| The dismal science
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“”Not a "gay science," I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science.
|—Thomas Carlyle, Occasional Discourse on the Negro Question (1849)|
The three primary fields of study are microeconomics (the study of small things such as how firms and households operate), macroeconomics (which studies things such as inflation, monetary policy, and international trade), and econometrics (which studies how accurate estimates may be made when applying statistical methods to social data). Other fields of study include game theory, behavioral economics, public choice theory, experimental economics and fake economics. We remind you to never mention taxation and government intervention when there are several economists in the room, as it will likely set off an endless and stupid argument about the effects each has on markets and which policies create healthy economies. (People may die of boredom as a result.)
Until the Marginal Revolution, classical economics was the dominant school of thought in academia. Adam Smith is largely regarded as the founder of economics as a science in its own right. The phrase "the invisible hand" was his, and he used it to show that if markets were freed from distorting forces, such as private land-rent privilege and over-regulation, they could allocate scarce resources efficiently through price incentives. The late 19th and early 20th century saw the Marginal Revolution and then the rise of Keynesian economics. This led to a paradigm which defined the 20th century economics scene of demand-based and supply-side economics in opposition to each other. More modern debates often focus on methodology, as current methods may be slightly lacking.
There are several heterodox (non-mainstream) schools of thought in economics, ranging from the right-libertarian Austrian school to World Systems Analysis, which is heavily influenced by Marx's historical materialism.
The trouble with economics is that governments generally don't let economists go around poking the population, making it difficult to verify economic theories. However, it would be awfully difficult to run one of these without any idea of when to stop the magic money machine. Just ask this guy. Think of it as performing surgery with a chainsaw instead of a scalpel.
Fundamentals of economics
What represents a fundamental truth in economics can be difficult to determine, as many theories have proven difficult to test. However, there are some ideas accepted almost universally, except by cranks. Here are ten commonly accepted principles taken from the top-selling college economics textbook, Gregory Mankiw's Principles of Economics:
- People face trade-offs
- The cost of something is what you give up to get it
- Rational people think at the margin
- People respond to incentives
- Trade can make everyone better off
- Markets are usually a good way to organize economic activity
- Governments can sometimes improve market outcomes
- A country's standard of living depends on its ability to produce goods and services
- Prices rise when the government prints too much money
- Society faces a short-run trade-off between inflation and unemployment
These touch on most of the major concepts and problems addressed in economics — the scarcity of capital, resources, and labor, the concept of absolute and comparative advantage that leads to trade, the use of the market as the basis of exchange, the disparity between rich and poor nations, inflation, and government intervention.
According to Yoram Bauman, Ph.D., Mankiw's Principles can be translated for the laity like this:
- Choices are bad
- Choices are really bad
- People are stupid
- People aren't that stupid
- Trade can make everyone worse off
- Governments are stupid
- Governments aren't that stupid
- Blah blah blah
- Blah blah blah
- Blah blah blah
False fundamentals of economics
Some assumptions made in specific areas of economics have come to be viewed as economic "fundamentals," mostly due to crankery and political hacks. Cranks make a big deal of these assumptions in order to create straw man arguments criticizing economists for making assumptions that any ordinary person knows is unrealistic. Often, the reality is that these issues have been the focus of much attention among economists, to the point where the finer details can be difficult to communicate. Other assertions come about as a way to defend certain political ideologies. A brief list of these false fundamentals include;
- Agents possess perfect information - A common assumption in the economic models presented to undergrads, but by no means accepted by economists as an accurate description of humanity. Introducing imperfect information often adds a level of strategic interaction to economic models, making them difficult to solve with elementary calculus. In reality, economic models routinely explore imperfect information, and its consequences are well documented.
- Agents are perfectly rational - An excellent example of the issues in using jargon. The definition of "rational" in economics, and in the rest of the world, are very different. Rationality in economics refers to the type of preferences a person exhibits, whereas the common usage of rationality describes the level of clarity present in ones thought. Certain fields of economic study, such as behavioral economics, have spent significant amounts of time testing the boundaries of this assumption.
- Firms are perfectly competitive - Mostly a misconception by those that do not expand their economic education beyond Econ 101. Perfect competition is an assumption that, like the assumption of perfect information, eliminates a level of strategic interaction between agents and firms. Economists rarely think of this as a good description of markets, so many modern economic models, such as the macroeconomic models utilized in New Keynesian economics, utilize some form of monopolistic competition.
- Government intervention is always bad (Or regulation/taxation always lowers welfare) - Many simplistic models of government taxation show that poorly executed taxes may lead to a dead weight loss for the economy. While this is sometimes true for marginal taxes, any losses caused by levying the tax should be weighed against the social benefit they provide. In theory, Pigovian taxes, which are marginal taxes designed to offset the effect of negative externalities, can improve social welfare (and have been advocated across the political spectrum). Many other examples of welfare-improving government intervention exist.
Economics and prediction
It is tempting to judge the quality of an economic theory based solely on an observed economic outcome, such as the current economic crisis. However, such comparisons are typically ill advised, as we often do not know what would occur if the state of economic theory was different.
This phenomenon, known as the missing counter-factual, leads to a great deal of contention among proponents of different economic theories, as it means the quality of such theories may prove difficult to test. Nevertheless, economists have a wide variety of statistical tools to employ in order to test the quality of different economic models, most of which rely on existing economic data. These tools are far less precise than those used to test the theoretical models in fields like physics. Consequently, (good/non-crank) economic predictions tend to shy away from the precise, such as "we will have a 5% dip in unemployment next month," and towards the general, like "If we don't increase the Social Security retirement age today, we will have a serious problem with destitute elderly sometime in the future." The lack of black and white explanations can be frustrating to cranks of all sorts, who would like to take this as a sign that their particular pet discipline offers the best possible explanation for the world we see today. Unfortunately, these cranks are typically unwilling to do the hard statistical work needed to empirically validate their theories.
Macroeconomics and microeconomics
“”Microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally.
Macroeconomics is the study of the overall flow of wealth in the economy at large. This involves looking at the structure and performance of an economy on a global scale and how it interacts with the actions and decisions of entire countries. It also includes a study of economic predictions and growth. There are several schools of macroeconomic thought, such as the Austrian, Chicago and Keynesian schools.
Microeconomics studies the individual actions within an economy. Microeconomics deals with smaller scale issues that macroeconomics from the interactions of supply and demand with businesses, to the affect taxation levels have within a country. It can be considered as an economic analysis of markets, prices and trends, as well as the effect competition and local factors have on these things.
“”A friend of mine once said: You know what the problem is with being an economist? Everyone has an opinion about the economy. No body goes up to a geologist and says, 'Igneous rocks are fucking bullshit.'
A large and diverse body of crank economic ideas exists, ranging from people who still adhere to quaint and archaic theories of the past (see below) to those ideas which still enjoy widespread popularity today, such as name it and claim it (aka. God will make you rich), pyramid schemes, and esoteric conspiracy theories about the Federal Reserve. The Liberty Dollar is a cranky libertarian scheme to set up a competing private-minted currency. Bitcoin is much the same.
Other notions such as the Laffer Curve are valid economic theories, based on a vague curve-fitting exercise with a broken data set, but have been misapplied by some who don't have a full understanding of these theories. Often solid economic thought is twisted to fit a political agenda; taxation and government intervention are two common targets.
Archaic ideas that still get brought up occasionally
- Austrian school: A school of economic thought from the early 20th century which rejects empirical testing in favor of narrative 'praxeology' aka the fantasy football of economics. That's the wonder of the Austrian
Preschool, you can skip learning nasty mathematics and get right to praxing out whatever you wish. Overall, they're just highly-paid fortune tellers.
- Bitcoin: Everyone outside the echo chamber has long realized that it offers no advantages over traditional currency. The notable exception being illegal transactions. That's the only thing keeping it alive—for now. Criminals have already started looking for solutions that offer real anonymity.
- Cyclical theory: Trying to predict how the stock market will go in the future by the Kondratiev Wave or Elliott Wave.
- Distributism: A failed attempt at forming a new economic ideology in line with Catholic social justice ideas, using an 1891 Papal encyclical as the basis; comes out something similar to the more recent "back to the land" sentiments.
- Galambosianism: Intellectual property rights taken to its absolute, and absurd, conclusion.
- Georgism: A belief that income gained purely from extraction of natural resources and monopoly over properties of nature should belong to society in common, but that income from things created by labor and investment should ideally be kept private.
- Goldbuggery: A belief that fiat currency is responsible for most contemporary economic ailments, and that currency ought to be backed by a commodity, namely gold. Variations of this doctrine replace gold with other commodities (oil, for example) while exhibiting the same basic mindset. When are these people going to learn that paper beats rock?
- Laffer curve: Keynesianism brought to its knees...by a napkin. What really happened was, the Reagan Administration asked Laffer to come up with a justification for a tax swindle which they were planning to implement anyway. Laffer got drunk and scribbled a line graph on a bar napkin. The Laffer curve is amongst the most discredited pseudo-scientific theories of the last century, but that doesn't matter, because it affirms what wheezing tax protesters and neoliberals want to hear: Your economy will be healthier if you only tax the poor. Still taught in economics classes.
- Laissez-faire: Almost no economists still hold to this, if only because of the understanding that the government needs to deal with externalities. Moreover, a free market depends on perfect information, and people are ignorant, as any person who walks around a given city for a few hours can discern. A subtype of this is the Austrian school, who do recognize that people have a bounded rationality, but their theories are highly impractical, if not downright pseudoscientific.
- Lyndon LaRouche's ideas. They involve quite a lot of protectionism (i.e., 19th century economic thought) and a harsh attack on globalism, the IMF, or anything else developed in your lifetime. He also has a rather hilarious hatred of both corporate interests and international institutions while supporting constant government intervention, then saying that governmental intervention is fascist.
- Marxism: The original Marxist economic theory was based on 19th-century concepts such as the labor theory of value and the tendency of the rate of profit to fall. Due to the cultish persistence of Marxism, these ideas still get brought up frequently.
- Social Credit: C. H. Douglas unveils the mysteries of consumer power using complicated mathematical formulas, like consumers exercising their power at the marketplace will direct the behavior of producers. Ya think?
- The Townsend Plan: Nobody seriously advocates this today (chiefly because a more workable, non-insane version was eventually created in the form of Social Security), but it is occasionally mentioned as an example of the economic woo schemes that flourished during the Great Depression.
- National Bureau of Economic Research
- Daniel Goleman's blog related to his book Ecological Intelligence advocating "radical transparency".
- Marginal Revolution: Common Mistakes of Left-Wing Economists, Common Mistakes of Right-Wing and Market-Oriented Economists
- Economics is the Worst Social Science - "The simple reality is that science is supposed to be based on inductive reasoning, but economics is overwhelmingly based on deductive reasoning, which is inferior and anti-empirical."
- Scarcity, in economics, just means you have to pay for it because there is not enough for everyone to have all they could possibly want for free.
- 10 Principles of Economics, Wikiuniversity
- Yes, apparently
- Blah blah blah
- Bade, Rachel, "Arthur Laffer is back as GOP tax man", Politico 10.14.13. Bruce Bartlett: “He’s got a shtick where he’s able to get right-wingers, wealthy people, investment managers to pay him a lot of money to be an entertainer and tell them what they want to hear — that they are vital to the economy and their taxes must be reduced.”
- "LaRouche Advises Democrats On What They Must Do"