Economists and honesty

Can economists be trusted to tell the truth?  If they can,  why can’t they see the same truths as I see?

These questions are prompted by this article about a very small experiment which suggests that economics and business students are more dishonest than students in humanities, sciences and other fields.

The study was based on a very small sample but still it is tempting to believe there may be some truth in it.

Economists tend not to see things that at least to me are very obvious.  For example, that economic growth has come to an end.  In light of the evidence it must take a lot of faith to predict that recovery is just around the corner although lately the time frame seems to be increasing to a year or two.  There’s a song which tells us that tomorrow is just a day away and a saying that tells us tomorrow never comes.

Are economists lying or are they deceiving themselves?  Or am I the one committing self-deception?

One has to note that most of us have to support the views and interests of our employers.

I have for a long time figured the role of economists is not to solve economic problems but to give legitimacy to economic activity which consumes scarce resources and sometimes trods over other people’s lives and values.  Economists were the theologians of the twentieth century.

In any case economists don’t have a great record for accuracy or for proposing viable solutions to economic problems.

 

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Wages, union bashing and supply and demand for workers

The media has recently been giving some space to union-bashing right-to-work legislation and the low wages being paid to unskilled workers such as hotel maids and fast food workers.

One of the most basic laws of economics is that price is determined by supply and demand and this also applies to wages and working conditions for employees.

During the long period of almost continuous economic growth there was generally a need for workers.  During this time unions gained strength, wages went up and working conditions improved.  We are now in a situation where growth is stagnating or maybe even going down and there is high unemployment.  Wages can be sticky going down but some how or the other they are going to continue dropping. .

We also have such a high level of technology that it should not be necessary for everyone to “work” most of their lives.

One way to limit the exploitation of workers would be with and income scheme such as Milton Friedman’s negative income tax or my proposal for universal subsistence payments outlined elsewhere on this weblog.

Solving the debt crisis with two coins in the bank. Probably not.

Two platinum coins worth $1 trillion each to solve the U.S. debt problem.  This proposal is reported in this article on the Huffington Post.  The coins would be made by the mint and deposited with the federal reserve to meet debt requirements.  Platinum would be used to get around legal requirements.

The good part of this proposal is that it would replace fractional reserve money with fiat money.  Fractional reserve money is created by the banks when they make loans.  Very little economic thought has gone into the effect of interest rates in this money creation.    This new fiat money would not involve interest charges and that is probably very good.

The problem would be what it does to the money supply.  Presumable  the $2 trillion would be used to pay off government debt.  Some of this debt would be held by the central bank and repaying this shouldn’t change the money supply.  The rest would be to repay bondholders and this would increase the money supply.  Further it would be what economists call high-powered money which is subject to a multiplier effect as it worked its way through the banking system.

The result would be the potential for a massive increase in money supply.  This is the opposite to a return to the gold standard which would force a decrease in the money supply.    The result would be deflation and a decrease in economic activity.

There are four variables in the equation that connects the financial system and the physical side of the economy: the amount of money, the quantity of goods and services produced,  the price index and the velocity or speed at which money circulates. The formula is MV=PQ.  If one of these changes at least one of the others has to change.

If we were to have an increase on the money supply then the velocity must decease or either the price index (inflation) will go up and/or the quantity of goods and services will go up(economic growth).

In an attempt to stimulate economic growth central banks have been trying to increase the money supply and called it quantitative easing.  So far there has been little indication of its working.  This leaves either inflation or a decrease in velocity.

There has been little inflation from quantitative easing so probably the velocity has fallen.

So the impact of the two little platinum coins is unclear but they would certainly be disruptive and have the potential for hyperinflation.

For a fuller explanation of fractional reserve money is created and some of its problems please see the essay “LETS go to market: dealing with the economic crisis” on this weblog.

 

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Economics, palliative care and life regrets

The production and exchange of food is a major part of economics.  Therefore economics is about life and living and it is appropriate to comment on this news item about the regrets of people of their death beds.

An Australian palliative care nurse has identified the top five regrets of people who are dying.  Second on the list was ‘I wish I hadn’t worked so hard’.  Men especially missed their children’s youth and their partner’s companionship.  “All of the men I nursed deeply regretted spending so much of their lives on the treadmill of a work existence,” said the nurse.

I see this as a reminder that each of us, on a personal level, should reevaluate our commitment to economic growth, the work ethic and   retirement savings.  ( I included the last item because retirement savings can be wiped out by inflation or the failure of firms.  Our retirement standard of living will depend upon the ratio of people to the quantity of goods and services being produced at the time.)

Generally the most important things in life we have to learn for ourselves.  But smart people also learn by listening to others.  When one is in palliative care it is too late to learn.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.