September 8, 2021

Economics So Far #1

‘Random thoughts’ are unedited, rough attempts I make to put together thoughts on topics I’ve been thinking about which I then publish here. The purpose is to raise the stakes by having an online, public record of the evolution of my thinking. 

Some thoughts on what I’ve learned so far studying economics.

A proper approach to economics requires one to be able to achieve two fundamental things:
(1) Identifying not just short-term, immediate consequences of a policy, but also long-range consequences;
(2) Identifying not just a given policy’s impact on a party that is immediately affected, but all parties;

Doing both of these requires long, difficult, somewhat boring chains of reasoning that can be difficult to follow.

A bad economist will often present half-truths. He has an easier time convincing people that a certain policy is good because he discusses what can be immediately perceived by an average person. A good economist, identifying not just immediate consequences, but long-range consequences, supplements the half-truth of the bad economist with the whole truth. But to grasp the whole truth requires abstract reasoning of a kind many seem unable to perform or trust. And so it is often the case that bad economists are more successful in convincing the masses of the policies that they advocate.

There is no economic policy which advocates immediate self-destruction—the only way to do that would be to advocate for a consistently bad policy. The reason why no economist is able to advocate for a totally self-destructive policy is that the effects of that policy are immediately seen and the average person would not stand for it. However, this is similar in other fields, e.g., philosophy. The bad does not depend on being consistently bad, it simply needs to be injected into a policy in an inconsistent way and the damage to wealth will be done. As the flower is in the seed, the hen in the egg, so the destructive consequences of a bad policy are built into the bad reasoning of the policy. 

Consider for example advocates of ‘make work’ schemes whose explicit goal is to create as much employment is possible and who fear the reduction in employment caused by progress in labor saving equipment. If they held their explicit goal of creating employment with logical consistency then all forms of labor saving technology would be bad—and the good could be achieved by abolishing all technology and getting more men into work, e.g., abolishing trains and having thousands of men carry the goods on their back. 

What I’ve understood so far is that economics might tell you that a policy will have negative, destructive consequences, but it will not necessarily be able to do so at a level of precision that allows you to identify who will be adversely affected by the policy. It can make broad, low resolution, long-range predictions, but not in a manner specific enough for an individual to take advantage of this knowledge. 

The proper approach to economics mentioned earlier captures both what is required to properly engage in economic analysis, and what is at root the cause of the majority of economic fallacies. And the root of this failure is the tendency to think in ‘frozen’ abstractions, e.g., to think of ‘society’ while forgetting that society refers to the collection of individuals that make it up. To avoid this error it is useful then to take the individual as the unit of economic reasoning, i.e., to take man qua man, with all the things that are true of all men at all times, as the basis for your thoughts. For example, if I want to consider whether war is good for the economy because it ‘creates demand’, I should first consider what war means to an individual person—the destruction of his shop, house, and his other material goods. 

Another important aspect of good economic reasoning requires one to get under the terms and try to identify what they refer to. E.g., if I’m thinking about credit and someone says ‘the bank won’t give him credit’, I should consider whether credit is something that’s given or recognized—is credit something someone already has, e.g., marketable assets of greater cash value than a loan, and then simply requires recognition or is it some ‘frozen’ abstraction that can be given or taken away without reference to whatever ‘credit’ refers to?

Posted in Thoughts