An Irish Parable

imo-blogOnce upon a time, there was a country where bankers, fed up with regulation, dissatisfaction, and downright hostility,… went on strike, not once, but three times. That country was Ireland, as economist Umair Haque points out in a compelling parable highlighted by University of Oregon economist and guest blogger Mark Thoma.

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This parable comes from Umair Haque:

The Irish Banking Crisis: A Parable, by Umair Haque: Once upon a time, there was a country where bankers…, fed up with regulation, dissatisfaction, and downright hostility,… went on strike, not once, but three times.

Here’s what orthodox economics would have predicted for a country without banks: A collapse in the money supply, a credit crunch, a trade implosion, mass unemployment, an atomized GDP, and the gears of industry and commerce grinding to a crashing halt. Imagine all the veins in your body suddenly shrinking and collapsing … and you might begin to see how economists conceive of banking shutdowns.

This is no fairy tale, so we don’t have to imagine what happened next. And what did come next was something really, really interesting — and just a little bit awesome…, the economy continued to grow. Though the money supply did contract sharply, neither trade, commerce, nor industry came to a grinding halt.

How? People created their own currencies, to substitute for the collapsing money supply. … The country in question was Ireland — today, in deep crisis because of profligate banks.

So why were the Irish of yesteryear able to trade notes with one another, in lieu of credit issued by banks? Well, Ireland … was … characterized by intense, frequent, conversational personal contact: tight, dense, solid local knowledge circulating at high velocity within and across communities. Result? Borrowers and lenders could build solid microfoundations of trust. In other words, when you’ve been chatting with Bill every night at the local pub for twenty years, you probably know whether his note is a good bet or not…. Furthermore, if you’re the publican, and you’ve been chatting with me and with Bill, then you’re even better positioned to become a de facto arbitrator of notes — a bank. And that’s exactly the role that pubs began to play. …

Now, here’s what I’m not suggesting: that you or I extrapolate directly and naively from history. … I’d suggest it’s more like a parable — a tale that highlights deeper principles at play.

It’s not that Ireland can exit its troubles merely by vaporizing the banks, and letting pubs trade notes. Ireland 1970 is a far cry from the Celtic tiger of the 2000s. …

[When mega-banks] blow up…, people and societies are left holding the bag. … The parable of the disappearing bankers gives the tiniest glimpse of a better way: a path to a smarter kind of growth, built on a different set of institutions — those that operate at micro-scale, instead of mega-scale, built on human relationships, instead of anonymous transactions, self-organizing, instead of “administered,” and that have the humanistic and the meaningful, instead of soul-crushingly trivial, hardwired into their very DNA.

Maybe, just maybe, banks need people a lot more than people need banks. Perhaps that’s true for the whole imperious, plodding gamut of yesterday’s zombie institutions, from corporations, to newspapers, to governments. Perhaps people and societies are a tiny bit more adaptive, resilient, intelligent, and creative than yesterday’s institutions assume. And perhaps failing to recognize that is what’s really at the root of this great crisis.

Mark Thoma is a professor of economics at the University of Oregon and the author of the blog Economist’s View. He can be reached at [email protected]. This blog is reprinted with permission.

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