The Problem with Economics

Courtesy of Sandeep Jaitly @ Fekete Research:

“Thank goodness my task is to teach economics to a bunch of physicists and engineers. The other way around would take an infinite amount of time,” was the comment made by my economics lecturer on a supplemental course to my maths degree at Imperial College.

Economics is an often maligned subject, especially to the scientifically inclined. To the physicist, mechanical engineer or chemist, economics is a mystery. They cannot see why graduates in the subject could be honoured with a bachelor of science. Is this disdain justified? With the current state of classical economics, it most certainly is. Scientific enterprise has achieved many things that have improved the living standard of humanity, for example: the pyramidal teabag; the jet-propelled aircraft and the suspension bridge. Classical economics has no such claim.

The sciences are based on ‘axiomatic systems.’ An axiom is a proposition that cannot directly be proved but is rather self-evident. For example, in Euclid’s geometry one axiom is ‘all right angles are equal to one another.’ From a system of axioms, a science such as planar geometry can be described. Axioms might seem too obvious to individually contemplate – but are the sine qua non of all scientific endeavour. But what is the axiom or set of axioms that defines the subject of economics? Is it even possible to have a set of axioms that defines the essential character of economics? The German word for economics ‘volkswirtschaft’ is a better starting point for this question than the word ‘economics’ itself. The former describing activity with relationship to people and the latter implying a set of ethereal household rules that don’t really exist (‘economics’ is derived from the Greek work όικος and υομος meaning ‘house’ and ‘law’ respectively.)

There have been many attempts to define the characteristic principles of economics in a similar vein to Euclidean geometry and all were utterly lacking until the mid 19th century. For it was then that the father of what was to become the ‘Austrian’ school, Carl Menger, espoused the true and simple nature of economics with just one axiom…

Value does not exist outside of the consciousness of mankind.

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Fiat Money and Independence for Scotland

Courtesy of Hugo Salinas Price @ Plata.com:

Doctor: “I told you thirty years ago that you should stop smoking and you didn’t; now you have full-blown emphysema.”

Patient: “That’s all beside the point. I want to know what to do now.”
Scotland and England got along together fine, for 150 years; now half the population of Scotland says they want a divorce. Perhaps they will get it.
For most people it is probably beside the point to discover why the relationship between Scotland and England deteriorated. But “Enquiring minds want to know.”

The Austrian economists long ago pointed out that gold money, and the strictly limited government and limited government intervention in the economy that necessarily goes with it, are sine qua non prerequisites for holding a country together and promoting peaceable international trade.

When real money was in the hands of the people for daily use, to go from one country to another made relatively little difference.

Up to the 1920’s, an Englishman – or anyone else, for that matter – could travel from England to Mexico, and work in Mexico, without any need for a passport. Money in the form of gold and banknotes redeemable at sight for gold flowed from country to country without restriction.

In the 1700’s, there was a cordial relationship between Scotland and England, notwithstanding a recent war between them. Dr. Johnson accompanied young James Boswell on a journey to visit Boswell’s dear Scotland, where Johnson was warmly welcomed. The money Johnson and Boswell employed to pay for their travels was either gold itself, or banknotes redeemable in gold.

Today a 50% or more of Scots are clamoring for independence. This is rather like one who has emphysema saying he needs immediate help to keep breathing; he is not a bit interested in being reminded that he got that way because he smoked too much. The fact is there is nothing to be done about the emphysema, and that independence for Scotland may only delay the arrival of further problems, at best. At worst, it will hasten their arrival.

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Look to ‘The Simpsons’ For Economics Lesson

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The book ‘‘Homer Economicus” zeroes in on a variety of economic fundamentals, as they have played in episodes of the show.

Courtesy of Brian Garr @ Boston Globe:

You might not have known it, but all those episodes of ‘‘The Simpsons’’ were just secret economics lessons. Turns out the yellowish, four-fingered cartoon characters have a lot of insight to offer on basic economic theory.

We know this thanks to Joshua Hall, an associate professor of economics at West Virginia University — and the brains behind the new book ‘‘Homer Economicus: The Simpsons and Economics’’ (Stanford University Press).

Hall got the idea to incorporate pop culture icons like Homer Simpson into his lessons after teaching a three-hour night business class. “It’s hard to go three hours when you’re just lecturing and eyes start glazing over,’’ he said.

Hall started using examples from ‘‘The Simpsons’’ to hammer home lessons — from urban transportation in the monorail episode to a gambling lesson involving Mr. Burns and a casino.

Hall began with the theory that episodes from the cartoon offered numerous: from the simple, such as supply and demand, to the more complex, such as the economics of immigration and health care.

‘‘Economics is about recognizing that everything has a cost and there’s tradeoffs — if you do X, you can’t do Y, we all have 24 hours in a day,’’ Hall said. ‘‘And ‘The Simpsons,’ even though it’s cartoonish, is not divorced from reality.”

Hall, editor of the book, teamed up with several other economists to produce it, with each contributing an essay on a specific economics lesson to be learned from the show.

Hall offers the following lessons from Homer Simpson and friends:

■ Individuals respond to incentives.

‘‘King-Size Homer’’ begins with Homer trying to avoid office calisthenics. He realizes if he is classified as disabled he can work at home and avoid any strenuous activity. After going through his options, he gains 61 pounds in order to be classified ‘‘hyper-obese.’’ While not everyone will respond to the same incentives as Homer, we all respond in a predictable way to changes in costs and benefits of an activity.

■ There is no such thing as a free lunch.

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The Economics Of Perpetual War

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Courtesy of Matt McCaffrey @ Mises Economics Blog:

The 100th anniversary of the beginning of World War I seems like an ideal opportunity to spread a message of peace and economic cooperation; sadly, 2014 has so far been a year of new and renewed conflict far more than one of reconciliation.

By now, talk of the horrors of war is nothing new. Everyone knows about the total destruction war brings; in fact, we’ve known for millennia. As Lew Rockwell points out, “just about everyone makes the perfunctory nod to the tragedy of war, that war is a last resort only, and that everyone sincerely regrets having to go to war”—but war continues all the same. Even classical military strategists like Sun Tzu believed war should only be used only as a last resort, and argued that military campaigns could bankrupt states and ultimately, destroy them. Art of War actually states that “no country has ever profited from protracted warfare,” and cautions generals to “fight under Heaven with the paramount aim of ‘preservation.’” Yet as far back as we have historical records, these sorts of ideas have fallen on deaf ears among governments and military organizations alike.

Economics offers many insights into war making and why it persists, but the most fundamental explanation is an institutional one. It’s tragically simple: warnings about the horrors of war go unheeded because the power to make war—as well as “justify” it in the eyes of those forced to fight and finance it—lies in the hands of the state and its business and intellectual allies. States are monopolists of organized force, and as such decide when and how to use their power on a grand scale, especially when they wish to confront other monopolists. Continue reading

Gold and Silver – The Eternal Monetary Couple

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Courtesy of Dan Popescu @ Goldbroker.com:

Roy W. Jastram, in his book, The Golden Constant, says, “When we go so far back into price history as I do here we are like the archeologist. We nurse together the evidence that has survived with as much test of its validity as is available to us. Statistics, like archeology, is an inexact science when practiced on numbers that are remote and fragmentary.”(1) This should always be kept in mind when analyzing economic data of any kind.

Just when they announced the end of gold and silver in 2000, both started shining again. It seems that it is not the death of gold and silver as money that will happen, but rather the death of fiat money. For more than 2,000 years, gold and silver have been used as money under different forms and have outlived any other form of currency (graph #1). We should not ignore also Dr. Copper. Gold and silver are called the eternal monetary couple, but I would also add copper and call it the eternal monetary trio.

Chart #1: International Reserve Currencies since 1400

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In his book, The Power of Gold, Peter L. Bernstein says, “Gold may again serve as the ultimate hedge in chaotic conditions. Its return to its traditional role as universal money is unlikely, however, unless the time should come when the dollar, the euro, and the yen have all failed to function as acceptable means of payment across international borders.”(2) He wrote the book in the late ‘90s and published it in 2000, when the US dollar was at its apogee. It seems that what he did not expect but cautioned against is happening now. The whole international monetary system is barely kept alive and is on the verge of a total collapse, followed by a reset. Now, that is not the end of the world no more than the collapse of the pound Sterling was in the ‘40s. The collapse of the US dollar standard is only the beginning of a reset, whatever the form the new system will take. Until then gold and silver will outperform.

I cannot stop looking at the next two charts and ask myself how this parabolic move of inflation can go on for much longer. This is not natural. Maybe it can go to infinity in the imaginary world of economics that economists call “nominal”, but in the real world that we actually live in, it just cannot. Infinity in mathematics is not a real number, but rather an undefined large quantity. You cannot go to infinity in the real world. What is also striking in Jastram’s gold and silver charts since 1500 is the volatility in the real price of gold and silver that was introduced when paper money replaced hard money. Parabolic moves always end badly. It would actually be more correct to plot the pound Sterling in gold and silver. This would show a parabolic collapse of the paper British pound rather than an increase in the value of gold and silver. Continue reading

University economics teaching isn’t an education: it’s a £9,000 lobotomy

Courtesy of Aditya Chakrabortty @ The Guardian

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The Post-Crash Economics Society at Manchester University has arranged an evening class on bubbles, panics and crashes. Photograph: Jon Super for the Guardian

“I don’t care who writes a nation’s laws – or crafts its treatises – if I can write its economics textbooks,” said Paul Samuelson. The Nobel prizewinner grasped that what was true of gadgets was also true for economies: he who produces the instruction manual defines how the object will be used, and to what ends.

Samuelson’s axiom held good until the collapse of Lehman Brothers, which triggered both an economic crisis and a crisis in economics. In the six years since, the reputations of those high priests of capitalism, academic economists, have taken a battering.

The Queen herself asked why hardly any of them saw the crash coming, while the Bank of England’s Andy Haldane has noted how it rendered his colleagues’ enchantingly neat models as good as useless: “The economy in crisis behaved more like slime descending a warehouse wall than Newton’s pendulum.” And this week, economics students from Kolkata to Manchester have gone on the warpath demanding radical changes in what they’re taught.

In a manifesto signed by 42 university economics associations from 19 countries, the students decry a “dramatic narrowing of the curriculum” that presents the economy “in a vacuum”. The result is that the generation next in line to run our economy, from Whitehall departments or corporate corner-offices, discuss policy without touching on “broader social impacts and moral implications of economic decisions”.

The problem is summed up by one of the manifesto’s coordinators, Faheem Rokadiya, at the University of Glasgow: “Whenever I sit an economics exam, I have to turn myself into a robot.” But he and his fellow reformers aren’t seeking to skimp on algebra, or calling for a bonfire of the works of the Chicago school. They simply object to the notion that there is one true way to do economics, especially after that apparently scientific method has been found so badly wanting.

In their battle to open up economics, Rokadiya et al have one hell of a fight on their hands, for the same reason that it has proved so hard to democratise so many aspects of the post-crash order: the forces of conservatism are just too powerful. To see how fiercely the academics fight back, take a look at the University of Manchester. Continue reading

Hitler’s Economics & Why You Should Know A Thing Or Two About Them

Courtesy of Chris Rossini, The Mises Economic blog:

Hjalmar Schacht was Hitler’s economic guy. According to Wikipedia, Schacht: ”became a supporter of Adolf Hitler and the Nazi Party, and served in Hitler’s government as President of the Reichsbank and Minister of Economics. As such, Schacht played a key role in implementing the policies attributed to Hitler.”

Now, we all know what happened to Hitler. But what about Schacht?

On June 9, 1947 Henry Hazlitt would write in Newsweek:

Nazism was defeated in war. Hjalmar Schacht, the Nazi economic wizard, is in jail.

So Hitler was dead, and his economic guy went to jail

But what about the economic ideas that the two would implement together? What happened to them?

Hazlitt continues:

But when Schacht and his surviving comrades survey the world today, they must feel consoled. Intellectually Schachtism has conquered Europe. The system of price control, wage control, profit control, interest control, exchange control, foreign-trade control, bilateral treaties, rations, priorities, allocations, quotas, with a special license required for almost every more, and with a mounting currency inflation hidden and repressed by these devices – this is Schachtism. And this is the system which nearly every country in Europe has now embraced. Continue reading