Questions For Economists

I have an engineering degree and worked as a communications engineer for many years. I also have a couple of degrees in psychology, the science side, cognitive and neuroscience. One of the habits that education in the sciences tries to instil in the individual is the need to return to the original sources and question the beliefs that are held. Think about that for a minute. Did you ever take a basic physics lad and run all those nice little experiments? You weren’t aloud to take on faith that a body of mass falls at 32 feet per second squared. The point of the lab was to put the individual to work proving some of the very basic laws of motion, gravity, and so forth true. A lot of science is best learned by hands on experience.

Psychology use to take a hands on approach. Back when Germany was the center of the psychological universe students were put to work examining the least significant differences. No one does Fechner’s experiments in a beginning psychology lab. Student sit while the professor drones on about his subject. No on challenges or disputes what he says. We all know that Maslow’s Hierarchy of Needs is absolutely true. Ask most professors of psychology and they will answer yes. the only one who didn’t know it was true was Maslow himself. He never conducted one experiment to prove this “theory”. In fact, he never said it was a theory. In an interview shortly before his death he expressed amazement that some many individuals thought his hierarchy was a proven theory.

So when it comes to economics, so much is taken for granted that such theories and laws must be true. Someone must have proved them, right? Well, not quite, not even close. In every first year text on economics the claim is that two percent inflation is good for economic growth. Well, if two percent is good the ten percent inflation must be really good, right? But is all the literature in all the economic journals and papers, no one has ever proved this assertion to be true. Then why is it part of the standard cant taught to gullible freshmen? Oh, that’s right, Keynes said it was so and we all know that Keynes is the best authority on economics and theory and such. Yes, an appeal to authority is the correct argument. Yet we are also informed that inflation is a tax on the poor. Meanwhile Japan has been trying to use quantitative easing to create inflation so they can keep borrowing their way to economic growth. This is the Keynesian approach as approved by none other than Mr Krugman. On the other hand, deflation is an evil thing. How dare goods and services cost less this year than last. It makes GDP look bad, shows a country’s weakness. So increasing consumer prices, interest rates, and wages is good for the economy but decreasing consumer prices and decreasing wages is bad. Has someone done any experiments to prove these theories? Then why are these ideas still taught?

Let’s move on to Say’s Law, one that has never been demonstrated to be true. Essentially Say’s law is that supply creates its own demand. Build it and they will come, maybe it works in Hollywood films, sometimes, but not in the real world. Let’s demolish this stupidity right now. Dogs and Cats and other animals create shit. I am not aware of any market for animal shit other than, dare I say it, bull shit. One can buy steer manure, the polite name for the product. But I see no demand for other animal feces, do you? Oh, you say, I’ve cited a special case. Say’s Law runs into the problem of utility as outlined by Jeremy Bentham called utility and marginal utility. You know, the marginal propensity to consume. But if goods and services exist that have a marginal utility as many consumer goods do, then how does one explain the operation of Say’s Law? Hey, it’s part of the cannon of economic thought. But iPhones create demand. Really, is that so. At six hundred and fifty dollars the demand is limited. And it suffers from marginal utility, one is good but why would you buy a second one? Obviously Say’s Law has some qualifications so that hardly qualifies it for being a law. Fads are really the old close connection Say’s Law has to the real world and most of that is due more to marketing than simple demand.

Another problem child is measuring economic growth. A measure or metric is only valid when it measures what it reports to measure. Sounds like a circular argument except it’s not. In the physical world we have discovered how to measure voltage potential with a volt meter. We can measure resistance and amperage. We can measure electrical power using several different instruments. But in the beginning, we had to define what a voltage potential was, how it acted, and then we could measure it. Our devices that we use for electrical measurements are also reliable, that is, we get the same readings every time. Now Keynes thought he could devise methods for measuring an economy. Gross Domestic Product or GDP is a measure used by most economists. The question being asked in the last ten years or so is whether it provides an accurate measure of economic growth. Government Spending plus Consumer Spending plus Savings or investment plus exports minus imports equals Gross Domestic Product. Let’s see, government spending would normally be taxes and other income minus spending. So government spending should be a wash, right? But when government spends more than its income from taxes and fees, then it skews the equation. Where does the government get that extra money it spends? It borrows the money from the private sector. Savings that would normally go into private investment now goes to support excess government spending at the price of added interest costs to the private sector. Government borrowing crowds out private sector borrowing. But now with the creation of excessive credit for both the government sector and the private sector, the measure is further skewed. What does an increase of the GDP percentage mean when we record an increase of x amount if that x amount is due to significant borrowing? Isn’t this a type of inflation? GDP may be expanding but at the cost of future contraction when debt must be repaid. Understand that we are trying to measure an economy by its spending habits, consumption. But consumption only accounts for some sixty percent plus or minus. What does that other percentage do, how does it affect GDP? So if we are measuring year over year increase in GDP, what exactly are we measuring and is it reliable?

One of the other problems within the economic community is the idea that governments that can print their own fiat currency can engage in unlimited deficit spending. Now why a government should be any different or exempt from the normal consequences of private individuals overspending their budgets is beyond me. It is still a matter of income. First, deficit spending competes with the private sector for scarce goods and services. Second, it competes with the private sector for investment or savings. Oh, yes, one just prints the money. Well, yes and no. If one prints money then one runs the risk of issuing cheaper fiat with each printing. One also increases the rate of inflation, that is, prices rise for scarce resources and services. Why the MMT people can’t understand this point is beyond me. Excessive government spending crowds out private spending. The fact that the GDP figures may show an increase in economic activity or growth tends to show that our measurement is false. If the government then curtails its deficit spending then if must also reduce its debt. But to reduce the debt means an increase in its income via taxes and fees. This then removes income from the private sector and reduces any savings or investment.

Now this leads us to one of the main problems with modern economics. There is an emphasis on growth. But growth is exponential and we know that the laws of power in math take small numbers and make them really big numbers very fast towards the rise in the curve. Some people call this the hockey stick effect. Growth has limits. Strictly speaking, assuming that everyone has a job and an income, the only way economic growth can occur is through an increase in population. That would mean that the world economy is essentially a closed system. Yes, we can find some exclusions but there are of no significance. When talking about discretionary income, there is only so much any individual can spend without the inclusion of debt. Debt merely amplifies spending for a short period of time before it reduces such spending as debt is repaid, or not, as the case may be. If income does not increase, then spending can only increase by the use of credit but credit is a temporary boost to spending and will soon reduce that growth in spending. The world economy is a zero sum system. it is closed. But wait, some critic said, the work economy grew by 250 percent in the last two hundred years. Ah, how much of that was due to inflation? Did you bother to break out the inflation from the figures? Back to one of the original assumptions by economist, 2 percent inflation leads to economic growth. Yeah, that is why in 1968 I could buy a Dodge Dart for $1350 and today the cheapest new automobile I can get is around $20,000. Do you think inflation has much to do with the price increase?

My point is that there are a great many assumptions that are made by economist that simply are not true, have never been questioned, or have never been extensively examined as to their usefulness. Is economics a science? Yes and No. One can prove a few of the “Laws” of economics. Certainly supply and demand can be proven as laws. There are others that work quite well. But there are more than enough that cannot be substantiated. Economics is a human activity and thus subject to a great many variables that defy formulation into mathematical based laws or equations. One can argue about whether humans are rational in their consumption and investment activities. The problem is describing “rational behavior”. What we may see as irrational may very well have a rational basis. How then does the economist decide where to draw the line between rational and irrational behavior?

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s