In which I have a laugh at economists: whistling at the abyss
I never studied economics. Don’t pretend to understand it. Don’t want to understand it any more than I want to understand Voodoo theology or radical feminism: it seems to me a pernicious form of anti-knowledge. Some of it makes a little bit of sense (maybe voodoo theology does too: dunno), but looking at it like a visitor from another planet (MFM Osborne or Joe McCauley are reasonable approximations, being from planet Physics), it doesn’t look much different from schools of medieval medicine, punctuated by occasional linear regression models. There aren’t generally falsifiable models, and when there are, people seem awfully reluctant to test them. Economic schools seem to grow up around charismatic prophet types, and the arguments for their validity seemed to be along the lines of “Rabbi X said Y, and lo, he was correct.” I think everyone on the internet has seen the Hayek vs Keynes rap, which is about as good an introduction as one could hope for to this sort of thing. I think the intellectual content of a posing rap battle is about as much as one can hope for in this sort of argument as well; ultimately, it’s just a dong wagging contest.
Hayek’s views on economics are, I think (and someone please correct me if this is a misapprehension) closer to the conventional thinking in the 1920s. Keynes views seem to be something approaching the conventional wisdom in the 21st century. Austrian views are “conservative” and Keynes is “liberal” (in the American sense anyhow). This is a broad generalization; most modern Keynesians have some Austrian ideas, and vice-versa, but ultimately, the debate between these guys boils down conflict between these two ideas:
- Expansion of debt is inevitably followed by economic recession (Austrian Business Cycle Theory).
- Economic recession is ameliorated by deficit spending (Keynesian idea).
The historical battleground they fight their idea on is the Great Depression and WW-2; the events which formed the modern world. The modern Keynesian view is that “Austrian” ideas made the great depression worse. The government, according to them, should have engaged in lots of deficit spending, and that would have magically made things all better. After all, things only got better after WW-2, when we engaged in lots of deficit spending, right? I’m certain the Keynesians have all manner of regression models with which to “prove” this idea, but ultimately, they’re only using one set of data points, and only a couple of variables. This school of thought seems to have won the modern day; we’re at WW-2 levels of deficit spending now. Of course, we’re not spending the money on the same things at all. It’s not clear to me how the Austrians account for the financial success of the United States (and Japan and Germany and the Soviet Union) in the post WW-2 era, but it seems likely to be an equally specious shaggy dog story.
I don’t know if any school of thought argues that the war itself had something to do with things, but I’m going to argue exactly that; call it the Heraclitus school of economics. Seems like an obvious thing to me. I can’t “prove” it using regression models, or by being a college professor or whatever nebulous vril economists use to “prove” their points, but it seems as ultimately convincing as anything else. My toy model does something few economic ideas since Pareto has done: it takes into account the fact that we’re talking about large groups of actual human beings, rather than utility optimizing economic robots.
To reiterate: in Krugmanistan, the prevailing idea seems to be that printing a lot more money will magically make things all better, because dropping lots of bombs on Germany and Japan seemed to be good for the American economy in WW-2. To a Keynesian economist, it was the magic of the printing press. Not the fact that the US developed new technologies, invested in vast new industrial infrastructure, mobilized its entire population, brainwashed its civilians into working double shifts for small amounts of money (and buying lots of government debt), brainwashed its military aged men into fighting a war in distant countries, displaced vast segments of the population to work in factories; hell, we even put women to work in factories. All those other countries did the same thing. Car makers and other manufacturers built giant ships, aircraft which couldn’t have been built before, new kinds of vehicles, tanks, atomic bombs, jets; radio makers made huge strides in electronics, computers and other electronic techologies: and all these companies retained the ability to produce these new technologies after the war was over. Entirely new forms of economic output were possible after the war which weren’t possible before. To name five obvious ones: Airlines, Computers, Atomic power, Highway travel, Rocketry. These new technologies and manufacturing capabilities became new industries which provided people with jobs and further economic output creating things which were figments of people’s imaginations a decade previous. The United States (and all those other countries) made a hail Mary investment in their infrastructure, and transformed their people into fanatical worker bees. The amateur businessman could look at this as an investment in the country; an investment in the employees and the infrastructure. By accident, it was a reasonably intelligent investment for future growth. And after that, the economy did a lot better. Economists want you to believe it had something to do with printing money or business cycles.
I don’t buy the arguments of economists. I think the reason things changed for the better after WW-2 is people were transformed into something they weren’t before, and the national infrastructure was transformed into something a lot more capable than it was before. I do think availability of money is important (duh), and deflation is generally worse than inflation, but if you asked me why WW-2 was followed by a period of prosperity in the US, the above is my reason: nothing to do the magical printing of money or lack therof. Single factor regression models rarely work on systems more complicated than a couple of diodes: why should I be impressed by spurious regression on ancient data?
Another thing economists don’t seem to notice much: the nature of the population. Taking only one variable: mean age seems important to me. Old people don’t work or innovate as much as young people. Old people also have more money than young people, and they do things like invest this money in hopes of making rent on it. Basically, finance is the loaning of old people money to young people, so young people can do useful things with the money, like start businesses. Populations in all industrialized countries are getting older. This means there is a surplus of old people money seeking young people to invest in. This is why interest rates are low, despite all the printing of money going on everywhere. If there were more young people, we’d be in a completely different pickle. This single fact pretty much makes rubbish of any statistical model based on historical data: we’ve reached a fundamental change point which is unprecedented in economic history. There are no historical regimes in which there were lots of old people money chasing young people to invest in. The idea of fitting an economic model to something in the 1930s and expect it to be relevant today …. I might as well trade a model based on 1930s IBM stock prices.
Me? I’m not an economist, or a prophet. I work for a living. I don’t have any answers, and I don’t have any bright ideas as to how to fix the mess we’re in. I’m pretty sure nobody else does either; certainly no politicians alive today are saying anything remotely sensible -it’s all magical thinking, and genuflections before long dead sacred idols. Since I’m of a scientific bent, I wouldn’t mind running some experiments. It seems to me the country is large enough this sort of thing is possible. Hopefully we don’t have one forced on us.