Of Moons, Stars, and Economists

Imagine that you are the captain of a ship in ancient times trying to make it to a faraway destination. You listen to your navigators, and with their primitive navigating tools, they assure you that they are correct and will lead you to the destination. Instead of arriving at the destination, you find yourself lost. Will you listen to your navigators again on the next journey?

Imagine that you are the king of an ancient city. Your astrologers assure you that they have read the omens and the gods are with you and that your city will surely be victorious in a coming battle. Instead of winning the battle, your army is left in shambles, your city is burning, your citizens are upset & starving, and your damaged city is put on the defensive. Will you listen to the astrologers when the next battle comes?

This is essentially the problem with economics today. Not only are some economists acting like navigators and astrologers in this time period, but they are pretty much acting as doctors judging the health of the US economy, attempting to diagnose problems, and recommending remedies. The problem is that many economists have been wrong, and governments and individuals are now paying a substantial price for their errors. Going along with the astrologer analogy, it is as if the astrologers did not see the comet coming, did not know when the comet hit, and did not know what it meant when it hit. It is important to keep in mind that economics is a relatively young science.

Economist John Maynard Keynes once wrote, "Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." Quite ironically, as of recent that "defunct economist" has been John Maynard Keynes himself. Unfortunately, contrary to Gov. Perry's claims at the recent Republican presidential debate, Keynesianism is not dead. Rather, Keynesianism appears to be alive and well as the official economic philosophy of Federal Reserve Chairman Ben Bernanke and Pres. Obama.

I think it is time we begin taking another look at economics as a discipline and the direction of economic theory going forward. In the words of economist Donald Marron: "The science of economics is thus still a work in progress." Economist Matthew Bishop wrote in the book "Essential Economics" that "[f]or economics, these truly are the best of times and the worst of times." Bishop continued, "The financial crisis that began in the summer of 2007 and the economic slowdown and recession that followed it shook confidence in what had become widely held economic truths." Bishop then discussed that much of the conventional wisdom regarding economics has been shattered. Thus, economics as a scientific discipline "has been forced to be rethought and reinvented".

My friends, let the rethinking and reinvention begin. It is time for an overhaul in economic thought.  

The Washington Post recently presented an Associated Press article that included the comments of Douglas Holtz-Eakin, a former director of the Congressional Budget Office and top economic adviser to 2008 Republican presidential nominee Sen. John McCain. According to the article, Holtz-Eakin claims that "economists have yet to satisfactorily explain business cycles, predict the duration of recessions, or explain why some nations' economies grow while others do not". I ask you, if these economists have not been able to satisfactorily explain these issues, then why do we continue to take their advice on these issues? Someone please tell me why.

Responding to the Washington Post article, conservative commentator Rush Limbaugh on Sept. 7 duly inquired, "Who the hell are we talking about? Economists? Are these the ones that are always surprised at every bit of economic new every week? Who the hell are these economists? Who do they think they are?" Indeed. And why do our public officials continue to listen to them?

The answer to that question is simple: Keynesianism works to the advantage of governments and central bankers. Keynesianism provides justifications for governments and central bankers to tinker with the economy and smooth out perceived problems with capitalism. The main problem though comes back to the control of the currency. Control of the value of a currency means power, and although maintaining and expanding power may be in the interest of government, it is not the proper role of government. The proper role of government is to ensure the rights of life, liberty, and property and to protect the validity of contracts.

Were the government and the central bank to take a step back to allow the free market to determine values, set prices, and adjust for market distortions & disruptions (whether they be artificial or natural), I believe that there is a good chance that in time the US economy would create jobs, create wealth, and promote prosperity for all. Unfortunately, taking a step back is not something that is so appealing for governments and central banks; their pertinent aim is control over the citizens. This aim does not always coincide with the interests of citizens attempting to simply live and survive in the world.

To say the least, it is time that governments, academians, and everyday citizens begin rethinking economics. Economics is not as arcane and clandestine as it seems. Professionals have made substantial amounts of money in making basic economics to be more enigmatic than it really is. Aside from the enigmatic terminology involved with academic economics, the basics of economic thought are relatively simple. As economists like Tim Harford and Steven Levitt have explained in a number of books, economics is something for the everyday individual; economics is not just something for professors, government officials, and bankers. Economics is something that everyone can understand and work with.

The word "economics" itself comes from the Ancient Greek "oikonomia" to mean "rules of the household". As such, perhaps one who has worked hard to balance a family budget or run a business while trying to raise a family knows more about practical economics than some 18-year-old college student who took a course on economics in college. In light of the current financial crisis, as much as economics may seem like astrology, there is yet hope for economics going forward. As Bishop suggests, we do have to rethink and reinvent economics, and perhaps academia is going to have to take a backseat while our society and culture reanalyze and redefine the science of economics. I am not sure if this means collapsing economics and political science back into one discipline called "political economy", but that could be a start. Given the prospect of a higher education bubble and an accompanying fall in academia, university administrators and college directors may want economics and political science departments to combine to form one discipline known as "political economy", the previous name for the academic discipline of economics.

It is significant to note that not all economists completely missed the coming of the financial crisis. Economic thinkers like Peter Schiff and Nouriel Roubini foretold of economic doom facing the globe early on, but they were dismissed by many mainstream economists and financial analysts. Alas, the stone which the builders rejected has become the cornerstone. Okay, so maybe Schiff and Roubini are not the cornerstones of economic theory in this time period, but our analysis of what we got wrong as opposed to those who foresaw the crisis will be able to help us going forward. Perhaps in time the Austrian School will form a cornerstone to a new economics that is to dawn upon the world. Looking forward, perhaps we can listen a bit more attentively to Austrian School thinkers like Peter Schiff and Ron Paul.

I think in the future it will do professional economists well to give the ideas of the Austrian School another look. This does not mean simply blindly adhering to Austrian School ideas, but using ideas of the Austrian School in conjunction with other future ideas yet to be discussed in further analyzing economic phenomena.  

In light of the current global financial crisis, the world needs new perspectives on economics. As astronomy displaced astrology and as chemistry displaced alchemy, perhaps there is a new scientific identity on the horizon for what we know today as economics. Given that what we know about economics today will have to be redefined, reinvented, and reworked, this would be for the best. I understand that economists like Paul Krugman may say that they have had the answers all along and it's just that the government has not been listening to them, but that doesn't get us anywhere; that doesn't help us too much. The simple fact is that economics as an academic discipline is at a crossroads and needs to be reworked in light of the sore facts of reality. Whether we appreciate it now or will only appreciate it in the future, Keynesian policies are not working in the way we hoped they would work. We need new perspectives on economics; I think concepts like Realoekonomie (as the economic counterpart to Realpolitik; analyzing economics in terms of the use of brute force in the struggle for survival towards perpetuation of the species) and looking into psychological, neurological, or biological aspects of human behavior is a good start. Looking into and focusing on economic history would also be worthwhile; Roubini and Mihm's "Crisis Economics" is an interesting book on economic history. I also believe that it would do mainstream economists and government officials some good to take another look at the Austrian School of economics.

Perhaps down the road when this global recession is simply a distant memory for the history books, the human study of economics will have improved and life on this planet will be better for it. Maybe in the future economists will get smarter and be able to free individuals from being "the slaves of defunct economists" that Keynes discussed. I think that is something we all can look forward to -- if not for us personally, then at least for the generations to come.

"Why'd you cut holes in the face of the moon base?
Don't you know about the temperature change
In the cold black shadow?
Are you mad at your walls
Or hoping that an unknown force can repair things for you?
Pardon all the time that you've thrown into your pale grey garden?
If your ship will never come you gotta move along."
~MGMT, from "Of Birds, Moons, and Monsters"