would you do when the loan man comes knocking ?
The ramification of a household borrowing beyond means would mean defaults leading to loss of face, jail time - the works!
For countries it means something simpler but a lot graver - End of Borrowing -
Borrowing forms a huge part of a country's growth, in an oversimplification of sorts - countries generate revenue by taxing their inhabitants, which would preclude a high level of employment for a thriving economy. Governments create jobs or simulate job creations partly by ear marking a part of the tax revenue for public sector projects, giving tax benefits and by borrowing!
You see where this is going, don't you : End of Borrowing means less money available for Job creation and so on and so forth...
So when sovereigns are faced with the problem of reducing debts - like they did in 2008/09, it really came down to 2 choices :
- Cutting spending and adopting austerity
- The John Maynard Keynes way of actually spending more, increase employment, generate more revenue and pay off the debt
Most of the euro countries chose the former and the predictions of the Keynesians have come to bear!
The Euro (with the exception of Germany and France) and the UK are regressing and their debt levels are not coming down either which sorta beats the point of austerity in the first place!
If the proof of the medicine is in the bitterness, then at this point in time it's Round 1 to the Keynesians...
To loop back to the prelude of this post - counter intuition has trumped common sense - pure genius :)
Epilogue :
There have been a lot of economists squabbles on the subject over the past few years not least the one's between Robert Skidelsky (Keynesian) and Niall Ferguson the Harvard historian on the austerity camp
The latest of the debates happened a week back on Fareed Zakaria's GPS show :
Take a listen -
http://itunes.apple.com/in/podcast/fareed-zakaria-gps/id377785090
(GPS June 17th)
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