Has the financial crisis ruined economics? Not only did economists fail to predict it, nobody seems to have a clue how to right the ship. Unemployment went up despite hundreds of billions of dollars of stimulus spending. Tinkering with interest rates and the money supply hasn't worked, either. The dismal science now has a dismal reputation. But economics itself isn't to blame. Economists are.
Everybody knows that economists are terrible at predicting the future. If the price of pencils goes up, people buy less of them. If the price goes down, more. Economists can predict that much. But they can't say by how much. That would require a depth of knowledge known only to the divine.
They would have to know to the shape and the slope of hundreds of millions of ever-changing individual demand curves for pencils at any given moment. The elasticity of demand for the same. They need the same information for competing products, like pens. Nobody has that kind of information. Nobody can predict the future.
Many economists pretend otherwise. They revel in seeing themselves on the TV and in print. They preach to all, "I have the answer!" They are liars. As with most liars, they get caught. And people stop listening.
And no wonder people stopped listening. Economists have overstepped their bounds. They are arrogant.
People are right to ignore such glory-seekers. But they should still listen to economics. The insights of even basic supply and demand are invaluable.
Prices, for example, are one of the fundamental drivers of human behavior. Economics teaches us that prices aren't just money. They are also time, effort, and hassle and more. From rush-hour commuting to Black Friday to the theory of natural selection, the economic way of thinking helps us understand our world as no other discipline can.
Let's go back to our humble friend, the pencil. They're cheap. They're everywhere. But nobody knows how to make one. It is mentally and physically impossible. Think that through for a minute.
You would have to chop and cut the wood yourself. If you use an axe, you'd have to mine, smelt, and process the iron ore in the blade. And make the tools to do so. You'd have to find rubber trees to make the eraser -- hopefully you happen to live in a tropical climate. You'd have to extract and process the rubber yourself, and make all the tools for that yourself.
Then you'd need to mine and mold the aluminum for the little bit that holds the eraser to the shaft. And you'd need to know how to make yellow paint, and have access to all the ingredients. And how to make the paintbrush you need to apply it. Then there's the matter of finding graphite for the pencil lead...
You get the point -- even the everyday is way beyond the capacities of any individual. It takes thousands of specialists coming together from all around the world just to make a simple, cheap little thing you can buy at any convenience store for less than a dollar.
Insights like that are why I became an economist.
Now apply the pencil lesson to the economy at large. Computers, tires, books, clothing, banking, insurance -- no wonder nobody can get a handle on the ebbs and flows of the global economy. It's impossible!
I think that's the source of economics' diminished prestige. Anybody with any sense knows how complicated the world economy is. But the human mind has limits. So does economics.
Too many economists have pretended those limits away. To go on the TV and say "I know how to fix the financial crisis" is the ultimate act of hubris.
Letter to the Editor
Ryan Young is the Competitive Enterprise Institute's Warren T. Brookes Journalism Fellow.
Twitter Trackbacks for The American Spectator : Economists vs. Economics [spectator. links to this page. Here’s an excerpt:
You say, "don't listen to economists". Yet you must have listened to Milton Friedman since you chose the pencil to describe the supply/demand curve. The pencil is the exact object of production that Milton Friedman used to explain the way of the world in economics. Mr. Friedman's example was to show that a number of individuals, from various parts of the world came together, independently, to produce a product without any government intervention. Mr. Friedman was a Libertarian. He believed that government that governed least, governed best. Sorry, I'm going to continue to believe in what Mr. Friedman preached.
Milton Friedman was clarifying what Adam Smith propounded in the 1780's. The pencil has been used by every economics lecturer since Adam (Smith.)
What Mr. Young might have more usefully suggested is that people would be far better served by learning the fundamental laws of economics, e.g. laws of supply and demand, diminishing marginal returns, elasticity of supply, elasticity of demand, et al. and then applying them to the talking heads' talks.
Not listening won't help anybody. Learning and then listening critically would be far more useful and helpful.
Then atrocities like the minimum wage (which simply outlaws low value work) and Keynesian stimulus programs would be greeted with the uproarious laughter they so richly desire. Not Presidential signatures on hopelessly convoluted legislation.
Hopefully that's why his picture is on the column header. A note in the column would have been nice.
Tell the Fed to stop paying interest to banks on reserves held at the Fed.
They may then resort to lending in order to generate income.
There, problem solved.
Is it logical to listen to someone who says "Don't listen to economists" and then says "I'm an economist"? I think we're getting the Liar Paradox that Epimenides accidentally created about 26 centuries ago.
According to your logic, only people who have never touched drugs should be counselors for addicts. The fact that Mr. Young is an economist means that he can relate to what other economists are doing and saying. Perhaps you'd rather have an expert on cleaning supplies write an article about the topic.
Adam Smith never would have made it in Hollywood, but time and again his theories are proven correct. The Krugman's of the world will be long forgotten.
Mr. Young,
Thanks for the essay.
I have one, minor, quibble. Your assertion is that the problem is economists, not economics. I suggest that people who steep themselves in leftist ideological cant lose the ability to comprehend economics. Thus, Mr. Krugman, to take one example, is not an economist. He is a leftist ideologue, fully qualified to describe macro- and micro-economics in his fantasy world, but completely at a loss in understanding the give and take of economic activity in this one.
Regards.
In the "golden age" of soap opera the serials were written by "Frank and Anne Humert" The actual writer was a woman who had won many typing contests. Later at Orwell's Ministry of Truth (modeled on the BBC) stories were all produced by machines. (Winstead's lover was a writing machine repairer). I believe that Word Processor Manque are producing ObamaCare ,Sarbox,andFranksDodd automatically with no human input or intervention.
Wednesday, July 21, 2010 « THE VOUGHT REPORT!!! links to this page. Here’s an excerpt:
Economist Young , Heal Thyself First .
" In late 2009, the Competitive Enterprise Institute reported a budget gap of at least $450,000 [12] and the loss of its profitable Center for Risk, Regulation and Markets to the Heartland Institute. Shortly thereafter, CEI reported a year-over-year decline in its program spending coupled with a large increase in its fundraising spending. As a result, the website Charity Navigator cut CEI's four star rating to two stars. CEI also contracted its web presence significantly in the wake of its financial ills leaving sites including controlabuseofpower.org, ethanolfacts.org, and enjoybottledwater.org dormant."
Tim, attacking the messenger when you don't like the message is getting a little old. I've read your comment twice and don't see a single relevant word about the article or the points made.
Go pick up your pay check from whatever attack dog you work for and head back to your mom's basement. K?
Gee Alexandra , we are experiencing an extended recession because Obama & Bush before him didn't allow the Free Market to correct the situation . Instead they threw tons of taxpayers money at failing enterprises . Aaaaand , now the inmates , Bawney Fwank & Chris Dodd & The Boys are running The Insane Asylum .
That's why Keynesian economics is a failed economics .
Got It !
See Timmy? You actually can make a valid point. Your mom must be so proud. And mocking people's speech impediments really punches up the quality of your work. Or am I "escalkating?"
By the way , Alexandra , you owe me an apology.
You got a loose cannon hair trigger mouth .
You mean hair 'twigger'? I, too might have a speech impediment. You never know. Why don't you re-read your first comment. And second. And third. You do kind of make yourself a target. I'll take back the mom's basement remark if you'll learn to actually respond to content rather than attacking an author and organization. Howth that thound?
You got more than a speech impediment Chubby Cheeks .
:)
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