Massachusetts Daily Collegian

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A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

Economic mysticism

MCT
MCT

Albert Einstein famously said, “Any intelligent fool can make things bigger and more complex … It takes a touch of genius – and a lot of courage to move in the opposite direction.”

He was speaking from his experience in theoretical physics, but he could have easily been talking about what passes for contemporary economics. As a result of having so many intelligent fools, most people have absolutely no understanding of contemporary economic ideas.

You can’t open a newspaper without reading the analysis of an economist regarding some arcane economic statistic, and how we need to do more to stimulate the economy. What does that even mean? These veritable geniuses can’t for a moment consider that the same principles that run a successful household – prudence, responsibility, thriftiness and savings – are also essential principles for running a nation.

Somehow, once the modern economist gets to the macro level, they think pumping borrowed money into the economy (anywhere will do) will ‘prime the pump’ and get the economy going. And because it’s all borrowed money, some generation down the line will eventually sort it all out.

There have been plenty of Einsteins in economics, who saw past the needless abstractions and the reckless, prideful pretensions of complex statistical models and understand the true long-term effects of economic policy. Unlike physics, however, there are plenty of parties whose interests are greatly advanced by hopelessly muddling the debate with endless complexity. A true economist sees past the short-term effects of government policy and sees, in the words of Henry Hazlitt, “… the longer effects of any act or policy … not merely for one group but for all groups.”

Of course, this always leaves an opening for sensational opportunists to decry the heartlessness of the economists. All the woes of the world are piled at their feet: they cause foreclosures, they allow the poor to die in the street; I’m sure these refrains are a familiar song to you by now. This is like blaming the weatherman for the weather that spoiled your picnic. Any honest and perceptive economist saw the mass foreclosures coming; they were the result of bloated government entities granting complex mortgages on overpriced houses to those who never would have qualified in a free market. Easy government money always creates speculative bubbles, and it is always the poorest who suffer in the resulting depression, while the government (you, through taxes) keeps well-connected businesses afloat, all in the name of ‘stimulating the economy.’ Never has getting ripped off sounded so humanitarian.

These arguments, to help one party at the expense of others, always come cloaked in the guise of morality. The economist, who coolly stresses that we cannot get something for nothing, is decried as an immoral monster. Minimum wage laws, for example, can’t magically raise wages without an adjustment made somewhere in the bookkeeping.

Therefore, jobs that aren’t justified at the new wage are destroyed. Now we have an unemployment problem, and we need to pay unemployment benefits. ‘Illegal’ immigrants come to fill the vacuum of necessary but low-paying jobs at the original wage, before it was made illegal. Now people are miffed, because they don’t have jobs and those willing to work below minimum wage do; now, they want to build a wall across Mexico. One ‘humanitarian’ intervention invites another, and the government is called upon to fix each problem it created, when there was no problem to begin with.

If the true costs of all these government interventions in the economy were apparent through direct taxation, we would all be more critical of government spending. But the costs are hidden away through the black holes of national debt and inflation, an indirect form of taxation as your money loses value in your hand. These are sure paths to ruin in the long run.

The free-market economist has quite possibly the most thankless job in the world. She must continually stress, against the turbulent ups and downs of popular emotional responses to economic situations, that in the long-run, there is no conceivably more efficient and elegant system for coordinating the wants and needs of humankind than the free market, and that free competition makes the price as close to actual production cost as possible. It is when the government gets involved, first to “fix” the free market and then to prevent reckless companies who exploited the artificial bubble from collapsing, that we all get burned.

Perhaps you have wondered at the complexity of contemporary political and economic notions, suspecting that your own common-sense method of fiscal prudence and personal moral compass is the answer. Well, you’re absolutely correct.

And with the experience of living under the mercantilist British Empire, the Founding Fathers enshrined these Republican ideals in the United States Constitution. With radical simplicity, they recognized that society operates best when government has as little of a role as possible. But intervention in the economy crept in, to “fix” the market, and then to “fix” the damage with more intervention.

The language of morality was used to demonize cool-headed economists who saw the long-term effects at every turn; this insidious use of collective moral language undermines real, individual morality as well as undermining real prosperity that fuels individual action.

We need to return to the Constitution and get the government out of the economy and out of the business of printing paper money, which is expressly prohibited in Art. I Sec. 10. It is an uphill battle; economic hokum has been the standard fare for quite some time. This flim-flam ignores basic economic truths, asserts that we can magically get something for nothing, uses morality to justify government intervention and fights needless wars overseas that pour private funds into the pockets of contractors.

Yes, friends, economic mysticism is one hell of a racket.

Gavin Beeker is a Collegian columnist. He can be reached at [email protected].

 

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  • G

    Gavin BeekerApr 20, 2012 at 1:52 pm

    Cool-headed-economist:

    With no. 4, you make the assumption that the only businesses who employ people are large corporations. Entrepreneurs and small business owners employ people, too. That is precisely the point I’m driving at; these kinds of regulations always hurt the little guy first. Entrepreneurs often have tiny profit margins, if at all, and they are always hurt the most by regulations that are imagined to reign in big, evil corporations. They are forced into choosing to fire their employees or arrange under-the-table payment. Either way, it engenders a bad-faith attitude towards the law.

    With no. 2 if you mean ‘homeless’ to mean renting a house instead of buying one then absolutely, it’s much better than the heartache of foreclosure. The easy credit and implicit governmental guarantees led to a mania for pumping out tenuous sub-prime mortgages. One could not ask for a better example of how government stimulation ended up hurting the little guy in the end.

    Mason-

    I should have been clear that, to me, the cool-headed economists (as opposed to the Keynesians) are the Austrian economists, like Harry Hazlitt, Friedrich Hayek, Ludwig von Mises. I can’t surmise if you’re familiar with them from your post, but they make the exact point you are making. As a discipline, it doesn’t seek to impute upon individuals any kind of ‘rational’ action, and therefore any macro-level abstractions are meaningless. I highly suggest you look into them.
    Basically, they focus on how free markets and prices are a way for individuals to coordinate their activity (whatever their values and motivations may be) and they stress how government intervention sends false signals through prices and causes poor investment.
    But ultimately, the freedom of individual actors is stressed, for various reasons.

    Reply
  • M

    masonApr 18, 2012 at 1:12 am

    I don’t really understand the point of your article, it’s not very coherent or clear. You seem to be saying in an elongated and convoluted way that we need to focus more on laissez-faire economics. Less government intervention, more emphasis on the free market. Which is not a revelatory concept outside of umass, outside of our heterodoxy economics program.
    Our heterdoxy economics program and capitalism and socialism all rest on the same underlying concept and goal and that is utilitarianism and utilitarianism goal is to spread the greatest good for the greatest amount of people; it’s goal is to allocate “maximum utility”.
    What they don’t realize and which you alluded to, it’s really irrelevant. Economics does a horrible job of understanding the economy, look no further than the 2008 crash. Millions of economists failed to predict the recession yet certain investors did and made millions as result. They fail because they only see the economics in abstract terms and they are do not see it clearly. They implictly primarily study large corporations and they seem them as “firms’ and they rudimentarly think of these firms as existing within simple supply/demand/opportunity cost constructs and other economic concepts are often just an extension or enhancement of those core principals.
    Also they primarily understand economics in terms of it’s end product and the end product is the consumer product and so the firms they focus are on small business and corporations which serve those needs. They do not understand the majority of the economy exists outside of creating consumer products; the plethora of firms that sell directly to business, there are millions of companies you have never heard of which serve as a pivotal interconnection componets to the the largest firms.
    They fail to take into account human nature as the greatest driver of behavior and when they do, it’s still in entirely wrong terms. They instead study it in the subfield of behavioral economics and that what essentially tries to explain is why people are “irrational” and maybe by studying that it will somehow magically create optimal utility, i.e. more jobs and higher wages.
    Their metrics are often entirely wrong. Per capita income and median come is very flawed; primarily because it can easily be skewed by higher wealth in other areas of a community or state and that it’s very outdated metric. It may have been useful a hundred years ago, however the economy is far more advanced and composed of intricies.
    Massachusetts is a perfect example, we have one of the richest states in terms of GDP and per capita GDP and median gdp. Yet most of that wealth is concentreted in Boston and certain areas of the Berkshires. West of boston and outside of pockets like amherst, this state is very impoverished and yet you could never possibly understand that by looking at metrics or even the metrics of those cities/towns.
    Economics attempts to allieves the misery of the poor and enhance the wealth of the middle-class but what it continuallly fails in doing that. It fails weather it’s through progressive policy or through less taxes. Economics doesn’t understand that society is hierarchical.
    When economics looks at issues effecting the economy it determines their importance and their meaning based on numbers and dollars. X illness is costing x amount, x lost of productivity, x stress at work is causing x loss of productivity. A monpoloy causes x raise in prices. Elasticity of x is causing price of a product to be. The end result is exactly what? I could not think of a more irrelvant science and even then economics is fractured. It is neither a social science nor a natural science; it haphazardly oscilates between the two.
    Economics has taken our greatest virtues as humans as turned then into assets; it’s taken our passions and turned them into producitvities, it’s taken our talents and turned them into skills.
    It’s greatest error is in what it’s effect on people. True regardless of any economic system, it’s taken who we are as humans and instead of seeing our own end as it’s ultimate goal, it’s created human capital and used it as a means to a misplaced goal.

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  • A

    A cool-headed economistApr 17, 2012 at 11:58 pm

    Albert Einstein was an outspoken socialist… but leaving aside that little irony, there are serious issues with your claims:

    1. A nation is not like a household. Seriously, think about it. A nation produces most of the things it consumes. A household these days (unlike a household in the 1700s) does NOT produce any of the things it consumes. It makes sense for a household to save money, because the household uses money to buy things from entities outside of itself (such as various companies). But a nation buys most of its stuff FROM ITSELF. That is the crucial difference, and that is why saving doesn’t make sense for a whole nation. A nation pays itself money in order to get itself to produce things. If you had to pay yourself money in order to get yourself to work, would it make sense to hold money back – i.e. to save? Of course not. In THAT case, saving would just hold you back from working. This is what the great economist J. M. Keynes called “the paradox of thrift”: saving money is good for one person, but bad for something as large as a nation.

    2. Your “solution” to foreclosures seems to be… saying that those people should never have had homes in the first place. After all, that is what you mean when you say that the people being foreclosed should not have qualified for mortgages. You are saying they should not have been able to buy homes in the first place. So, the effect of a free market would have been pretty much the same as the effect of all these foreclosures: the same people would have been left homeless.

    3. Speculative bubbles are caused by free markets, and they’ve existed as long as markets have existed. The first recorded speculative bubble was in the Netherlands in the 1600s, when the price of tulip bulbs got inflated to the extreme. The mechanism that generates a bubble is simple: people expect the price of something (tulips, houses, whatever) to grow in the future. So they buy lots of tulips/houses/whatever today in order to sell them later. So the demand for those things grows today. So their price also grows. It’s a purely market-driven self-fulfilling prophecy.

    4. Minimum wage laws can raise wages by making businesses accept lower profits in order to pay higher wages. Passing a law to make employers pay a minimum wage doesn’t force the poor little corporations to lay off workers or hire cheap immigrant labor. They COULD just scale back their profits and pay the higher wages. If they don’t, it’s THEIR fault.

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