Posted on by Art Powell

What is wrong with economics? Through the years a lot of people, including the current group of students have recognized there are problems. This blogger figures there are two types of problems – problems with human nature and problems within economic theory and understanding.

Most of us most of the time think and act in our own short-term interests, Some people won’t listen to things that contradict their interests. This can be a problem for economists as their paychecks often depend upon telling business people and politicians what they want to hear. It is likely some of the students demanding changes in the way economic is taught will have to come to terms with this.

The other human nature problem which interferes with economics is that some people like to exploit others – sometimes deliberately and sometimes because they believe it is their right. Using money as a tool to facilitate the exchange of goods and services allows us to have economic relationships with strangers from many parts of the world.. It also makes it easier for some people to exploit others. I am currently reading The Big Short by Michael Lewis in which he details the people who foresaw the subprime mortgage bust and profited from it. It’s sort of interesting to see the exploiters being conned although I believe that for relationships to be satisfactory there needs to be a more or less equal two-way exchange. Another interesting thing is that most of the players on either side came out of it rich.

Neither of these human nature problems is likely to be resolved by changing the economic curriculum or the way the subject is taught.

It may be that for economists to tell their employers what they want to hear the economists have to be blind to some realities. Here are four examples.

One of the greatest of economic myths is that growth can continue forever. Economists occasionally talk about scarce resources then assume that there never will be scarcity. Yes, we still have lots of mineral and energy resources. However we have used up the most easily accessible of them. What’s left is difficult and takes lots of energy to extract. This is a diversion of energy from other uses. From history we know that all previous civilizations have collapsed. Some people talk as if we will be the exception.

The second unseen reality relates to free market competition. The problem with competition is that the more competition the smaller the profits. In large parts of our economy competition is restricted by government legislation and regulation. Licenses, patents, copyright, tariffs all allow firms to make profits they wouldn’t get with full competition. It also means consumers pay more than they would otherwise. When we talk about a market economy we ignore how governments work to restrict competition.

Sometimes economists distinguish between the real economy and the financial economy. It’s an important distinction and we lose some understanding when we forget it as we often do. My favorite example is with pensions. Most people plan their pensions in money terms. But there are three things that can happen to one’s pension savings: inflation, failure of the firms in which savings have been invested and a government mandated haircut. For most of us our standard of living in retirement will depend upon the ratio of goods and services produced to the number of people making demands on those goods and services. If we experience a major drop in production, it will not matter how much pension money one has. It might be prudent to plan for retirement at least partially in terms of the physical economy. How about a large garden?

The complexities of money creation and the deep emotions associated with money make it the most misunderstood and problematic aspect of economics. A number of posts on this weblog have dealt with the problems of money. I believe that in the fractional reserve method of creating money economists have ignored the fact that interest is charged on the money created. This feature makes the fractional reserve money into a Ponzi scheme. This explains the regular financial crises our economy has experienced. If more people understood how the banking system creates money and the problems, we would probably be demanding changes which would take away from the profits and powers of bankers. How many economists would even dare to think that?

There appear to be lots of problems within economics. How we exchange goods and services and the relationships involved in these transactions are an important part of our lives. It may be that some people can benefit if most of us don’t see these relationships clearly. However, I think we would all be happier if we did.

If you liked this post your are invited to comment, press the like button and/or click one of the share buttons. If you disagree you are invited to say why in a comment. While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

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Filed under: Economics | Tagged: economic growth, economic theory, Economics, financial economy, free market competition, human nature, money, money creation, real economy, students |