[Futurework] More crap again, or Woods and Trees

[Ed Weick]

Keith Hudson's stuff in black, mine in maroon. At 17:14 18/12/02 -0800, you wrote: >As I keep saying. Neither Republicans, nor Democrats, have a clue why the >economy is in recession, nor why it was booming in the first place. Exactly. And at the risk of this message being called "crap" again, I would agree with you wholeheartedly. The "economists" to day, and most "economists" of pretty well all the past century have little idea either. I have a great respect for the intellectual competence of the so-called "economists" of today. Most of those we hear about are brilliant people -- there's no doubt about that. I have two bookshelves of standard texts by Baumol, Binder, Mankiw, Dornbusch, Samuelson, Nordhaus and several other less well known ones. Most of these texts are superbly written with a precision of language which is all too rare these days. I have been dipping into them now for several years off and on (ever since I joined FW list some four/five years ago) -- considerably more often than the average university student of economics has ever done I'm sure. But if you asked any of the above text-book writers, none of them -- as you say above -- would be able to offer you a good strategy for America at the present time. Nor is it likely that any two of them would agree with each other on more than one or two simple issues. Nor is it possible that any two of them could have any sort of straightforward argument based on agreed postulates -- as Ricardo and Malthus used to, or as many scientists do today over their hypotheses. (I suppose the debate between the Friedmanites and the Keynesians in the last century was the nearest thing we had but even they had different definitions of the terms they used.) Keith, there are several possible explanations for disagreement, or perhaps lack of agreement, among economists. One is that the phenomena they are studying are not straightforward. It would indeed be very nice if one could establish universally applicable first principles concerning human behaviour in complex situations, but I don’t think one really can. The Classicist, imitating the physical scientist of their day, tried to do that and what they formulated still remains valid as the simplest possible way of explaining behaviour in a rational and predictable universe, but given that so much of the universe is neither simple, rational nor predictable, what they formulated is probably of pretty limited use and may not have explained things very well even in their day. One also has to recognize that economic concepts are ideologically based. Economists disagree because they come at things from different perspectives on how things "ought" to be done. I don’t know if you’ve had a look at Stiglitz’s "Globalization and its Discontents", but he strongly suggests that the "Washington Consensus" approach taken by the World Bank and the IMF in bailing countries out has probably done more harm than good. Of course, World Bank and IMF economists strongly argue the opposite. Jeffrey Sachs came under discussion on this list recently. The "shock therapy" that he recommended for Russia at the time turned out to be a disaster not because it was somehow wrong on "first principles" but because it was applied in ignorance of the what the Russian state was really like at the time. I talked with Russian economists who were very skeptical of the Sachs approach at the time, but were not given any attention. The reason is that just as governments (that is, civil servants, who are the real bosses) have dug themselves deeper and deeper into the ordinary matters of our everyday lives -- supposedly for our benefit, but actually for the sake of their status and careers -- in the course of this century, so have economists felt they had to find some rhyme or reason that could also include government policy and spending *as though* these were basic parts of the subject. In other words, economists have been forced by recent circumstances to look at all sorts of relatively unimportant expenditure pathways (albeit sizeable and which can do damage!) within nations which are really not fundamental to human economic activities. (e.g. The cost of transfer payments ends up at twice the size of the actual receipts.) They are cultural artefacts which will tend to disappear when the era of easy prosperity based on oil and gas passes away and civil servants start to lose all contact with real affairs -- which is what they always do sooner or later because they make everything too complex for even themselves to handle (e.g. the Chinese empire on at least two occasions, the Ottoman Empire, the British Empire, most recently the USSR, etc, etc). (Increasingly, the UK Inland Revenue department is unable to interpret its own tax legislation because it's become too complex.) (And the more complex tax legislation becomes, the more loopholes are made which the rich can take advantage of.) Whether you like it or not, government is a major actor in the modern economy. Its revenues and expenditures are huge, and you can’t somehow pretend that the only and proper focus of the economist is the private market. However, I would agree that the question of how much and what kinds of things government should do is very important. But I would suggest that it’s and ideological question, not an economic one. One reason why government does the variety of things it does is because people want it to do them and the market has not been able to provide them effectively. In things like health and education, a non-public user-pay system would deprive ever so many people and their children of services which are not only important to the individual, but to the nation as a whole. I read recently that some thirty to forty million Americans do not have health insurance. To me, as a Canadian who has had universal coverage for some forty years, this seems utterly barbaric. Given that government provides services because people expect it to, there are questions of how best to provide these services. Here the economist, concerned about the efficient use of resources, can be of help, provided that the politicians and ideologues pay attention. In other words, for about a century now, professional "economists" haven't been able to see the wood for the trees. I’ve often felt it was the other way around. Some economists I’ve worked with have been so focused on the detail of the wood that they had little idea that trees even existed. And, of course, because the economists of today rely on statistics mainly collected by governments (or at least measured in the variable-value tokens we call money), they are actually missing out on the relevance and nature of what I reckon to be about 50-60% of the world's economic activities. Within the developed nations, economists are missing out on between 15-40% of the economic activities within national economies (that is, the so-called 'grey' or 'black' economies), and probably another 10-20% of world trade and investment due to counterfeit cash and the drugs mafia. Also, within the poorer half of the undeveloped world, almost all the economic activities are unmeasured and unmeasurable. Add all this up as a sort of mental average and I arrive at about 50-60% as mentioned above. You may be right. Perhaps we should have our motor cycle gangs file monthly reports on their drug activities to Statistics Canada. I do think, however, that 50% to 60% may be a little high for Canada, though it might be indicative of the Russian experience in the immediate post-Communist era. And then, of course, there's an immense amount of the world's capital which is totally unused and largely unmeasured and a great deal of which could be used for constructive economic activities if liberated and entitled. I refer, of course, to land. Your guru on this subject is George, my guru is Hernando de Soto whose recent book "The Mystery of Capital" is already beginning to change economic perceptions in a major way. Hernando de Soto, while not a formal economist, but an ex-industrialist, will probably turn out to be the most important economist of the last century. My grandchildren will be able to have a more balanced view of his contribution. Professional economists are missing, let us say, half the data they really need to make their subject into a genuine science (which it will be one day, I'm sure) but, during the course of this century, they have shut their minds to several extremely important features of their subject which, sooner or later, is going to impact on them with the momentum of a modern American armoured tank. Pretty well all the text book economists I have read have patently no idea about the relative productivities (essentially, thermodynamics) of the major economic systems which man has passed through (and of the possible new one which he is shortly going to pass into!). Text book economists seem to have no appreciation whatsoever of the fantastic increase in productivity which took place when man changed from hunter-gathering to agriculture and pastoralism. They also have no appreciation whatsoever of the considerable increase in productivity which took place when we turned to industrialisation based on coal, oil and gas. It is no wonder therefore that economists haven't the faintest idea what might occur in 20/30 years' time as the price of oil and gas starts going through the roof and, in effect, starts to becomes unavailable to most of the world. They are not to be blamed for not knowing what energy technology might, or might not, take over. Nobody knows. But they are most certainly to be blamed for blundering on blindly at the present time as though our present sorts of governments are divinely sanctified and as though nature is somehow going to continue to provide man with an abundance of energy as absurdly cheap as oil and gas -- as it has been in the course of the last century. You may have a point. Many economists do focus on the wood and not even the tree let alone the forest. I have known many hunters-gatherers in the Canadian North and have exhorted them to give up their unproductive ways and become productive in industry (bypassing agriculture because it’s not easy to do in a cold climate). They have replied that they like their lifestyle, productivity be damned! Eventually, though, when we’ve fill the North with pipelines, mines and oil and gas fields, I’m sure they’ll come around. Economists, generally, have no idea of the essential thermodynamics that are involved in the business of survival and procreation -- which is what their subject is truly all about! In the course of the last century, subjects such as physics, anthropology, biology, genetics and so on have been giving us increasing insights. If only student economists would learn the basics of these subjects during their university training and not just the differential calculus. The sad thing is that academic and textbook economists of the past century have spurned the help that is available. They have confined themselves to what can be called the "palace politics" of their subject and not the expanding horizons of the open plains. I agree with you, but only partly. I don’t think economics will ever be a science in the same sense as physics or chemistry. It’s about human behaviour, a very complex and uncertain thing, not easily subject to experimentation. I’ve often felt that it is very important to learn textbook economics, but it is even more important to get out into the field and find out how people actually manage their lives, whatever their circumstances. Sorry about the "crap", but you did get me steamed.  However, I suggest that had you done economics rather than chemistry, you would have been very good. Regards, Ed Ed Weick 577 Melbourne Ave. Ottawa, ON, K2A 1W7 Canada Phone (613) 728 4630 Fax     (613)  728 9382