Sunday, 6 March 2016

Economic Myths: Most of them.

To my mind, economics is like astronomy, evolution or geology, first you look at what has happened and what happens and then you work out an explanation or recognise patterns, out of intellectual curiosity as much as anything and whether you can influence outcomes or not.

William Smith and Charles Darwin knew nothing about the finer workings of plate tectonics or DNA but worked out that the most likely explanations for what was actually observed were 'geology' and 'evolution'. There's no point trying to debunk their explanations on the basis that they didn't know about plate tectonics or DNA.

To paraphrase Peter Hitchens, capitalism (i.e. business i.e. micro-economics) is like the weather, it just is, it is a force of nature and the government should try not to meddle too much. Micro-economics is merely the study thereof. I know nothing about the practicalities of oil extraction, but when oil was over $100/barrel, it seemed quite likely to me that it would fall back to $30 or $40 because that is the normal state of affairs. There are simple explanations why, but the the explanations follow the facts and cannot influence them.

No government can predict how much people are prepared to pay for a particular good or service; how much it will cost to produce; whether you can do it profitably and so on. That is up to entrepreneurs to work out by trial, error and a large chunk of luck.

Macro-economics i.e. government policy is different. It is not like the weather, it is entirely man made by politicians who all have their own agenda and marginal voters and who sift through mountains of economic theories to find some which justify what they were going to do anyway.

But government policy can be studied the same as anything else. Over the past century or three, countries have tried implementing just about anything you can dream up - minimum wages; minimum or maximum prices; exchange controls; import and export duties; setting interest rates, NIRP and ZIRP; subsidising banks or any other industry for that matter; taxing this or the other activity or economic variable; means-tested, universal or contributory benefits; jobs guarantees and so on. Some have worked, most have failed.

At any time you will have people focussed on one or the other particular area, usually to the exclusion of all others, claiming that their solution is the Holy Grail, the Silver Bullet, the Panacea etc, despite it has all been tried before and we have good records on all this stuff and whether it led to a favourable outcome or not.

What's wrong with going back to basic principles and looking at what actually happened when a government did X, Y or Z?

And the fact is, that as crazy as these ideas sound to the brainwashed, my few favourite hobby horses (taxing land values and monopolies instead of turnover, wages or profits; replacing means-tested and contributory benefits with universal benefits; having free trade which includes abandoning The War On Drugs etc) have all been tried and tested and have always 'worked', without fail. None of these are the Holy Grail, Silver Bullet or Panacea because they do not seek to improve 'capitalism', which will never be perfect, they just go with the flow and make things better rather than worse. They work whether you understand them or not, whether you agree with some vague set of principles or not.

To sum up, it is far easier addressing the question "what happened when" than twatting about with hypothetical "what would happen if…"s

The only argument worth having is over which outcomes you want - if you actually want high land prices, high unemployment, low wages and profits, depressed growth, rampant inequality, government and trade deficits etc, then by all means, stick with what we've got. But at least be honest about what you want.

14 comments:

A K Haart said...

"They work whether you understand them or not, whether you agree with some vague set of principles or not."

As a non-economist that's how I see it. Look at the past and learn from that but avoid theoretical complexities and the rampant bias of vested interests.

Lola said...

Two words. Laissez-faire.

Lola said...

Or, Mises Human Action ( a HUGE book) in one short blog post.

Mark Wadsworth said...

AKH, nobody who takes an interest is a "non-economist".

Even I know that it's colder at night when there are no clouds; that it's colder October-March than it is April-September; that the weather tomorrow will probably be like it was today etc. I'm certainly not a meteorologist but am I a non-meteorologist?

L, that's the general idea, go with the flow.

Sean Vosper said...

Great post

Bayard said...

"that the weather tomorrow will probably be like it was today etc"

Not where I live, it won't be.

I think that the problem with economic and political theories is that their proponents see that there are problems with political and economic systems when you just "go with the flow" and try and solve those problems. They then become so convinced that their idea is the Silver Bullet, that they become blind to the fact that, when yu start disturbing the equilibrium, things always get worse, not better. Just as evolution has produced, through millennia of trial and error, an ecosystem that works, and buggering about with it always causes problems, the same thing is true with economics and politics. The rest state may have its flaws, but it's the best we can hope to achieve.

James Higham said...

There's no point trying to debunk their explanations on the basis that they didn't know about plate tectonics or DNA.

No, just on their arguments.

Lola said...

B. Yes. The phrase is that 'bureaucratic interventions always create chaos in the spontaneous order of freedom and markets'.

Lola said...

"But government policy can be studied the same as anything else." - Public Choice Theory

Mark Wadsworth said...

GP, ta.

B, in Wales the weather is the same every day, a mixture of sunny and raining.

JH, they weren't making arguments. They were looking for the most likely (or least unlikely) explanation, and seeing as evolution and earthquakes, erosion etc have merrily continued since, it appears to stack up.

L, public choice theory is a load of BS. Politicians only get away with stuff because people are too dumb to realise that everything has already been tried in one form or another in one country or another at some stage in well recorded history and that we know what makes things worse and what makes things better.

It's like the difference between measuring the stars and continental drift - you can measure them but you can't change them. What politicians do is real life experiments where different actions lead to different outcomes. You can study this objectively and ideally, would be able to influence people to vote for politicians who do stuff which leads to better outcomes. That might mean 'doing nothing' in many situations or 'doing much more' when it comes to taxing rents instead of earnings.

Lola said...

MW I did not say that PCT was not BS. I just that what you said would be considered PCT. (FWIW I think it's BS too)...

The other thing that they are working with now is Behavioural Economics https://www.fca.org.uk/static/documents/occasional-papers/occasional-paper-1.pdf

DBC Reed said...

Crikey! Lola is saying he believes in the " spontaneous order of freedom and markets". There we go: anarchy rules. All those poor sods sleeping on the pavement should blame the " bureaucrats".
I would remind all Gothic horror laissez fairites on here ,that we are dedicated to radical market intervention in the form of LVT and the public redistribution of the tax take.

DBC Reed said...

Crikey .Lola has just declared that he believes in the "spontaneous order of freedom and markets". There we go: anarchy rules or rather as the Physiocrats thought: the natural order must prevail.
I would remind the Gothic Horror laissez fairites on here that the rule of nature (this is what Physiocracy means) was subject in the Physiocrat and subsequent LVT systems to a massive market intervention aka land tax or, otherwise, land values would naturally and spontaneously grow out of control.Si monumentum requiris circumspice or whatever. This tax take was to be redistributed for the common good of the public whose work and enterprise had increased the land value to start.So you are going to need humble public service bureaucrats to redirect the rents back down to street level where people are spontaneously sleeping on the pavement.

Robin Smith said...

@dbc that is hardly a radical policy