We are all economists now

To say that economics is about money is like saying art is about color.  Money is a critical element, but it explains very little about the discipline. Many laymen confuse economics with finance. While the subjects substantially overlap, our recent financial collapse was largely a result of economists who understood finance very poorly.

I recall meeting economist Richard Timberlake (Monetary Policy in the United States, 1993) when he was asked if he was a ‘monetary’ economist or an ‘Austrian school’ economist. His reply was that there was good economics and bad economics.

Economics is more about human behavior than money.  Since economics behaves in a global realm, whether we want it to or not, this behavioral aspect is subject to a lot of unknown unknowns.  This defies a scientific approach, though there is a long line of economists who practice that approach anyway.

They too often prefer to have a model to explain what is happening than to examine the evidence at hand.  Economists love to study how long it took unemployment to recover during the last twelve recessions and draw some predictive conclusions as to what we can expect this time. These economists sell their analysis to brokerage services to ‘inform’ their clients, to news services to fill the evening news and to policy makers to help them make ‘informed’ decisions and pass credible legislation.

But this is analogous to having a map of the Pyrenees when you are lost in the Andes[1].  Too many feel it is better to have a wrong map than no map at all.

Good economists see the world and its inhabitants as they are; poor economists see them as they ought to be.  One may think the latter possesses the moral high ground, but experience teaches us that the opposite is true.  By seeking to get people to act against their nature the moral supremacists end up using force to make one group of people act at the whim of another.  By using force they convert the morality of charity to the immorality of theft.

Virtues in the private sector can become vices in the public sector.  It is the nature of man to try to improve his position in life. This is not limited to increasing his creature comforts, but it includes meaningful work, intellectual and spiritual growth, physical health and security.  This is as true in a socialist economy as it is in a capitalist economy. The only difference is whether you use economic self interest to pursue your goals or political self interest.

Those who believe that political interests are a more moral guide than economic self interest defy history and human nature. The reason socialist economies continuously fail is because they oppose human nature rather than cooperate with it.

Capitalism is integral to a free society because the essence of capitalism is not ‘greed’ as we are too often told , but the competition of ideas. Good ideas are accepted, and bad ideas die on the vine.  But when these decisions are made by central planners and government bureaucracies bad ideas remain on costly life support systems for decades.

A capitalist system is not contrary to moral behavior but integral to it.  A capitalist system produces what people want, not what they are told to produce by moral supremacists and elitist central planners. Stated differently they serve rather than comply. The difference is significant.

Successful economics deal with human nature as it is. The supply-sider revolutionaries predicted correctly because they both understood the dynamics of wealth and the humans who create it.  Robert Mundell, Arthur Laffer, John Rutledge and others correctly predicted the growth that became the Reagan revolution.  Robert Mundell retraced history to find that his prescription of sound money and low taxes created growth.  This was as true with Republican administrations (Coolidge and Reagan) as it was with Democratic Presidents (Kennedy and Clinton).  Inflation and high taxes destroyed growth and caused economic volatility and depressions.  This was proved with Hoover and Nixon as well as Lyndon Johnson  and Jimmy Carter.

Today we have leaders who deny the empirical with such ludicrous statements as “unemployment benefits creates jobs.”   Laffer explained how this is untrue in his recent Wall Street Journal piece.   We have slipped so far that it has become profound to state the obvious.

While sound economic principles do not change, the environment does.  What worked before may not work as well today.  What works with one sum of money (or national debt)  may not work with a much larger sum. Recessions from cyclical corrections require different tactics than much rarer financial and credit collapses.  The further we stray from sound economic principles the more painful it will be to return to them.

Economists have been criticized for explaining  the obvious in a way that is incomprehensible. While not every economic concept is intuitive, it is not incomprehensible. The quality of an academic is not in making the simple complicated, but exactly the opposite.