by James Corbett, The International Forecaster:
Quick. When I say the word “economist,” what comes to mind? Fearless truth-teller? Sage wise man? Someone whose deep understanding of the complex web of billions upon billions of daily interactions in the sphere of human activity enables them to predict the outcome of those interactions years in advance with near certainty? …Or do you think of Paul Krugman? …. Be honest now. It’s Krugman, isn’t it?
Why is that? How can it be that a profession that likes to call itself a science (even a dismal science) and whose practitioners are entrusted with steering the economies of entire nations can be so consistently, horribly, laughably wrong? (Case in point: Paul Krugman.)
Why is it that these piercing intellects praised Bubbles Greenspan as “the Maestro” for saving the US from the consequences of the dot-com bubble by blowing an even more destructive housing bubble?
Why is that these wise men consistently laughed at the only people who dared to point out that the housing bubble was in fact a bubble?
Why is it that they now sing the praises of negative interest rates and other “innovations” that were once thought of as literally impossible?
Ask an economist these questions and you’ll get any number of excuses as to why economic calculations are not quite as accurate as a physics equation, or as predictable as a chemical reaction. It turns out economics is not that kind of science, after all. I mean, what are you looking for? Certainty?
Some of the more thoughtful economists will even offer compelling counter-analogies. In his 2013 op-ed, “Is Economics a Science?” (faux) Nobel laureate Robert J. Shiller concedes that since macroeconomists are primarily concerned with policies and their outcomes, not raw data, it is more accurate to think of them as engineers rather than scientists.
“My belief is that economics is somewhat more vulnerable than the physical sciences to models whose validity will never be clear, because the necessity for approximation is much stronger than in the physical sciences, especially given that the models describe people rather than magnetic resonances or fundamental particles. People can just change their minds and behave completely differently. They even have neuroses and identity problems, complex phenomena that the field of behavioral economics is finding relevant to understanding economic outcomes.”
The irony is that, although Shiller almost certainly doesn’t realize it, he has just pinpointed the fundamental underlying flaw in the so-called “science” of economics. It is not just that there are some equations here and there that need refining. It is not an incomplete theorem that is getting closer and closer to the truth with every approximation. The field of economics is in fact built on an entirely false premise and thus cannot yield anything but results that are only coincidentally related to reality.
The false premise is to be found at the very root of the word itself: economics. The word “economics” is derived from the Greek οἰκονομία, meaning “household management.” The word was employed by Aristotle to analogize the management of a household to the management of a city-state. It is now employed by macroeconomists to describe the management of entire nations or of the globe itself.
But as F.A. Hayek points out in his landmark opus, Law, Legislation, and Liberty, this analogy is not merely wrong, it fundamentally obscures an important truth about the sphere of human activity that it purports to describe:
“An economy, in the strict sense of the word in which a household, a farm, or an enterprise can be called economies, consists of a complex of activities by which a given set of means is allocated in accordance with a unitary plan among the competing ends according to their relative importance. The market order serves no such single order of ends. What is commonly called a social or national economy is in this sense not a single economy but a network of many interlaced economies. Its order shares, as we shall see, with the order of an economy proper some formal characteristics but not the most important one: its activities are not governed by a single scale or hierarchy of ends.”
Make no mistake: This quibble is not semantic. Although “economics” describes the study of resource allocation in line with a unitary plan to satisfy a single scale of value, that is manifestly not what “economists” are trying to describe. As Hayek explains, this is in fact a chief source of error in the study of economics itself:
“The belief that the economic activities of the individual members of society are or ought to be part of one economy in the strict sense of this term, and that what is commonly described as the economy of a country or a society ought to be ordered and judged by the same criteria as an economy proper, is a chief source of error in this field. But, whenever we speak of the economy of a country, or of the world, we are employing a term which suggests that these systems ought to be run on socialist lines and directed according to a single plan so as to serve a unitary system of ends.”
Thus, baked into the “economics” pie is the notion that the economist’s job is, as Shiller concedes, to fine-tune the unitary economic plan of a government or central planning council in the service of a single set of ends. Any guess whose ends these economists end up serving? Hint: it’s not yours.
This explains why classical economists concerned themselves with the ultimate form of “household management,” i.e. the creation of a centrally planned national or even global “economy.” As Ludwig von Mises elaborates in Human Action:
“The question which preoccupied the economists was whether a tailor could be supplied with bread and shoes if there was no government decree compelling the baker and the shoemaker to provide for his needs. The first thought was that authoritarian interference is required to make every specialist serve his fellow citizens. The economists were taken aback when they discovered that no such compulsion is needed. In contrasting productivity and profitability, self-interest and public welfare, selfishness and altruism, the economists implicitly referred to the image of a socialist system.
“Their astonishment at the ‘automatic,’ as it were, steering of the market system was precisely due to the fact that they realized that an “anarchic” state of production results in supplying people better than the orders of a centralized omnipotent government. The idea of socialism — a system of the division of labor entirely controlled and managed by a planning authority — did not originate in the heads of utopian reformers. These utopians aimed rather at the autarkic coexistence of small self-sufficient bodies; take, for instance, Fourier’s phalanstère. The radicalism of the reformers turned toward socialism when they took the image of an economy managed by a national government or a world authority, implied in the theories of the economists, as a model for their new order.”
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