Factoring 'animal spirits' into Zimbabwe's economic discourse

John Maynard Keynes is considered by many to be the most consequential economist of the past century. Perhaps one of his boldest contributions to economics was postulating, perhaps correctly, that the gold standard was inefficient as a basis for monetary policy. He argued that the gold standard was not fluid enough to afford policy makers enough leverage to influence economic activity. According to the doctrine of Keynes (which has come to be known as Keynesian economics) a more expandable currency regime is needful to allow for governments to stimulate national productivity. This is especially true during periods of recession and is achieved through stimulus spending.

Therefore, within the framework of Keynesian economics, deficit spending can actually be used as a medicine of sorts for distressed economies. Keynes' ideas underpinned the economic strategies that were adopted by American monetary authorities to pull their economy out of the great depression.

That Keynes was fine thinker on the subject of economics cannot be disputed. You see, Keynes was remarkable character who was as colorful as he was seminal. Being as he was a man of letters, he had a penchant for using ingenious expressions to describe technical and theoretical concepts in his many writings on the economic affairs of mankind. One such expression is 'animal spirits,' which was first used in the context of economics in Keynes' magnum opus The General Theory of Employment, Interest and Money. In this book Keynes uses the term 'animal spirits' to describe the irrational instincts and biases that lead to the human behavior that shapes economic outcomes. In present day Zimbabwe I believe we are in the age of 'animal spirits.' The RBZ governor has in the recent past said that what is obtaining in our economy with regards to the parallel market exchange rate is due more to human behavior than to economic fundamentals. Our balance of payments figures, nostro account balances and stifled ZWL money supply would suggest a strong and stable local currency, but alas the ZWL remains to be in tailspin. Our irrational instincts and biases are indeed fueling the continued depreciation of our local currency.

The human psyche seems to somehow swing between rational and irrational modes of thinking depending on circumstances. For example, during periods of difficulty people are more prone to be irrational than rational. When people are subjected to dire shortages of any vital resource, they are likely to stampede over each other to get such a resource wherever and whenever they find it in supply. The parallel market ZWL/USD exchange rate is really being driven upwards by a stampede of those that hold the ZWL in excess. If everyone thinks the ZWL is bound to lose value and thus surplus ZWL balances should be quickly converted into USD then we inadvertently enact a self-fulfilling prophecy. Our premonition of the loss in value of the local currency will actually cause it to lose value as we all seek to dispose of our ZWL balances in exchange for the USD on the black market. There is in fact a technical term for this self-reinforcing effect of market sentiment, it is called reflexivity. If one is to use the tongue of the learned, one can say what we are witnessing in the Zimbabwean economy is basically reflexivity with a negative feedback loop.

There is yet another subtlety in the Zimbabwean economy that has probably not received enough attention. There is a particular coterie of economic players that have the means to generate huge amounts of ZWL with unprecedented ease. Most of these players generate surplus ZWL from transaction handling fees, ICT facilitation fees and inflated government tenders. These economic actors fall into the following four broad categories: banks, fintech companies, mobile network operators and government contractors. Players in these sectors of the economy have been tacitly if not complicitly allowed to make truckloads of ZWL money without commensurate effort. These players have been able to tactfully game the system by becoming the invisible hand driving the parallel market. These companies are in spirit and truth, the giant elephants of our economic landscape whose stampeding for available foreign currency on the black market, has caused the grass to suffer. Needless to say, the hapless consumer is the grass.

Zimbabweans as a collective are obsessed with the corruption of those that occupy public office. What we may not have realized is that our lives as ordinary citizens are probably impacted more by the systemic and nuanced form of corruption that is perpetrated by those in the private sector. This form of corruption directly accounts for most of the continued price increases that we have been seeing in the shops. Sophisticated jurisdictions like the European Union have managed to develop advanced consumer protection laws because of an understanding that not everything should be left to 'market forces.' It seems that we are in a policy environment that believes hook line and sinker in the virtue of liberal economics. Perhaps too much learning has made us take as cardinal fact largely theoretical ideas such as price equilibrium, price discovery and market determined foreign exchange rates. Look at the Chinese policy makers, they have managed to build a robust economy whilst at the same time retaining a firm grip on mundane aspects of their economy such as the price of pork. Any attempt in Zimbabwe to protect the consumer against opportunistic price increases is construed as imprudent price control which will lead to shortages. The private sector, is all too willing to remind us of 2008. As a result, price increases on basic commodities continues unabated. The value of monthly wages for most of the working population continues to be eroded vis-à-vis the USD.

My own thinking is that our use of the USD as legal tender in Zimbabwe under the multi-currency system seems to be wise but is yet unwise. The Zambian Kwacha is a somewhat stable currency today because the Zambians have always stuck with their Kwacha. They did not make the mistake of adopting a hard currency such as the USD as legal tender. Using a first world currency in a third world economy is a misnomer. A multicurrency system is analogous to a traditional polygamous relationship. One spouse tends to be preferred over the other, resulting in the progressive loss of esteem of the less preferred spouse (who is usually the first wife). In a like manner, in a multicurrency system preference will most likely be shown to one currency over the other. This difference in preference alone is enough to result in the progressive loss in value of the less preferred currency. Our policy makers are probably alive to this fact, but what is required of them is the wisdom to restore the value of our own money and hence the health of the economy.