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Economics

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The dismal science
Economics
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If you're looking for the definite article, see The Economist.
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)

Economics is the social science that deals with the production and allocation of scarce resources.[1]

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. If there are two or more economists in a room and you want to start an argument, just mention the type of market that should be created by government, the role of state-owned-enterprises, fiscal policy, or tax.

Until the Marginal Revolution, classical economics was the dominant school of thought in academia. The Physiocrats of France were the first economists, and their most famous English-language disciple was Adam Smith - call him 'the founder of economics' on the continent at your peril. The Physiocrats' systems asserted that there was a limit to economic activity given the limited capacity of the land to support agriculture, and developed the Labour Theory of Value from the observation that economic activity was basically all about human relations within a finite-energy system. Adam Smith did however coin the phrase "invisible hand", which was later misappropriated by neoclassicists. [2] The Physiocrats and smith generally expressed opinions that if governments reduced market distortions caused by poor law-and-order, excessive rent-seeking activity, special privileges, and poor (whether insufficient or excessive) regulation, markets could under certain conditions allocate scarce resources somewhat efficiently through price incentives.

This sensible conclusion was promptly dropped in favour of assuming that the price incentive system allocated resources perfectly, since that made it possible to use maths when guessing what might happen if you changed the economy. The so-called Marginal Revolution by Classical Economists established supply-side economics as the dominant school of economic thought, which spectacularly failed to to predict or fix the Great Depression of 1929.

Reacting to this failure, Empiricists developed models of the economy in which a Great Depression was possible. Keynesian economics took the heretical long-forgotten approach of analysing how the economy worked in reality and creating theories to describe it. Their policies were actually implemented by several governments desperate to stave off The Red Hydra. Keynesian demand side economics economics began to supplanted by another assumption-based branch of economics, the Neoclassical Chicago school of supply-side economics, in the 1970s due to the mishandling of the 'Stagflation' crisis.

The Neoclassical revolution once again assumed away the problem of the Great Depression by asserting that it occurred due to some sort of external 'exogenous' shock to the capitalist market system rather result than its internal 'endogenous workings. Of course no proof for this was offered, because there is none, but it is why Libertarians et al. keep publishing revisionist histories blaming e.g. the US Federal Reserve for causing the Great Depression instead of a stock market bubble. The Koch brothers and other plutocrats led the charge to push Neoclassical assumptions in the USA's universities and schools by providing free textbooks, training, and funding in return for the phasing-out of Empirical economics and its practitioners. In the public sphere more generally they also funded thinktanks to supply Neoclassical economic reports, deny that smoking caused cancer, and deny that pollution killed animals or people to policymakers and the media. Failure to predict or fix the Great Recession, when neo-Keynesian analysis did and has in countries like Australia, has not broken the Neoclassical hold on power because said hold is based upon money and not intellectual honesty. Quoth Saint Alan:

Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s 'invisible hand' that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.[3]

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.

Even the empirical schools of economics don't model reality perfectly, since economists are rarely given the funding to perform multi-million (or billion-) dollar social experiments just to test their theories. However, even some of the theory-based schools - such as monetarism - can sometimes do just enough to keep the economy ticking over without imploding spectacularly... for a while, anyway.

Assumptions or Empiricism?[edit]

Economics continues to be split between the schools of thought which use axioms about human nature and how the economy works, and those which attempt to create models which describe the workings of real world economies. This is because the former is very popular with small numbers of anonymous donors, some of whom give many hundreds of thousands or millions of dollars annually to support it through think tanks, university appointments, academic journals, and special interest magazines. The latter is only popular with principled academics and idealists. In the USA and UK in particular the Neoclassical-Neoliberal Revolution has produced a literal split between the best-funded universities which are targeted by the Koch Brothers et al. and so do not tolerate empiricism, and the second-tier and marginal universities which they have used little or no money to influence. This is why the six prominent economists who predicted the Great Recession can't find work at the likes of Harvard and Oxford: they are drowned out by the likes of this guy, who asserts that it was impossible to predict and so all those people are liars.[4]

Unsurprisingly, axiomatic and empirical schools of economics lead to very different policy prescriptions. Axiomatic recommendations include:

  1. No minimum wage, because it causes unemployment and poverty. A product of the assumption that all a firm's profits but none of its employees' wages are spent in a way that positively contributes to the economy.
  2. No collective bargaining (unions), since wages always reflect the objective value of the work to society. Product of assuming that the society-wide demand for a job will translate into the specific wages offered by the employer, since that employer is assumed to be omniscient, and it is assumed that they wish to better society rather than maximising their profits.
  3. Low taxes on labor (e.g. income tax), because it makes people work more. Product of assuming that working hours directly and only reflect wages, having no relation to the nature of the work or total hours worked.
  4. Low taxes on capital (e.g. machinery), because it makes people save more and thereby increases growth. Again, comes from simply assuming that this happens.
  5. No state healthcare, since private companies provide cheaper and better care. Derived at base from the assumption that people only work for personal profit, and therefore a for-profit entity will always be more efficient than a non-profit/government one (aka 'private good, public bad').
  6. No healthcare monopolies (public or private), since competition produces the cheapest and best care. Comes from assuming that if multiple entities provide the same good or service, they won't cooperate to maximise their profits but will instead compete to minimise them.
  7. No outlawing any goods or services, because people always choose what is best for them. Known as 'Marginality', this tautology applies to everything which could be bought if it was offered for sale e.g. child prostitution and heroin.
  8. No outlawing financial derivatives, because they produce the best possible allocation of capital and reduce systemic risk. Comes from assuming that everything which can be sold is good for society, that the financial sector plays no role in the economy, and that financial entities are omniscient unto eternity so they will never do anything bad for the economy.
  9. Free Trade (no restrictions on the movement of capital or labor), because the flows and specialisations benefit all countries. Simple tautology.
  10. Free Trade, since it benefits everyone within those countries. Again, tautology.

Whereas Empiricism favours:

  1. Minimum wages, because they reduce poverty but have little or no effect upon employment (but it does reduce corporate profits).
  2. Collective bargaining (be it unions or other), since wages largely or solely reflect relative bargaining power (the average US CEO is not actually 700% more productive than their Swedish counterpart).
  3. High taxes on labor have few effects upon employment, bar a small number of married women.
  4. High taxes on capital have little to no effect upon savings or investment (people make emotional decisions about how much to save or spend without paying much or any attention to taxes).
  5. State-operated or state-monitored healthcare, since the state provides cheaper and better care (e.g. French 14% of GDP to US 18%).
  6. Healthcare monopolies (public or private), since state-monitored monopolies provides cheaper and better care (monopolies have fewer bureaucrats and are easier to monitor).
  7. Outlawing goods and services designed to take advantage of the consumer, because people are relatively easily duped (e.g. complex credit card and mortgage plans) and this reduces economic efficiency.
  8. Outlawing financial derivatives, because this produces excessive risk-taking and systemic instability (see 2006-8).
  9. Free Trade can benefit all participant countries, but it rarely does (capital constantly flows from the third-world to the first, into such 'useful' forms as stock market and housing bubbles).
  10. Free Trade in the form it usually takes today does not benefit everyone (since it prioritises corporate rights).[5]

Fundamentals of economics[edit]

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:[6]

  1. People face trade-offs
  2. The cost of something is what you give up to get it
  3. Rational people think at the margin
  4. People respond to incentives
  5. Trade can make everyone better off
  6. Markets are usually a good way to organize economic activity
  7. Governments can sometimes improve market outcomes
  8. A country's standard of living depends on its ability to produce goods and services
  9. Prices rise when the government prints too much money
  10. 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.,[7] Mankiw's Principles can be translated for the laity like this:

  1. Choices are bad
  2. Choices are really bad
  3. People are stupid
  4. People aren't that stupid
  5. Trade can make everyone worse off
  6. Governments are stupid
  7. Governments aren't that stupid
  8. Blah blah blah
  9. Blah blah blah
  10. Blah blah blah[8]

False fundamentals of economics[edit]

Their definition of 'rational' is your definition of 'prophetic'.
— - Steve Keen
[9]

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 activity is always incompetent or harmful (including lowering taxes always raising tax revenue) - 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 greater economic efficiency and social benefits 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.

Macroeconomics and microeconomics[edit]

Microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally.
—P.J. O'Rourke

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 than 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.

Economics and prediction[edit]

At the macroeconomic level economics is lumped with a school which can't work but we know why, and a school which does work but we don't know why. At the microeconomic level economics is stuck between limited reports on real-world behaviour in very specific sectors (e.g. the relationship between executive performance and pay), and psychological deductions about universal tendencies. At both levels, Good/non-crank economic predictions 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. Economists do have a wide variety of statistical tools to employ in order to test the quality of different economic models, but as in all social sciences what you're measuring is as important as it is subjective. For instance Chicago School believers in homo economicus would attribute a worker's productivity solely to pay, whereas behavioural economists would also consider things that can't be quantified as easily (e.g. relative pay, job satisfaction, workplace culture).

Pseudo-economics[edit]

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.'[10]

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[edit]

  • 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. Despite their almost cartoonish inaccuracy, they don't use Homo Economicus because their batshit insane unique Austrian logic says not to.
  • 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.
  • Chicago school: A school of economic thought from the 1940s which uses mathematics to 'prove' its axioms and rejects empirical studies which show them to not apply in the real world. For instance it used the Homo economicus assumption, perfect information assumption, and (near perfectly) efficient market hypothesis to 'prove' that total Deregulation of the banking sector was safe because stock market bubbles were literally impossible.
  • 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.[11]
  • 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)[12] 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 valueWikipedia's W.svg and the tendency of the rate of profit to fall.Wikipedia's W.svg Due to the cultish persistence of Marxism, these ideas still get brought up frequently.
  • Privatization: The Austrian and Chicago schools go the way of Animal Farm when it comes to enterprises operated by the state instead of by the wealthy, bleating 'Private Good, Public Bad' on three spurious grounds which they know are bullshit are paid very well to believe. All three (shareholder/citizen monitoring, corruption, Too Big To Fail) apply to the private sector as well. Indeed, private enterprises can be much worse due to their opaque operations and vast resources.
  • 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.

See also[edit]

External links[edit]

References[edit]

  1. 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.
  2. He opined that there was no need to force English merchants to do more business in England than overseas. This was on the grounds of their relative ignorance of opportunities to profit from trading abroad. Consequently, they would (begrudgingly) act patriotically as if guided by an invisible hand. He did however note that if this situation were to change, their 'patriotism' would evaporate since they loved money above country (it did, and theirs did). See https://www.youtube.com/watch?v=x1GF_o7Fj0M
  3. With Notably Rare Exceptions
  4. http://www.independent.co.uk/voices/brexit-economy-economists-predict-financial-crash-recession-2008-michael-fish-austerity-cant-solve-a7513416.html
  5. Hickel, Joseph, “Aid in Reverse: how poor countries develop rich countries”, The Guardian Online Edition, posted 14/01/17, https://www.theguardian.com/global-development-professionals-network/2017/jan/14/aid-in-reverse-how-poor-countries-develop-rich-countries; Kwak, James, Economism: Bad Economics and the Rise of Inequality (New York, 2017) pp.181-182
  6. 10 Principles of Economics, Wikiuniversity
  7. Yes, apparently
  8. Blah blah blah
  9. Steve Keen, Understanding Economics featuring Dr. Steve Keen - Part 2 of 4 8:50
  10. https://www.reddit.com/r/badeconomics
  11. 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.”
  12. "LaRouche Advises Democrats On What They Must Do"