10 Things You Didn't Know About Economics: Numbers 7-10
The ongoing economic crisis has occurred against a backdrop of flawed economic theory. Much of this faulty thinking has been obscured from the general public by the impenetrable jargon and complex mathematics that has become part and parcel of the economics profession.
However, the profound implications that economics has for society's prosperity mandate a solid understanding of the field and its assumptions. So, without further ado, here are 10 big ideas and assumptions in the modern economics profession that you probably didn't know about: numbers 7-10.
7. It's all about the money!!
Economics assumes that if someone is participating in a market, they are only concerned with making or keeping as much money as possible.
A company seeks always to maximize profit, period. Whenever we're met with a question in economics that involves a company, we simply ask "what would a profit-maximizing entity do in this situation?" In reality, businesses do many things that have little or no chance of increasing profits, such as donating to charity, spending millions on expensive parties, or going into debt purchasing a large office building for the strategic value of looking bigger than they actually are.
When it comes to consumers, the same money-grubbing rules apply. Too bad reality bursts this bubble, too. A good example is educating children. From a parent's perspective, the best "economic" choice would be to pull their kid out of school and send him shining shoes on the corner. And this is exactly the calculus we see in poor countries in Asia or Africa. (Hey, I thought economics was supposed to make us richer?!) But given the option, parents will always keep their kids in school, despite the great expense and zero monetary return in the short run.
People routinely make decisions--sometimes really big decisions--without exclusively considering monetary factors (if they did, almost no one would ever have children). Indeed, they may make an economic decision that hurts them monetarily, because it actually helps them in some non-monetary way. Such a person is hardly irrational. The narrow view that modern economics has of human life is a key reason for its disconnectedness. And it's a key reason why people should be suspicious of its policy recommendations.
8. The Efficiency obsession
Efficiency in economics means simply producing the most stuff for the lowest price. It does not account for other benefits or needs, as most honest economists will admit. But they then go ahead and construct a whole theory anyway, and make policy recommendations based on that theory!
It's like saying "I know that short term pleasure isn't everything in life. But let me just assume for the moment that it is. Given that assumption, I should spend as much money as I can on shiny stuff I don't really need! Here I go!"
The narrowminded concern with efficiency, low prices and the rest of it helps justify free trade policies that often put the interests of multinational corporations ahead of local workers. Now, one can debate whether this is good or bad for the individual or for society as a whole. But that's the intellectual justification for it.
Certainly we can all agree that there are other things in life besides efficiency and low prices--job stability, family stability, community cohesion, and others. My argument is simply that since modern economics can only handle efficiency, price or other variables lending themselves to mathematical analysis, it is incapable of dealing with other things, which may be just as important to people--if not more important--than a low price.
9. Economists don't study history
What happens when you don't study history? That's right, you become an economist! The economic history of developed countries, as seen in my hubs on Capitalism: Myth and Reality (Part 1... Part 2... Part 3... Part 4), shows that the kinds of policies that naturally flow from modern economics are not, in fact, the best for attaining prosperity.
For example, modern economics assumes that consumers and firms are perfectly rational, 100% self-interested, and have access to all relevant information at all times. Therefore they will always make the best choice for themselves. If that's true, then state intervention in the economy is unnecessary at best and destructive at worst, except in a narrow set of circumstances. The market will take care of itself. If the government leaves people alone, they will attain higher levels of prosperity on their own.
Except they don't. In every single country that has become rich, the government didn't leave them alone. It intervened in the market through laws, regulations, tariffs, subsidies, price controls and other measures. And they became rich. The disconnect between real world experience and theoretical predictions is why some have argued that economics as a field neglects economic history.
10. Economics has two options
Given everything we have learned (and this is just the beginning of the story), it would seem that the field of economics has two options going forward.
The first option is that economics remains an essentially mathematical and quantitative discipline. It would shrink in importance. It would no longer enjoy a privileged place in public policy-making, but would come to rank with quantum physics, advanced engineering or theoretical mathematics: the domain of a tiny, dedicated community of brains that has some intellectual merit unto itself, but only marginal relevance to the average person's life. I would consider such an outcome a shame.
The second option, which I am much more attracted to, is that economics becomes less mathematical and arcane, more realistic, more open to feedback from the real world and less rigid in its assumptions. Some thinkers have already offered some ideas to this effect, such as Paul Krugman and Ian Fletcher.
Economist Ronald Coase is quoted as saying:
Economics has been becoming more and more abstract, less and less related to what goes on in the real world. In fact, economists have devoted themselves to studying imaginary systems, and they don’t distinguish between the imaginary system and the real world. That’s what modern economics has been and continues to be. All the prestige goes to people who produce the most abstract results about an economic system that doesn’t exist.
So it would seem the old joke really does hold true: an economist and his friend are walking down the street. The friend spots a dollar bill on the ground. As he reaches down, the economist grabs his arm, and says "Don't pick it up. If it were really there, somebody would have taken it already."
More by this Author
The rich should pay more in taxes than the middle class or poor. A moral argument for why tax rates should increase as income increases.
Economic justifications for progressive taxation. The rich are not as affected by tax increases as other groups, the rich will always pay more in taxes, and high inequality and low interclass mobility are bad.
Brief history of isolationism and interventionism in the US, and current trends in American attitudes.