Since before the late 19th century we have been struggling to understand Economics in such a way that like other sciences we can make predictions about what will happen when we apply a particular stimulus.

Countless higher degrees and PHD’s have been awarded as we honed our collective understanding of economic cause and effect, but over a century since the beginning of the study of economics we have still not been able to come up with a definitive model that describes how our economy works. This is nothing to be ashamed of.

We have been studying the weather for a lot longer than our economy and have only recently come to the conclusion that the processes that produce weather are chaotic. This means that while we may understand the physical processes that produce weather we do not have the ability to make predictions because the complexity of the weather generation processes defies prediction. In the same way it would appear that the economy, while we have a broad understanding of cause and effect, because of its chaotic nature, also defies prediction.

What we are seeing now in the aftermath of the Credit Crunch are attempts to influence the economy by governments who are ploughing in Billions, of pounds or dollars, into systems to try to stimulate them without any clear understanding of the effect that their efforts at stimulation will have. It is like watching someone trying to start a car by kicking the tyres.

In the sixties we were given two types of weather forecast, the short range forecast, for the coming week, and the long range forecast, for the next quarter. When the UK meteorological office in Bracknell got two super computers to make more accurate forecasts, the first thing that the computers told the forecasters was to stop making long range forecasts because the results were no better than chance.

History may be trying to tell us that our attempts to stimulate the economy have just as much chance of success as forecasters had at predicting the long range weather.

The economy, as does the weather, goes in cycles. In the seventies we were sure we were seeing the beginning of a new ice age and today we are predicting global warming with no less certainty. For the last fifteen years we have been experiencing steady growth in the global economy, and today we are in recession.

The difference between the weather and the economy is that we never thought that we could control the weather so it was quite easy to admit that we could not predict it beyond the three day forecasting service we currently enjoy. Economists have not yet reached that epiphany and believe that they do still have some degree of control over the economy.

The consequence of this difference of understanding is that economists continue to throw Billions of public money at their problems while weather forecasters are content to make the short term forecasts that their understanding of chaos shows them is the best that they can expect.

Because the economy was in a state of stable growth for so long the perception appears to have become that this was the natural state of affairs and would continue for the foreseeable future. People working in the financial sector therefore traded on the expectation that this expansion would continue forever and therefore lost their ability to continue to trade when the other half of the cycle, recession, occurred.

Their business’s became tuned more and more finely to the conditions of a growth market and were no longer able to cope when the conditions of that market changed. We can see the effect more dramatically if we use the world of formula one racing for an analogy. We have F1 cars that have been developed to run in a specific environment, the F1 race track, but outside of that environment they are completely useless. Take an F1 car down the high street and you will see what I mean.

There is no room in the car for shopping, the traffic calming measures would tear the aerodynamic features off, a single raised drain cover would rip the bottom out of the engine, the car would overheat by going too slow and it would not be able to turn corners. In this situation would you spend more money to change the F1 car to try to make it cope with the high street conditions, or would you recognise that the design was fundamentally unsuitable, throw it away and start again?

In the economy we are facing a situation where our financial and other institutions have tuned their operations for a specific set of market conditions, growth. They have now shown that they are unable to cope with a different set of market conditions, recession.

We have two choices. We can continue to throw money at the problem in the vague hope that it might do some good, or we can we admit that theses institutions have evolved to service a specific market and are now no longer viable when those market conditions change.

If the latter do we, like the F1 car, keep patching it up with expensive solutions that don’t really solve the problem, or do we allow them to fail and replace them with something more robust.

What would be the cost of allowing the institutions who have evolved in this way to fail? Would it be more than the money that is currently being spent to try to save them?