The Ignorance That Passes As Economic Thought

I like to read the occasional WordPress post, some of which have thoughts on economics.  I also read a number of blogs that are written by economists, commentators, financial analysts, and so forth.  The social sciences, if one can really call them sciences and I would believe it is due more to convention that an allegiance to truth, love to quote their authorities as these same individuals make it all up.  You may think that a very bold claim.  But consider that if one speaks of human rights as being endemic or even systemic to the human condition, that such rights naturally rise out of the very beingness of being human, then should I ask what proof have you, you treat me with scorn and derision.  But, But, But, don’t you see, we are born with these rights.  Yes, okay, but where is your proof?  I mean, it is like arguing that god really exists.  That argument has been around for thousands of years and the best we can do about such proof of existence is belief that god exists.  On the other hand, when I question if there really is a law of gravity, someone picks up a stone and lets it drop.  We can do that a million times and not once will that stone fail to drop to the ground.  In fact, we can do that with any number of objects and see that the law is never violated.  Mass has attraction as was demonstrated by Cavendish although the idea of mass and its properties had been studied fro several centuries through observation of planets and stars.  My point is that the social sciences are particularly poor at the problem of experimentation and proof.

If we look at economics, for instance, one of the first ideas in econ 101 is that 2% inflation is good for the growth of an economy.  That precept is never proved, simply stated.  Well, if 2% inflation is good, that 10% ought to be great, right.  I mean it should stand to reason that more is better.  But what about no inflation?  Is that good, bad, or indifferent.  If you ask your underpaid profession, most of whom make from $100,00 to $500,000 a year, depending on whether they have a Nobel prize in economics and all the outside consulting work they actually do and receive hansom payments, just why this small amount of inflation is good, he will tell us that it is needed for growth.  But won’t an increase in productivity and a decrease in price with an increase in supply result in growth?  Well, no, see all three components may not produce enough expansion in growth by themselves or collectively.  Therefore we need inflation.  But isn’t inflation a tax upon the poor?  Well, yes, but see by having growth in the economy we enable more people to have jobs and earn an income.  So if we have 10% inflation then we could have full employment?  Well, no, 10% inflation would be too high a tax of the poor and we might suffer a collapse in wages and income as well as in employment as corporations would seek to cut costs through greater productivity in labor, which means greater unemployment.  Wait am minute, isn’t all this just a circular argument that offers no proof that 2% inflation actually does what is intended?  Go ahead Mr PhD in economics, show me the research that proves your assertion that 2% inflation results in economic growth.  Well, that’s only one instance.

What about Says Law, that supply creates its own demand?  Jean-Baptiste Say proposed the following which I lift from Wikipedia: A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.  As each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.

Found in classical economics, that aggregate production necessarily creates an equal quantity of aggregate demand.

Say further argued that the law of markets implies that a “general glut” (the term used in Say’s time for a widespread excess of supply over demand) cannot occur. If there is a surplus of one good, there must be unmet demand for another: “If certain goods remain unsold, it is because other goods are not produced.” [2]

Over the years, at least two objections to Say’s law have been raised:

  • General gluts do in fact occur, particularly during recessions and depressions.
  • Economic agents may collectively choose to increase the amount of money they hold, thereby reducing demand but not supply.

Now we should not confuse marketing with actual supply.  There was never any rational reason for buying and owning a “Pet Rock”.  And when that product came onto the market, sales were the result of a marketing campaign rather than any natural or man made accumulation of a supply of rocks.  When one creates a fad, then one can say that it is marketing that creates the demand and not supply.  Had Whamo merely manufactured a million Hula Hoops it would not more have created an instant demand than had it manufactured a million buggy whips.  Both items were not needed any more that one needs an iWatch.  An iWatch is not a technological innovation whose time has come and the world has a great need of it.  It is a marvel of marketing and merchandising.  Just as one does not need a Rolex when a Timex will do for the general public, so fads are items that we buy with disposable income, that is, income not needed for necessities.  Yet in Econ 101 this same Says Law is taught as absolute truth.  Well, what about Harry Potter books?  The author never worked out a marketing plan or did any research that would indicate her first novel would be a success.  She simply wrote the book and people wanted it.  Do you have any idea of how many books are written each year and there are damn few buyers who want them?  For every writer who makes it big time there are a million who never get read. Besides, the book didn’t just appear.  It was marketed by those individuals who have an idea of what the public wants.  JK Rowling wrote a book that just happened to be good enough to sell a lot of copies.  If you are a writer and are trying to write a best seller then the chances are you will never sell.  Again, where is the experimentation, where is the research that proves Says Law is true?  Friends, there ain’t none.

Consider the following statement: “According to Smith, the wealth of nations is labour force and education accelerates productivity of labour where division of labour increase individual productivity and personal work satisfaction.”

Yes, division of labor can increase productivity up to a point.  But this division of labor has more to do with an assembly line process.  Let us go back to merry old England before the start if industrialization.  The weaver, who was a craftsman and member of a crafts guild needed yarn in order to weave his cloth.  Now he could buy wool locally, spin it into yarn and then weave that yarn into cloth.  If he was lazy, he would buy the ready spun yarn and thus reduce his profit.  Or he might marry and have children,  the wife and children might do the wool carding (the first stage of spinning), and then the spinning of the wool into yarn.  He might even teach his wife or one or tow of the children to weave.  He was paid both for the quality of his product and the quantity.  But then technological innovation comes along and literally puts his wife and children out of work.  Machines can make yarn far faster and cheaper than his children.  What’s more, the land owners find they can grow more wool by enclosing the commons and raising more sheep.  That small patch patch of common land upon which he might have grazed his cow and planted a vegetable garden is not gone.  The common woodlot has been cut down for pasture and so his source of cooking and heating fuel is gone.  His supply of yarn may be cheaper but he cannot reduce the time for the production of cloth.  Then another innovation takes place, the mechanical loom.  The technological wonder can produce more yardage at better quality that our individual weavers can. so they are now out of work.  Now you tell me, where is this new division of labor and where is this greater satisfaction with one’s position in the labor scheme?    Well, yes we do need people whose skills are such that they can manufacture the spinners and looms and those whose knowledge of such machinery will enable them to maintain the equipment. But that number of new workers is far fewer than the old craft weavers and spinners.  As for working on assembly lines being more satisfying personally, I can tell that the man whom I quoted has never worked in a factory on an assembly line.  No one who has would ever believe such bullshit.  Assembly line work is, for the most part semiskilled labor.  Everyone works at the same pace and there is a limit to the speed at which work can be accomplished.  The factory floor is very noisy and tends to diminish your hearing ability over the years.  And that noise takes a toll on one’s personality, it tends to make the average worker feel mean.  Noise is an environmental factor.  Okay, so the assembly lines in a microchip manufacturer is not as noisy or dirty.  But go ask women who did that type of work for ten or twenty years what they thought of it.  Yes, most academics are idiots when they think along these lines.  Most have never held a real job in their life.  You may work in a government office and find that most of the employees have no interest in doing their jobs with any greater productivity than they do now and most dislike their work.  Most of these academics and their followers have never heard of Parkinson’s Laws, which are really observations about organizations.  One such law states that Work expands to fill the time allotted.  I have seen that law in action and can testify to its truthfulness.  The average individuals would rather be kept busy that to sit around doing nothing.  If you pay a man for eight hours of work and all you require is that he place a dozen eggs in a carton he will take all eight hours to accomplish that work.

So much that passes as economic wisdom and knowledge is nothing more than guesswork and wishful thinking.  Does Quantitative Easing really work?  Hell no, it creates asset bubble.  More and more economists are starting to see that.  But the question has always been, why was it believed in the first place?  Banks were suppose to lend out more money to the consumer, but the consumer is pretty much tapped out and has been for years.  Look at all the low down and no down payment mortgages that went bust.  All that happened was the creation of inflation in the price of housing because we created an oversupply of credit.  When that price and credit bubble could not be sustained then it started crashing down.  But The Fed thought it could create more demand in the economy by pumping more money into the banks.  Well, with the number of bad non-performing loans on mortgages and now auto loans going up, where does the bank put its money?  Into anything that promises high returns no matter the higher risks.  The Fed does not comprehend that banks create more money by creating more credit.  You know that credit card in your wallet?  That is as good as cash.  It is money.  Yet how many economists say it’s not?  Can you buy stuff with your credit card, same as if you paid cash?  Then it’s money.  What’s to argue?  Oh, alright, it is not exactly currency.  I never said it was.  I said it is money, a medium of monetary transaction.  I can pay for somethings using Bitcoin.  That means that Bitcoin acts like money, like currency.

So let’s take about money and currency, these two different concepts most economists can’t seem to keep separate nor completely understand.  Money is a medium of exchange.  It can be measured in ounces of gold or silver.  I could be measured in bushels or wheat or apples.  But it is a third party to any transaction.  Currency is what a government issues, a fiat that this item, be it paper, gold ounce, lead coin, copper ingot, whatever, is the official money and is accepted as such for all government purchased and debts.  If the government accepts buffalo chips as payment for the taxes it levies on you, then buffalo chips are official currency.  Do you see how simple those two concepts are?  Now, let’s go one better.  Remember credit?  Credit is measured in terms of currency, not money.  And as it is used as currency, it becomes debt, which is measured in terms of currency.  Do they teach this in Econ 101?  Oh hell no!

So let us talk a little about monetary policy, such as it is.  Frankly, what is a monetary policy?  Let me turn to Wikipedia for a common supposition.  Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.  Further goals of a monetary policy are usually to contribute to economic growth and stability, to low unemployment, and to predictable exchange rates with other currencies.

Our monetary authority in America is the US Federal Reserve Bank, which is owned not by the US Government but by the banks in the US.  All are members and those with the most assets have the most say.  That is why when Goldman Sacks speaks the Fed listens.  Each of the thirteen reserve banks have their officers appointed by the various member banks.  The board of directors fro the central committee that sits in Washington DC is appointed from these reserve banks.  Thus, the Fed is a quasi government agency.  And as Congress has found out, it believes it has its own sanctity of existence.  The Fed also is the largest employer of Economists, as defined as having a PhD in Economics.  Far more that the Department of Labor with its Bureau of Labor Statistics and other agencies.  Does that give you the impression that the Fed knows what it is doing?  Well, the Federal Reserve does print the currency, which is composed of IOUs.  That is what a Federal Reserve Note is, a note or promise to pay…in the form of another note.  Our currency is debt.  Oh wait, they didn’t tell me that in Econ 101.  The Fed controls the printing of currency, which is a form of money, but so is credit and the banks control that issuance.  So the Fed, unless we count it as the arm of America’s banking system does not totally control the supply of money.  But is does control the interest rate, at least that discount rate at the Fed lending window, and the deposits it requires bank members to hold in its vaults.  However, all those payday loan businesses control their own rates.  So do those credit card companies.

But how does one measure inflation?  Well, one might think that if we were to gather a weekly or monthly set of prices on every good and service normally for sale we could track the changes in those prices and determine whether prices, in general, as a aggregate were increasing, decreasing, or staying the same.  MIT has been doing this for several years, by the way.  But both Congress and the Fed have constantly changed what goods and services they follow and thus play with the numbers so as to arrive at politically correct numbers.  This has gone on since FDR’s time in office, so don’t worry, it’s nothing new, as we know, politicians love to lie when it suits their purposes.  So how does one control inflation?  Ah, the usual answer from the professor of Econ 101, the Fed’s interest rates.  Interesting concept.  So Arthur Burns finally had to raise the Fed rates to 16% during Reagan’s first term of office.  Back in 1970 I believe those rates have been about 4%.  So how did inflation get so out of hand for some fourteen years?  Because by 1970 credit cards were coming into a wider scale of use as more retailers started to accept them.  And by 1984 one could use a major credit card to buy gasoline, groceries, a restaurant meal, a hotel room, an airline ticket, and so much more.  The supply of money was greatly expanded and thus this over supply of money helped to cause the inflation in prices.  Of course debt is a claim on future earnings and must either be repaid or defaulted.  But no matter.  During the sixties we had the War in Vietnam, the NASA Space Program, and the War On Poverty, which we never won or even came close.  Couple that with an increase in consumer spending caused by an increase in the issuance of consumer credit and debt, what else did you expect.  Gosh, and o think that our skyrocketing inflation rates could only be brought to heel by the rise of the Fed rate to 16% along with an great increase in unemployment.  And this is monetary policy?  Surely you economists at the Fed jest.

A science is known by the rigorousness of its foundation.  Physics proceeds from its first principles on the laws of motion, its laws of weak and strong atomic interactions, and gravitation.  From this pillar of truth, all else proceeds.  One cannot violate the laws of physics.  Of course we can get into the more exotic of the various studies of physics assuming we have the mathematical knowledge to understand such studies.  But where are the foundations of Economics?  There are no laws of science that guide us to economic revelations.  It is all based on human behavior.  Economics is just another method to describe human behavior.  To think otherwise is to believe in the Easter Bunny and tooth fairy.  So what do all the Economists really know?  Well, for one, they know a lot of advanced mathematics.  But human behavior is not about mathematical formulas.  Any Psychologist who studied behaviorism in the fifties and early sixties and did the experiments with animals know that behavior may be predictive but it is never exact.  Your rat may run a maze one way a thousand times and then one day, for no discernable reason it goes another.  That is to say that rat has a mind of its own and will be damned if you can tell it that it will always do your bidding.  We can predict human behavior,but only to a point, and we can never be sure that the same behavior will always occur.  Like the weather, it is one thing to predict, it is another thing to cause it.


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