Monday, October 6, 2008

Critique of Economics

We place a lot of credibility on economics and on economic thinking. Is this justified? Previous blogs have shown the weakness of over-reliance on statistics to answer questions that statistics are not able to answer. The discipline of Economics does tend to use statistics quite heavily. Thankfully, the experts of that discipline know the weaknesses of statistics and they do take account of them in their calculations. Their theories are not based on statistics but they do use statistics to measure specific areas and they then base their decisions on what they know in their theories.

To use my previous metaphor that statistics are like photographs and that we should rely on them as guides, not truth. The economics expert will take a photograph of the atmosphere at a certain altitude, see the result and based upon that result steer the metaphorical ship towards the right or the left to avoid whatever pitfall the theory predicts. So the economics expert is not using statistics to make decisions, he is using statistics properly like a weather forecaster for proper navigation and based upon the metaphorical photograph and the metaphorical knowledge of weather systems (economics), he steers the ship.

I believe that many of us misuse statistics. Thankfully, the school of thought we call economics makes better use of statistics. So what is the problem, you may ask? Well the basic premise of economics as it was first invented is based upon a false assumption. It comes from a philosophy of utilitarianism, where things are useful only if they are of use. (love is useful because it encourages procreation, procreation is useful because it increases productivity in a population). The weakness of that philosophy has already been explored by others and I will not bring it up in this particular blog.

The false assumption for the discipline of economics is that people make rational choices with the limited resources that are available to them. Now, if you think about it for two seconds, anyone knows that this ain't true. It took economics about 150 years of research before they have discovered this obvious fact, and the guy who discovered this won some economic nobel prize for it. The theory he proposed was that we don't always make rational decisions with our limited resources. Now I won't get into what he said or why he said it, if my readers care to, they can go research it on their own and have their curiosities satisfied.

The human being has been transformed into a greedy consumer and selfish producer under this viewpoint that we only make decisions that are of immediate use to us. Capitalism is born under this economic philosophy where we have a system that uses the selfishness of people to create great things for society despite the individual's selfishness. Now lets us not get into the argument of whether we are selfish or not. Let's stick with the assumption that we will be logical robots in all our decisions. If you have $100, you will need to spend X on food, Y on shelter and Z on entertainment. If the doctor says that you need to spend 90$ on food for proper nutrition, the economist will think that you are being irrational because you only have $100 and that you must place X on food, not $90. The economist will say that if you can manage to have X=$90 then you must work more to get this. But if you worked more, you would have less time to enjoy the Z spent on entertainment. Yes the example is extremely simplified, but it is there to demonstrate the flaw in economic thinking.

Life as we know it is complex. The economics discipline has created a model of the world and how it operates. This model can be seen as a very sophisticated type of game like Monopoly: you have the bank, you have the players, you have transactions and you have the assumption that everyone is trying to buy Boardwalk and using rational decisions to get to that point. On the surface, many people seem to be in that metaphorical "model/game". The problem is that this model assumes that everyone sees the same end goal, that this model is self-contained and that the world is as self-contained as the model.

When governments created social welfare, they used economics as the basis to determine a proper amount of money to survive. Other resources at their immediate use was divided up in many other areas as we all know.... that is what governments debate today, how to allocate what resources in what departments to best serve society. Unfortunately, that is part of the problem because we are using economics to write us our reality. We only use the resources that economics says exists and we limit our budgets based upon economic fantasies.

In the case of social welfare, nutritionist indicate what is needed for a balanced meal for any given day. If the person does not get this, he becomes less productive. The food that is affordable for the poor who needs social welfare, is the type of food that does not produce energy. So the poor have less energy. This same less expensive food is also known to produce sickness in the longterm which places the poor into hospitals much earlier than the one who eats the supposedly proper diet. Economics does not study the effects of bad food choices versus good food choices. Under economic thinking, food is fuel.... you need fuel to keep going and X amount of money enables you to get some fuel. Economics then struggles to figure out why more and more people need hospitals or are less motivated to find work.

Now are the nutritionists right? Who knows.... but I do know that our belief that things should be run by economics mindsets is the wrong kind of thinking. They should offer options, but they should not presume to say that theirs are the only available options. While we allow them to dictate their reality, we lose out on options that could be used to pay for better health care, or eliminate the deficit or other human created problems that can be solved by the same stroke of the pen that created them.

You don't believe that a stroke of a pen can solve a problem? Isn't that what was just done to re-establish confidence in the banks in the US? Economic thinking caused a panic because money was running out in the Monopoly game and people couldn't pay the Boardwalk hotel fees so a temporary solution was created to solve an immediate problem: they inserted money from another Monopoly game to the hands of the players and hope that this solves the problem.

When one believes in economic thinking, you see situations where farmers burn entire crops of wheat because they do not want prices to drop because they need money to pay their loans. Meanwhile, starvation is on the rise in another country because the price of wheat is too high for these people who are in a drought period. We want that logic to determine our governmental budgets?

I have shown the logic of utilitarianism run amok and I have also shown how not everyone follows this logic of rational decision making. Economics assumes that we ALL make rational choices and that these choices can never get to an extreme because there is an inherent balancing tool within the system that they call the "invisible hand of the market". I propose we see the Economics discipline as one potentially plausible point of view in which to make decisions, let us find other plausible points of views that can help us in society.

1 comment:

Anonymous said...

I tried using rationality 24 hours on 24 and it drove me mad. Then I used creativity (which is only to make people think they are a bit different than everybody else but true artists and true intellectuals are just a lie). Perhaps I'm not just made for the mold. Perhaps nobody is. Some are just better at pretending. Though pretending useless things are useful is fun. Everything has its uses, but not necessarily for everybody. Ah, relativism again. Needs should drive the society, not money. I should only have to work when there is a need for me, not inventing work for the sake of getting my daily money. But now, how are we supposed to pay anything with that?

*moan*