The Tao of Economics?

That which is meddling, touching everything,
Will work but ill, and disappointment bring.

(Tao Te Ching, c. 58, ~600 B.C.)

I do not consider myself a Taoist, at least no more than I do a Muslim, Christian, Jew or Hindu.  That being said, this proverb from the Legge translation ¹ of the Tao Te Ching is one of my favorites from any sacred text, and one that seems worthy of some reflection in these tough economic times.

The concept is quite simple, yet mastering its application can be a lifetime's work -- if it can be done at all. Here are a few examples of how the lesson of this passage play out in many aspects of our day to day lives:

In the culinary world, experienced chefs know that excessive meddling with foods often leads to disappointing results. This is true of overseasoning, overmixing and overcooking, as well as excessive flipping, handling, poking or prodding.  (Incidentally, in my own 20 year culinary journey, I have found patience to be the most important cooking technique.)

In drawing and painting the most skilled artists are often those who use the fewest brush or penstrokes to create an image.

In photography, the most highly regarded images are often those that capture their subjects in a natural, unforced state.

In music and film, the sparsest of compositions can also be the most powerful. "Overproduction" can produce a generally inferior song, at least from an artistic standpoint.

In personal affairs and relationships, unnecessary or unwelcome meddling most often causes more harm than good.

In the financial world, the most successful investors are usually those who "look long" and do not excessively meddle with their investment strategy. Certainly, some meddlers prosper in the short term.  But, the Taoist would be quick to point out that these types of positive gains for one individual are offset in the broader picture by the losses of others.  (My personal belief is that speculative and intangible "investments" have had a large hand in precipitating this economic crisis...but this is another chapter altogether.)

You get the point. There are many similar examples. Perhaps what is to be taken from this simple lesson in the Te Ching is that the best solution to a problem is to avoid it in the first place.

But that is easier said than done, of course.  I turn back to the current economic crisis since it seems to be the most pressing issue for our people at the moment.  The real fault for this crisis lies not with those seeking to profit in the free market, but with 'We, the people' for allowing excessive meddling and manipulation in the credit and housing markets in the first place, especially in the past few decades. Now, we are allowing trillions of dollars to be thrown at a clearly broken system in an attempt to prop it up.

Have we not been here before? It is now generally accepted that the last time we experienced this level of economic malady was in the months leading up to the Great Depression.²   Here are two graphs.  They have not been manipulated in any way, and simply show the Dow Jones Industrial Average for about 6 months each in October of 1929 and 2008, respectively.   Yes, many "experts" could baffle me with the reasons 2008 was not 1929, but in the end it is clear that we have been here before.

Although the similarity is striking I am not suggesting that history repeats itself in this mathematical of a manner (though it has in this case, so far), or that we are doomed to fall into another depression.  I am trying to point out that when we make the same mistakes, we get similar results.  The bubble will always burst when we allow the market to be run up based only on the confidence of the investors with little or no connection to actual, tangible value.  Inevitably, this bastardization of the free market turns into a de facto pyramid scheme.  It becomes necessary for many to lose so a few can gain.   And yes, those few do gain.

The consensus in May 1930, just as it is today, was that we had "bottomed out" and the economy was recovering. ³ But history shows that there was actually no recovery, and the rest of the 1929 chart looks like this:

The black dot is placed at a point corresponding to May/June 1930, which is now considered the beginning of the actual market collapse that pushed us into depression.  When adjusted for inflation, it would be 1965 before the market recovered to this level.

Again, I am not saying we are 'destined' to repeat this decline; simply that if we follow the same path it is quite logical that we have neither seen the end nor the worst of this downturn.  What we are now experiencing could turn out to be a "sucker's rally" similar to what was experienced in the April  to July market in 1930.

Then again, maybe this is a true bull market... Maybe all of the bailouts and bank rescues have restored enough confidence in the system to keep it afloat.   But in that case, what is the long-term prognosis if the system itself has not been repaired? The lesson that should be learned is that we need not only to be prepared for the possibility of economic collapse in the short and long-term, but we also need to work at correcting the "meddling" that leads to it in the first place. Perhaps this means returning to an economy that is based less on confidence (or lack thereof) and more on actual value.

As draconian as it may in today's socio-political climate, the best course of action for our economy is likely the same as nearly everything else in life. Stop the meddling.   I do not mean to let the economy collapse in a frefall, rather to stop fighting the natural result of failed systems and policies, and help the economy correct itself as gently as possible; "guide" it down to its natural state as we shift back to a value based system from a debt and credit based one.

While I am opposed philosophically to all of the current bailouts and rescues and I do not believe they will be effective, I must concede that simply restoring confidence to a majority of investors will likely succeed in stemming (or at least prolonging) this collapse.  As far as I am concerned, what we do in the meantime to prevent it from happening again is much more important issue than these relatively small bailouts.

And this is where this simple lesson from the Tao Te Ching should be applied.  A more hands-off approach by our government must be preceded by a more hands-on approach by We, the people.  We need to educate ourselves and learn to responsibly oversee our government and our markets, because "free market" does not mean "free to manipulate", "free to abuse", or "free to take advantage of".

The pundits can go on blaming Obama, blaming Bush, blaming Wall Street, blaming banks.  The simple fact is that We let this happen.  It is our fault, our mess to clean up.

I am always impressed that the great thinkers of ancient times were so often able to parse a great deal of wisdom into a few words.  I just wish more modern thinkers would learn from the history they so often cite.

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1. James Legge - Wikipedia
2. Global recession worst since Depression, IMF says (AP 4/22/09)
3. The treacherous nature of bear market rallies (Jan. 2002)