Economists are Wrong. About Everything!

The economists were wrong.

Yep, wrong.

About everything!

Ok not about everything. They are great at gathering data; if you are a manufacturer and want to examine your prices to see just where you become profitable, your should hire an economist to figure it out. They are great at sweating the small stuff.

But macroeconomics? It’s for the shit birds (my mothers favorite expression).

Let me compare economics to engineering. Both disciplines are essentially applied mathematics. Economics applies higher math to social science, engineering uses mathematics to solve practical problems in physics and chemistry (sometimes even in biology). Both even start with the same broad thinking, what I might call a back of the napkin calculation. But then economists takes what is a simple idea too far.

Here is how engineers approach a problem – let’s try global warming. The engineer may dream up several schemes, such as imagining devices placed in the atmosphere to reflect sunlight back out to space, to growing large fields of algae in the oceans (that will trap carbon, die and sink to the ocean floor) to the tweaking of existing devices so that they use less fuel and so emit less carbon (think hybrid cars). The first idea remains pure pie-in-the sky – like the old notion that someday we would have jet cars. The second one has found funding and is being tested. Turns out, its complicated. To begin with, the algae need to live long enough to die naturally, and many are eaten before they do. This one may never be practical or scalable. The third approach is already working. The hybrid car is just a lot of small improvements to existing ideas, using the energy of braking, and channeling all of the car’s excess energy to making electricity. Over time, the hybrid car (or its electric successor) will become much cheaper to build. Yes it will. Remember how expensive PCs were in 1981? My first deskjet printer cost $500 in 1993!!. So the third approach (tweaking around the edges) will slowly bear fruit.

We may also benefit from fields of algae, and maybe a completely new and better idea will emerge, but whatever it is, engineers will try their idea out in small batches first.

Economists on the other hand, go boldly into the night, converting their untried ideas into policies with not even a wink.

Sadly, many of their notions don’t pan out.

Here are just a few:

Paying corporate officers mostly in stock. This was a bright idea that emerged in the late 50s in reaction to the staid and self satisfied corporate hierarchy at the time. Directors were paid mostly in salary, so economists thought we ought to align officer compensation with that of the stockholders. This was supposed to incentivize a concern for the shareholders and so for stock value. It took a few decades, but what happened instead was that corporate execs cooked the books so that they could cash out and who gives a damn after that!

The Laffer Curve. This was the basis for Reagan’s trickle down economics. The Laffer Curve is no longer a subject for serious discussion, even as it still motivates conservative politics. Sorry, wealth didn’t and doesn’t trickle down. As we can see in the current economy, it is not the supply of capital but the demand for products that is driving this downturn – and has driven all of our downturns.

Deregulation. Deregulation is really a huge issue, and here the results have been mixed. Yes, some deregulation works, and much is inevitable as the industries change so much that the old regs don’t apply. But still, it’s a mixed bag. It always adversely impacts businesses whose cost structure was built to work with the regulations that were overturned. So the legacy airlines vanished with deregulation (it took a few years but they were all ruined). So did the old trucking industry. The issue with savings banks is a more complex one. Yes, they were hurt when deregulation forced them to compete against commercial banks and then the industry was hurt further as regulators stopped paying attention (this was a Reagan idea, to starve the regulators). A few large savings banks emerged that were terribly capitalized and collapsed.

Global Free Trade. Free trade has been an American ideal since before General Grant became president (he was in favor). But “free trade” assumes a lot that never exists in the real world. There are no economies without internal supports of some kind. Our government supports commodity farming, cotton growing and highway construction (and the consequent suburbanization). Other governments support small scale agriculture (most of Europe does) and favors cities. Much of the world has no practical rule of law, so free trade with these nations is impossible.

Free trade was supposed to let the markets find the best way to benefit American workers, but it turns out, markets don’t care about the worker. They care only for price. Three decades of global trade has reduced manufacturing to a shell of its former self. It was to manufacturing where Americans once turned for jobs. So eliminate making things, and Americans are left with a service economy. (Flipping burgers!) Only the recent rise in shipping costs has begun to stem the tide. Yet politicians continue to propose more free trade pacts. Sorry, this experiment has run long enough.

Managing by the numbers. Ok, this is tricky. But starting with think tanks like Rand in the 50s, we have been oversold with the value of numbers. The better question is which numbers? And what tale do the numbers tell. By the time we learn what the lesson was, we have often lost the game.

Recently, those who study manufacturing have learned that it was not a good idea to allow the less profitable parts of manufacturing cease, and focus only on the more profitable parts. The object lesson came from steel making. The least profitable part of old fashioned steel making was in making rebar. Well we ceded this to Asia and over time ceded each facet of steel making as the Asians got better and better. Then we ceded steel making almost entirely. There are a number of situations similar to this. The numbers told us it was ok. It wasn’t. By the way, a secondary impact of getting rid the less profitable parts is that we lose the place for less skilled workers – so we lose the ability to make them better skilled. And we lose the subcontractors and side businesses.

Why are economists so wrong? Well they can’t really test most ideas, and then there is the excitement of a new idea. They think its brilliant, and really want to see it put into action.

And then there is the problem that economists are not responsible for execution anyway. Engineers are. So when the World Trade Center collapsed, the man who designed it was mortified to learn that he had not build a robust enough structure. But when the global economy collapsed in 2008, the economists shrugged.

Oh, I used engineer somewhat loosely - some of those working in applied biology or chemistry are not engineers, but the approach is the same.