Some reasons economists don’t get it.

What is wrong with economics?  Through the years a lot of people, including the current group of students have recognized there are problems.  This blogger figures there are two types of problems –  problems with human nature and problems within economic theory and understanding.

Most of us most of the time think and act in our own short-term interests,  Some people won’t listen to things that contradict their interests.  This can be a problem for economists as their paychecks often depend upon telling business people and politicians what they want to hear.  It is likely some of the students demanding changes in the way economic is taught will have to come to terms with this.

The other human nature problem which interferes with economics is that some people like to exploit others – sometimes deliberately and sometimes because they believe it is their right.  Using money as a tool to facilitate the exchange of goods and services allows us to have economic relationships with strangers from many parts of the world..  It also makes it easier for some people to exploit others. I am currently reading The Big Short by Michael Lewis in which he details the people who foresaw the subprime mortgage bust and profited from it.  It’s sort of interesting to see the exploiters being conned although I  believe that for relationships to be satisfactory there needs to be a more or less equal two-way exchange.  Another interesting thing is that most of the players on either side came out of it rich.

Neither of these human nature problems is likely to be resolved by changing the economic curriculum or the way the subject is taught.

It may be that for economists to tell their employers what they want to hear the economists have to be blind to some realities.  Here are four examples.

One of the greatest of economic myths is that growth can continue forever.  Economists occasionally talk about scarce resources then assume that there never will be scarcity.  Yes, we still have lots of mineral and energy resources.  However we have used up the most easily accessible of them.  What’s left is difficult and takes lots of energy to extract. This is a diversion of energy from other uses.  From history we know that all previous civilizations have collapsed.  Some people talk as if we will be the exception.

The second unseen reality relates to free market competition.  The problem with competition is that the more competition the smaller the profits.  In large parts of our economy competition is restricted by government legislation and regulation.  Licenses, patents, copyright, tariffs all allow firms to make profits they wouldn’t get with full competition.  It also means consumers pay more than they would otherwise.  When we talk about a market economy we ignore how governments work to restrict competition.

Sometimes economists distinguish between the real economy and the financial economy.  It’s an important distinction and we lose some understanding when we forget it as we often do.  My favorite example is with pensions.  Most people plan their pensions in money terms.  But there are three things that can happen to one’s pension savings:  inflation, failure of the firms in which savings have been invested and a government mandated haircut.  For most of us our standard of living in retirement will depend upon the ratio of goods and services produced to the number of people making demands on those goods and services.  If we experience a major drop in production, it will not matter how much pension money one has.  It might be prudent to plan for retirement at least partially in terms of the physical economy. How about a large garden?

The complexities of money creation and the deep emotions associated with money make it the most misunderstood and problematic  aspect of economics.  A number of posts on this weblog have dealt with the problems of money.  I believe that in the fractional reserve method of creating money economists have ignored the fact that interest is charged on the money created.  This feature makes the fractional reserve money into a Ponzi scheme. This explains the regular financial crises our economy has experienced.  If more people understood how the banking system creates money and the problems, we would probably be demanding changes which would take away from the profits and powers of bankers. How many economists would even dare to think that?

There appear to be lots of problems within economics.  How we exchange goods and services and the relationships involved in these transactions are an important part of our lives. It may be that some people can  benefit if most of us don’t see these relationships clearly. However, I think we would all be happier if we did.

 

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.

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4 Responses

  1. I enjoyed reading your post because it attempted to question the status quo of today’s economics. I agree that there are clear disconnects between practiced economics and the realities that actually envelope us as people, our financial decisions and the economic web that connects everyone today. On a high level, I believe that it is the lack of sociology in today’s increasingly precise, mathematical and narrow focused economic practice that has completely shunned any study at the ground level.

    Adam Smith did write the Theory of Moral Sentiments before WONs. Books like Poor Economics touch on the tendency for large scale, one size fits all economic solutions to overshadow the intricacies of everyday life. Coupled with some of the perverse financial incentives you mentioned, and you have a large rift between the theory of economics and reality. Nate Silver cites the shockingly low prediction success of economists in his book The Signal and the Noise.

    Change of any sort save discussion seems to have suffered inertia.

  2. Because of the system, the money supply has to increase continually so that everyone can be paid their interest. We either print the money and cause inflation, or not which causes bankruptcies. If banking was just the recording of trades and there was no private ownership of the stuff, there would be no financial industry, no inflation and insurance industry….we would need a different system to redistribute the wealth created by industry, but we will have eliminated poverty, war and money related stress.

  3. Interesting article! It raised a lot of questions about the Economic Science.

    I would like to ask you: do you advise any good book/article/author/whtv that explains Money, the Financial system and the complexities of money creation?

    I would like to start with the basics.

    Thanks for your suggestions!

  4. 1. Economists do not believe that growth is perpetual. Otherwise, we will not have a business cycles and trends.
    2. Economists discuss multiple models, including perfect competition, oligopoly, and monopolistic competition. However, emphasis is placed on perfect competition because it models optimal outcome in terms of the preference for freedom to choose options and allocate resources in order to enhance welfare. While imperfect markets somewhat guarantee profits, they are not very efficient allocators of resources.
    3. Normative decisions are not economic issues per se. They depend on the human moral compass. Human nature decides how human beings treat one another or how they decide to show compassion to one another. Not surprisingly, some public companies engage in corporate social responsibility and pay livable wages without government intervention.
    4. True, some consideration must be given to the real economy when thinking about pensions. In the interim, inflation indexed bonds (for invested pensions) and cost of living adjustments have been thoughts in the right direction. More should certainly be done, but economists are not unaware of these problems. The problems should be seen as inherent policy implementation challenges.

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