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How Economics Fails

Economics is nothing more nor less than the study of the primary way in which people connect with society and get on with their lives.

In everyday life, you may interact with a few people – family, colleagues, and friends. But through the process of eating and paying the mortgage you interact, at some distance, with hundreds more. Because this interaction is entirely through something called “money,” a way of keeping score, it’s very tempting to look at it entirely through numbers. The dizzying details of tens of millions of exchanges every day makes a top-view in bulk the most desired method of analyzing how things are going.

Yet this process has proven wrong over and over again. The failure of economics, particularly macro-economics, is the primary reason why the only true study of an economy has to be a People’s Economics.

Vive ex Machina

The very idea that it is possible to get some kind of read on this massive thing called an economy in bulk is a product of the industrial age. The more the world came to be a series of whirring gears in need of motivating force and occasional maintenance the more it seemed desirable to even try to create something called “macro-economics.” This is nothing more than an analysis of where the money is at any one moment. Balance sheets, surveys, and contracts hold every number we need to understand and eventually control our world, the theory goes, awaiting only the right math to render it all into wisdom.

After the mechanical horrors of World War II it was a widely accepted belief that this mechanical approach would deliver us into some kind of mechanical paradise.

There is work to be done.

The problem with all of this is that it has not only failed, it has failed repeatedly pretty much from the moment it was implemented. It’s an approach which works very well in static conditions when everything is going along fine, but it has proven lousy at predicting the crises and shortcomings of our system. If analysis is going to have any use at all it would be when things change or go wrong – and indeed an economy based on technology is an economy based on constant change.

What we have now fails whether you look at it from the left, right, or center. This is not a political problem.

A good article on the problem with modern economics from a leftist perspective can be found in this undated article. They are summarized at the top very well, and boil down to this:

  • Economics has no respect for nature and resources,
  • The models are all built on unsustainable consumption, and
  • There is no place for resilience in the systems we have developed.

In short, the primary argument is that economics as we have come to understand it today is unsustainable. This is important to the left because the advancement of any social goal you can name – civil rights, equity, or environmental protection – is going to perform better in a sustainable world where individuals are not compelled to compete for every small scrap they can grab ahold of.

It always takes a little more.

That’s not to say that modern economics has many defenders on the right. As the “General Theory” of John Maynard Keynes was still hardening into the basis of modern economics it met its detractors form the outside. Henry Hazlitt was a journalist for the Wall Street Journal when he summarized the in his 1959 book, “The Failure of the New Economics,” now considered a foundation of Libertarian thinking. To Hazlitt, the problem with the era of macro-economics of Keynes was that had no concern at all for constant improvement and favored ever bigger intervention:

Because Keynes, with his lump, aggregate thinking, is opposed to restoring employment or equilibrium by small, gradual, piecemeal adjustments . . . we must achieve the same result by inflating the money supply and raising the price level, so everybody’s real wages are slashed by the same percentage. . . . The Keynesian remedy, in short, is like changing the lock to avoid changing to the right key, or like adjusting the piano to the stool instead of the stool to the piano.

These two are contrasted with each other here for several reasons . They are both criticisms from far outside the field by observers dismayed with the “product” that modern economics is in effect selling. They also have a unique symmetry to them in that they both decry an aversion to details – a key feature of macro-economics as we have come to understand it. Both of these observations come from the same perspective, after all. Macro-economics does not produce a product for them. It is designed for those who run things at various levels of government, not for the people who supposedly elect these leaders in a democratic republic.

The product was never designed for free citizens making choices in any social or political system.

Awaiting real leadership.

So, then, let’s take a look from the perspective of the managers of our world. If they are in place to make the best decisions possible for the people of this great republic, what is it that they really need? The ability to predict the future has to be the top definition of utility for any policy maker. After all, the wheels of government naturally turn slowly in the consensus-based system defined by our constitution.

So how is the predictive nature of today’s economics?

Bloomberg columnist and finance professor Noah Smith has studied the last official recession, in 2008. His conclusion comes from an in-depth study on that phenomenon, well predicted by the markets but not by economists. To him, it comes down to this:

Recessions just aren’t very predictable from economic data. The reason economists couldn’t foresee the Great Recession isn’t that they’re blinkered or closed-minded or arrogant or stupid – it’s because no one could predict it, at least not with the kind of macroeconomic data that now exist.

Where does this leave us? The conclusion is inescapable. Economics, as we know it now, is not suited for any kind of democratic politics – whether it is progressive or conservative. Nor is it particularly effective for anyone charge with the careful management of things from afar.

The future is theirs. Let’s make it bright!

What use is the mechanical, mathematical macro-economics which we have come to rely on? The long and short of it is that a large part of today’s politics, left and right, is based on the observation that something is deeply wrong. Voters, with great intuition if not always perfect logic, have it mostly right.

The truth is that no one actually knows what they are doing because the basic science which supposedly drives policy is deeply flawed. We really don’t know what we are doing and It’s long past time we admit that and simply start over.

That is the need for a new economics. That is the need for People’s Economics.

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19 thoughts on “How Economics Fails

    • Yes! That isn’t my main point, but I think it is a valid way of looking at it. My main point is that something new, which is based on people and delivered to people, has to be the answer.

  1. Pingback: -Isms | Barataria - The work of Erik Hare

  2. If it doesn’t come at all we are doomed to live in the rotting past […] My main point is that something new, which is based on people and delivered to people, has to be the answer.

  3. If it doesn’t come at all we are doomed to live in the rotting past […] If it doesn’t come at all we are doomed to live in the rotting past […] My main point is that something new, which is based on people and delivered to people, has to be the answer.

  4. If it doesn’t come at all we are doomed to live in the rotting past […] That isn’t my main point, but I think it is a valid way of looking at it.

  5. If it doesn’t come at all we are doomed to live in the rotting past […] That isn’t my main point, but I think it is a valid way of looking at it. If it doesn’t come at all we are doomed to live in the rotting past […]

  6. If it doesn’t come at all we are doomed to live in the rotting past […] If it doesn’t come at all we are doomed to live in the rotting past […] That isn’t my main point, but I think it is a valid way of looking at it.

  7. Quoting from the Freakonomics’s Steven Levitt, Economics can help though work out a person’s incentives and thus it can help predict what people’s outcomes are. However, economics becomes flawed when it uses conventional wisdom, which we know to not always be true

  8. I think Economic fails only when the behavioural changes are unpredictable. This leaves most of the assumptions of the economic theory irrelevant and hence many economic theories dont hold in such cases.

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