Economic ideologies

There is common thread across modern economics. Not something that is useful. It is the fact that no one really seems to know what the hell is going on. Yes there are some people who are seen as “prophets”, depending on your ideology they may be anyone from Mr Buffet to Mr Kaiser.

But economics is not a science no matter how much it tries to be. It is a fascinating and somewhat frustrated mix of mathematics, psychology, culture, astrophysics, chaos theory and random number generation.

Maybe one day, somewhat like the weather, we will have the computational processing power to be able to build models of this system, but until we do we are all just weathermen watching the clouds and claiming we can predict rain.

For me personally one of the most interesting things about economics, like any complex system where the basis of truth is misunderstood and/or unknown are the ideologies that grow around it. Somewhat like religion we have people who have very strong beliefs about how the system supposedly works. Yet the reality is that no one really understands everything. This is one of the major reasons I was attracted to this field.

For example the ideological differences between the Austrian school and Modern Monetary theorists is in some regards a parallel to a mindset struggle between Christian and Islamic schools of religious thought.  Sure that maybe a crass and somewhat basic comparison, but at the root of both is an ideology, not something based in demonstrably repeatable evidence. The complexity of macroeconomics makes this impossible because there is no way to tell that whatever you did last time will definitely work again this time.

So with that in mind macroeconomics is in my opinion a fascinating and wonderful area of study, because even after hundreds, perhaps thousand of years there is no grand-unifying theory. Given the every accelerating world of computational power it is unlikely, at least in my lifetime that anyone is going to get there.

So as a scholar of macroeconomics one of the first lessons to learn is that everyone has their ideologies. In many cases they wear them on their sleeves (think Bill Mitchell or Mish Shedlock) in other cases you can’t be too sure. But I don’t have to think so widely to consider this difference in mindset. In fact while we are in the early stages of setting up MacroBusiness myself and other founding members had some very interesting discussions along these very lines. I will leave it to our readers to work out where each of us sits in the ideological spectrum.

There is also another, perhaps more important dimension to these ideologies which I understand to be socio-political in nature. In my experience these ideologies are linked to what people believe to be the purpose of the economy. There are those that believe that the economy is there for their own personal gain, and others who believe it is a social asset to be shared for the good of all.

I believe myself to be somewhere in between. I would happily be a billionaire but I don’t want my neighbours kids to starve to death while I get there. This may seem to be a somewhat trivial observation but it is actually something that defines many of the global economic organisations that set economic policy for millions of the world’s citizens.

The economic beliefs of the people who work for these organisations is paramount in understanding what solutions they will attempt to solve economic problems, and why in the face of mounting evidence to the contrary they continue to offer the same solutions to economic problems and argue that they will be successful.

This why I consider this morning’s somewhat revolutionary statement (well at least for the MSM anyway ) by Jessica Irvine to be so interesting.

But Swan’s and Rudd’s response to the financial crisis emerges as one of the finest practical executions of Keynes’s advocacy of counter-cyclical government spending. It demonstrated, for one of the first times, that, executed properly, Keynes’s prescriptions work – they can save an economy from recession.

I could argue this fact, because the government stimulated credit into non-productive “investments” and not productivity returning investments. Instead of a “cash splash” I would much prefer the government has a priorities list of nation building infrastructure that could be developed at times of low capacity constraint. But that does not change the fact there is very good evidence that Australian and Chinese stimulus did avert an economic downturn in this country contrary to the usual anti-government spending rhetoric you usually read in the Australian media.

A much more worrying place where you see economic ideology setting policy is on the world stage. Have you ever seen the IMF tell a nation that the best course forward would be for the government to employee thousands of people and concentrate on building a new piece of national infrastructure to lower production barriers? Until March this year when they told Panama to spend more on education I had never witnessed such an event. There is probably a good reason for that, but it isn’t based in evidential economics, it is based on a dogma that economic rationalisation and free markets provide the most efficient economies, and therefore this is the only course of action that will lead to success.

Every now and then the IMF actually does some research on the things they have been suggesting and come to the stunning realisation that they are not always correct.  They did this with Capital Controls (h/t billy blog) in 2010 after they had previously warned Iceland about using them just 1 year earlier.

In fact the IMF warned Iceland about pretty much everything they did.

Iceland’s central bank lowered the benchmark interest rate by a percentage point, defying the International Monetary Fund, as the economy slumps into its worst recession in 60 years.

The repo rate was cut to 12 percent from 13 percent, Reykjavik-based Sedlabanki said on its Web site today. The rate cut is the fourth since the island received a $5.1 billion IMF- led bailout in November.

Policy makers bowed to pressure from labor unions and businesses for lower rates to soften a recession that the bank estimates will culminate in an economic contraction of 11 percent this year. IMF Mission head to Iceland, Mark Flanagan, last week advised against a cut, arguing a planned gradual easing of capital controls requires higher krona returns.

“The concern of the IMF is that the lowering of interest rates will have an impact on inflation, which will then maintain a weak krona,” said Ingolfur Bender, head of economic research at Islandsbanki hf, the state-controlled unit of failed Glitnir Bank hf. “However, there are hardly any domestic factors that can fuel inflation.”

Interestingly it was later realised that the deflated Krona was something that has turned the country around. Here are some charts for Iceland economy over the last few years.

It would seem from those charts that the fact the Iceland ignored the IMF about economic settings after the banking collapse of 2008 was warranted, and in fact the IMF’s approach for the Icelandic economy may have been a mistake. If we compare those charts to Greece which is a country with little choice but take its austerity medicine as it is trapped in Euro monetary policy you can see a very different outcome.

Economic ideologies in any form can be dangerous and it is important to recognise that people have them, even those who claim to be experts.

59 Responses to “ “Economic ideologies”

  1. Deus Forex Machina says:

    Bravo DE…a brilliant piece.

  2. Erges says:

    Yes, yes, yes.

  3. JMD says:

    “Interestingly it was later realised that the deflated Krona was something that has turned the country around.”

    Indeed “Economic ideologies in any form can be dangerous”, especially the one that purports devaluation leading to prosperity.

    • Care to expand on that JMD?

      • JMD says:

        You are claiming that the devaluation of the Icelandic Krona (by some 50% against the Euro), has “turned the country around”.

        I call bulls**t on that & I don’t care what graphs you put up to justify the claim.

        Devaluation never causes prosperity but rather penury. Those Icelanders with their life savings in Krona have been robbed blind. Since the Krona is no doubt legal tender in Iceland, that would be just about everyone.

      • JMD this civil discussion.

        I asked your opinion because I was interested in it to understand the context around your statement.

        Your statement “I call bulls**t on that & I don’t care what graphs you put up to justify the claim” doesn’t make much sense to me, but you are entitled to your opinions about their validaty.

        Now to the point..

        Have you considered what will happen if that turn around in the economy continues and the value of Krona re-rises as the economy recovers?

        Do you have an alternative course of action that you think iceland should take, that would provide a good economic outcome. ?

      • Dennis says:

        Obviously JMD must be one of these Gold to the moon type of fellows who cant wait to go back to the glorious period of massive deflation to maintain currency value.
        What is strange about these guys and their claim of the ‘glorious 3000 year Reich’ of gold is that they ignore real events occurring in places like Greece or the Baltics or Portugal where there is a de facto ‘gold standard.’

        If we want to rescue his mad comments from complete irrelevance I would suggest this argument “Debasement of currency only works when others maintain their own currencies. A small, trade dependent state may be able to accomplish such a goal but if the larger currency units start engaging in mass debasement we will see a race to the bottom AND a growth in trade tariffs that will generate a return to autarky for all.

      • Deus Forex Machina says:

        JMD that would be true only if Iceland had agreed to make whole its creditors rather than what the citizens have now done to the British and Dutch Governments which is repudiated its debts. the currencies devalutaion was a result of this and as a result Icelandic interest rates went sharply higher.
        But the key is iceland is now out from under its debt burden in a way that Greece, Ireland now Portugal and soon Spain will be. You want to see penury just look at the citizens of these countries. it is their inability to repudiate debt and cop the currency devaluation that is selling the next two generations into slavery.

      • Alex Heyworth says:

        Good link, AnonNL. The problems with Greece are cultural and go far deeper than economic issues. Vanity Fair has an excellent article going into all the cultural issues in some depth http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010?printable=true.

        There are equivalent articles on Iceland (http://www.vanityfair.com/politics/features/2009/04/iceland200904) and Ireland (http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103) as well. All worth a read.

      • Alex Heyworth says:

        Oops, posted that after the wrong post. Perhaps it could be deleted, I have reposted below in the right place.

      • AnonNL says:

        While I don’t share JMD’s colourful use of words (well, not on this platform anyway :P ) I do agree with his statements.

        Deflating a currency to me seems to be the easy way out and easy ways out is what got us into this mess in the first place. Rather than pushing the necessary reforms to get rid of the problems which led to the current position we use a clever monetary ‘trick’ so we can live to go bust another day.

        It is why I simply cannot see what is happening as Europe as a wrong approach. Sure, they have to be careful not to push Greece, Ireland or Portugal to the brink of collapse, but those reforms need to happen. To me it seems the only way those reforms will happen is through external pressure.

        This interesting article (no good news for my optimistic Europhile point of view though) states that Greece has been unable to ‘properly collect tax revenues from its citizens’. It shows certain things over there are so ingrained in culture that there is no way this will ever change from the inside out:
        http://www.goldalert.com/2011/04/does-greece-need-another-bailout/

        Have you looked at the same charts for a longer period btw? Shows that Greece has been running a negative terms of trade for a very long period with 2008 especially being a notable year…

      • Alex Heyworth says:

        Good link, AnonNL. The problems with Greece are cultural and go far deeper than economic issues. Vanity Fair has an excellent article going into all the cultural issues in some depth http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010?printable=true. There are equivalent articles on Iceland (http://www.vanityfair.com/politics/features/2009/04/iceland200904) and Ireland (http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103) as well. All worth a read.

      • BK says:

        Deflating your way out is a zero sum game. So it certainly isn’t a long-term solution

  4. Alex78 says:

    Great piece DE.

    The Austrian guys did pick the extent of the GFC ,Peter Schiff and Marc Faber spring to mind, but they can sound like broken clocks sometimes and there’s only so much ‘buy gold and shotguns’ I can take before I want some theory to go with it.

    As I have an interest in Keynesian economics as well (pretty easy to pick you)I’d like to see someone write a piece on the pitfalls of neoclassical thinking and it’s infatuation with the concept of equilibrium, which it copied from physics.
    Surely we should all be learning dynamic systems, and stock and flow models like the good Professor Keen says?

  5. Peter says:

    “Yet the reality is that no one really understands everything.”

    yes but you don’t have to understand everything to know something and the things that are known can be used as a foundation on which to attain more knowledge, 1 + 1 = 2 very basic indeed, if you start from such simple concepts and work your way up you can indeed understand a lot about economics.

    • I agree Peter..

      That is the point of studying and sharing knowledge on the subject, and using sites like this to discuss economic topics.

      Thanks for your comment.

    • The Prince says:

      Agreed Peter. It would do well for the economic community if many actually admitted they didn’t know from time to time.

      Here is a known known – economies are complex, dynamic systems inhabited by participants, among whom who observe and report on those systems, thus affecting the economy.

      To think that we can understand all of this is hubris itself.

      Economic models – be they neoclassical (which have been largely disproved in observation, and IMO can not stand as a science any longer), post-Keynesian (which has merit, particularly dynamic modelling and how credit works), MMT (which I think explains how monetary systems are working, but not necessarily how they should), Austrian (which explains why capitalism is the best way to maximise and allocate resources but doesn’t fully understand how capitalism and monetary systems really works) and Mandelbrotian – which explains but does not predict the chaotic nature of how markets really work.

      Who have I left out to slander? A synthesis of the above without regard to ideology – ie what are the best tools and paradigms to bring about a robust, prosperous economy – should be the current goal of economic scientific development.

      Great discussion point DE – thanks for posting this.

      • Peter says:

        “what are the best tools and paradigms to bring about a robust, prosperous economy – should be the current goal of economic scientific development.”

        This is I think one of the major problems the very thought that we as finite beings can understand what is nearly infinite in its complexity, and because of the near infinite variables its also were the word “scientific” doesn’t quite fit, as well as the notion that having a few wise people with the right “tools” would lead to sustainable (multi decade) economic prosperity. It starts with the basics – rule of law, sound money etc.

      • JR says:

        “robust, prosperous economy” should really the goal? (getting into the boundaries of philosophy here, so need to be careful) BUT it seems to me that one problem with Australia currently is it hasn’t had a recession for decades. Leads to high prices for everything, fat in the system everywhere and this unbearable profusion of bureaucracy. Back on the philosophical point – I think everyone benefits from some dynamism (stuff goes down as well as up). Stops us getting suppressed by the rich over too many decades ;)

      • Alex Heyworth says:

        Excellent analysis of the state of play in the various branches of economics, TP. The way forward (in practical terms) is unfortunately not very clear. Until academic economists start putting in their textbooks what they know to be true, rather than the current outdated nonsense, I sense that little progress will be made in terms of mainstream understanding of economics.

    • Greg says:

      So what serves as the “1+1=2″ of economics, more specifically macroeconomics?

      I have a few nominees;

      1) Spending = income…. so anyone advocating broad cuts in spending is essentially saying we need incomes to drop in this country. Try getting elected on that economic platform

      2) It is not necessary to save in order to invest, in fact savings are the left over from prior investment.

      3) Public debt is a private sector asset. We dont need to lower our public debt to improve our debt to GDP ratio we need to raise the GDP.

      These are a start

  6. Dennis Bauer says:

    Well how come Economists can do more with mathematics than Physicists.
    Science give us the means to do great things, Economists use the Science to destroy great things, actually while people go on about the great greed of Bankers at Wall street, if you took the same number of people off the street and schooled them they would probably make the Wall street Bankers look like Saint Vinny volunteers.

  7. >Who have I left out to slander? A synthesis of the above without regard to ideology – ie what are the best tools and paradigms to bring about a robust, prosperous economy – should be the current goal of economic scientific development.

    Absolutely agree Prince.

    • Deus Forex Machina says:

      oh lets get started…
      i have a few employees who wanted to do their master of applied finance…i told them not to yet as I wanted to ring the professor and talk about the course…i suggested that the course needed to be rewritten but was told that even though they agreed with me it was probably too early….go figure!!!!!!
      even harry markowitz once remarked that “they didnt read my books”…

  8. Dennis Bauer says:

    Ok DE now i read your article,very good thankyou, i made the first comment after reading the first few lines, basically a lot more honesty would be a huge help to the system, i will allways believe honesty is the best policy, even though it’s caused the loss of money, no im not silly. I wonder how long mankind was in a tribal state, i bet it’s a lot longer than mankind with a monetary system,no body can imagine life without a monetary system, and were supposed to be intelligent creatures, as i get older i become more convinced we took the wrong path some were. I am a great fan of Steve Keen, first time i ever donated money on the internet was to Steve, and i look foward to your articles every day DE. thankyou.

  9. Ronin8317 says:

    Unlike other branches of science, the rules of economics changes along with society and technology. This leads to many economists suggesting the right solution for another problem. It’s similar to how army generals keeps fighting the last war.

    Iceland is not out of the woods yet, as there is still the issue of the 5 billion dollar deposit guarantee. Someone must pay, and we may be treated to the spectacle of British troops invading another NATO country.

    Greece in contrast is an example of what can happen when the citizens of a country don’t believe in paying taxes, yet they still expect the government to solve all their problems. Neither austerity or stimulus can save Greece : it is beyond saving.

    • The Prince says:

      >Greece is an example of what can happen when the citizens of a country don’t believe in paying taxes, yet they still expect the government to solve all their problems.

      My wife and I had this same discussion tonight: Australia could head in the same direction. I recently saw a shocking graph on Catallaxy Files regarding the proportion of taxes paid by the lower 75% of income producing households: only 35% of all income tax. In fact the lowest 25% only pay around 3% – and are in fact net tax recipients due to transfer payments.

      With the new carbon taxes compensating these same households, the burden is again shifting to the higher income households: when the Boomers start retiring, this burden shifts to the mortgaged to the eyeballs Gen X.

      The deleterious state of our taxation/welfare transfer system is one of the biggest problems this nation faces – and I have next to no faith in either side of politics (Evil and Stupid – although they change attitudes regularly) in tackling and solving it, mainly because of what Ronin has just said – no one believes in paying taxes, whilst “Why doesn’t the government do something about it?” is tattooed on every Australian’s lips…..

      /rant. Need more coffee.

      • Alex Heyworth says:

        ” “Why doesn’t the government do something about it?” is tattooed on every Australian’s lips…..” Or the shorter version – Aorta.

      • AnonNL says:

        Coming from socialist Europe* I am quite amazed by this contradiction. No one is willing to pay taxes, new policies are always labelled to be ‘a tax’ by the opposition, causing everyone to riot and rebel, causing Australia to fall behind, causing everyone to riot, rebel and blame government.

        You get what you pay for peeps…

        *this country is so much like the US that regarding myself as a socialist is becoming second nature here, just like it was when I lived over there… :P

      • learner says:

        Prince,

        Reading your comment I ask the question how can you separate politics from economics? For me economics is a straight forward science. I think the “Economic ideologies” piece above forgets it is only a tool that everyone uses to support their own view/political persuasion.

        For me I see an increasing aggression in key democracies (of course I include Australia) between all sides of politics. IMO this happens when the key issue is not being addressed, often because we as people have difficulty standing up and speaking to “power”, particularly when in finding our collective strength we have to embrace our own darkness… hmm perhaps I should stop there. The example I have in mind is what brought the world to the GFC. It is easy to blame the “Banksters” but how many of us made money with them by, for example, flipping properties?…Greed, a powerful motive. Lack of social mobility (particularly in the US atm) a powerful suppressive force.
        Your comment assumes the rules of this world are based on cooperation when the evidence clearly indicates collectively we have been living in an ever more competitive world since WW2. Again IMO if the key drivers of the GFC remain unaddressed I expect to see tension increasing until there is the rise of another Hitler somewhere in the world. Then we have to hope we rediscover how much better life is when we cooperate before we blow each other up.

        Sincerely
        learner

      • Dennis says:

        What percentage of the GDP does the top 25% control though? If the bottom 25% represent only 3% of the GDP I see that as fair. Obviously the whole system could only be justified if there is a way for someone from the bottom 25% to move to the top 25% but somehow I doubt that is the case.

      • Rusty Penny says:

        That’s only one side of the story.

        Tax as means of redistribution is a reaction to national income distribution at the hands of those in power.

        I have a pretty firm view that net incomes have a very wide distribution, with the current neo-classical mantra disempowering the populace from combatting this via means of collective labour and the like.

        That really only leaves taxation as a means of redistribution.

        Now, it’s not too far of a stretch of the imagination to say this redistribution is still unfair, but it is clear, any withdrawal of these transfer payments will see diminshed aggregate demand.

        OK, it’s easy to have a view of ‘so what’ in regards to Mr and Mrs Bogan, but tell Mr small business owner time to close up cause your business will diminish.

        Bill Mithcell’s work has shown wage share compared to profit share is now bordering on post WWII-lows. And of this wage share, the polarity of this distribution is appaoching post-Industrial age highs.

        In comparison, we have the big 4 banks alone between them having something like 2% GDP in after-tax profits.

        Other big companies are duopolies, or worlds best practice rent-seekers in our miners and Westfields.

        In light of this, to start bleating that the lower paid need to give more tax at the present time, just so the upper end can pay less tax, affording them another imported luxury item, my moral code says is obscene.

        Put wage share higher, with most of it going towards the lower paid, then there’s no neeed for transfer payments. Likweise our dollar can take the burden if this labour cost becomes uncompetitive.

    • Patricia says:

      Why should the the people of Iceland guarantee a foreign person’s investment? Those Iceland private Banks were dodgy. When you put money into a dodgy venture and it fails you lose your money. QED. Hopefully now Greece, Ireland, Portugal and whatever Country follows these three will also say no.

      • AnonNL says:

        It’s called an agreement. In the agreement it said those funds were guaranteed up to a certain limit. This guarantee is why many people went ahead and felt comfortable to put their money on such an account. In my world agreements are supposed to be upheld. If you don’t no one will ever want to do business with you again.

        The banks in Iceland did not have a dodgy rep in the mainstream population, not did any of the central banks in Europe state there was a risk involved.

      • Greg says:

        And I believe Iceland has agreed to pay them in Krona, a currency which they control. Why should they pay in Euros when it is something they do not control?

        Neoliberal dogma drove banks and countries into unsustainable and ill conceived financial arrangments, it is apropos for them to blow up. It’s the only way we will ever learn to ignore the people who preach the lies.

  10. BurbWatcher says:

    Axiomatic choices (core beliefs) are the “glasses” through which we see everything; they “light” some areas, whilst at the same time “darkening” others – and this is totally inescapable.

    A thoughts are totally bounded and directed by them; we only see what they allow us to see, and we cannot see what they do not already envelope.

    When the human mind is all we rely upon, all is descriptive and nothing in prescriptive – we are imperfectly limited by what we choose to believe in the meta.

    It is a key and inescapable aspect of the human mind – Choice rules the human mind and all the details that flow into and through it.

    …there’s my Epistemologic and Philosophy of Science mini-essay for the day.

    Now to go have a beer.

    Stewart

  11. Mark says:

    I personally believe there are ideologies but then there are likely outcomes that can been seen despite your idelology. The problem with ideology is that it isn’t really focused on reality and what is actually happening in the system. The system is something abstract that we used to define ourselves and our collective motivations. You may be wrong sometimes sure; no one can predict the future. However a lot of stuff in hindsight is common sense particarly when it comes to economics. Why? Because in that I personally think it isn’t all that complicated since once the full facts are revealed most people can easily judge. How often can you say “of course that happened!” but never predict an outcome? I really do think it is the lack of information in general that makes predicting things so difficult; and this is where life truly isn’t fair. Some people are better positioned to predict in general what will occur.

    Most problems with economics are caused by the problem of the commons where the reward responses of the system encourage system destruction. Most ponzi schemes suffer from this destructive feedback.

    I think successful policy makers look at data, think about what courses of action they can take and with what they are given attempt to predict the outcome of their decisions. Just like we all do in life; and it is human to not consider every piece of data/knowledge you may have or every unintended consequence of your decision. Ideologies are like “rules of thumb”; ways to simplify decision making and shortcuts to predicting/approximating output.

    I do believe that the people that benefited from the GFC whoever they may have been have definitely worked out “how it works”.

  12. Steve Roberts says:

    Love this article.

    The problem I have is when as people we recognize our faults yet continue down a path willingly ignoring those faults. Keynesian economics in simple terms means step 1)stimulate when the economy is struggling and step 2) pay back the fuel we used when the economy is strong. Our human fault is that we never actually do step 2. Like an alcoholic, every time we take a drink we promise this will be our last time and we’ll fix the problem the next morning but the next morning we just need one more shot to get us going. As long as we ignore the fact we are stimuholics, we’ll continue down the path we are on.

    • BK says:

      Completely agree

    • Yes.. I completely agree with this assessment.

      It is the issue of theory versus practice. Which is why you need to provide lots and lots of anti-vested interest legislation in your economic policy, and that includes political vested interest.

      This is also why even though I am obviously a scholar of functional economics under a FIAT currency, I have time to accommodate Austrian thinking because it restrains those who never do step 2).

  13. Mick Peel says:

    As Keynes himself said, “…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.” And furthermore, “…soon or late, it is ideas, not vested interests, which are dangerous for good or evil.” – John Maynard Keynes, ‘The General Theory of Employment, Interest and Money’ (1936), Book VI Chapter 24, p.383.

    However, Keynes was not an ‘economist’ in the sense that is commonly understood in today’s world – his field was political economy (i.e. a strange mix of philosophy, political science and economics, from which uni graduates do not emerge today). It requires a life-long dedication to formal study in this day and age. My advice to young charges is to start with an understanding economic systems (both macro and micro) before tackling philosophy (metaphysics, followed by ethics, and political philosophy), then engage with the tools of economics and the historical insight of philosophy (combined with the knowledge of metaphysics and ethics) to embark on political science with a mind to creating a contribution to solving the problems of human society. It is a sacrifice, but personal ambition, almost by necessity, must be put aside. Nevertheless, it is a noble pursuit and it is a shame that neoliberal political ideology and neoclassical economic ideology think nothing of it, only rewarding the self-interested, ‘rational’ agent.

  14. Schofield says:

    “There is also another, perhaps more important dimension to these ideologies which I understand to be socio-political in nature. In my experience these ideologies are linked to what people believe to be the purpose of the economy. There are those that believe that the economy is there for their own personal gain, and others who believe it is a social asset to be shared for the good of all.”

    Personally I go along with Sue Gerhardt’s (Psycho-Analyst) notion that it all depends on the quality of your parenting how large your empathy function developed (orbito-frontal cortex)or worse still whether you have a black-hole where it ought to be.

  15. Irrational says:

    Where do you see the astrophysics in economics? I certainly did not recognise anything from one in the other! Fluid dynamics perhaps, but that’s more properly physics.

    One thing that science does do is check that approximations are not too bad, so I am all for the experimental strand in economics, let’s have more of it.

  16. Why is economics the “Dismal Science”?

    1) Consistent data isn’t necessarily easy to come by. There’s TONS of data about markets, but the way people react to a certain set of policies can vary with culture, time, zeitgeist, etc.

    2) People don’t always make rational (in the “most likely to help achieve their ultimate goals” sense) economic choices. This makes generalizing difficult.

    3) There are potentially long lag times between when a policy is enacted and its effects. Policies are also subject to change – and can be changed before the results of the policy are seen. This is another thing that makes getting good data difficult.

    4) There are many Economists who aren’t necessarily using real empirical data or anything resembling the scientific method to decide what principles “work” or are “good”; these Economists have made assumptions about human behavior first, then decided on their principles rather than using actual non-anecdotal data.

    As the article states, perhaps one day we’ll be able to model economies; right now, economics will remain a a game of trial and error, math, psychology, sleight-of-hand, and black magic.

  17. JR says:

    It’s just like climate – nobody knows anything at all. And all complex models are wrong. An interesting spectator sport.

  18. jack says:

    This is a great discussion, Icelands economic growth in comparism to Irelands tends to validate Bill Mitchell’s MMT. Having a lousy currency is only relative, if you want to import stuff from other countries. If you are happy to eat local cod cooked in a volcanoe then at least you have the money to pay for it, but dont try buying barramundi as it is going to cost you.

  19. rohan chapman says:

    As an economics graduate myself I share a bond between with the delusional economist and others of like mind. If we wanted an exact science we would of been one of those nerdy science students who locked themsleves in labs for hours. Instead we now lock ourselves into blogs such as this one for hours contemplating the merits of keynes or the like.

    My lecturer on my first day of macro economics told us that Economists rule the world , with there friends the lawyers!!! 16 years later I still agree, and if you dont we will just assume it anyway!!!

  20. Great post DE.

    To add to you point, the difference between economic ideaologies often comes down to a few small be very specific assumptions.

    And while politics taints economics, economics taints politics.

    For example, the Austrians basically think governments can’t be trusted to do anything, while to believe that MMT has practical application you need to believe that governments can do something for the greater good, and not screw everything up for their own self-serving political interest.

    And then these economic ideaologies reinforce themselves in political alliances.

    • JR says:

      It’d be nice if the economists and politicians had a version of the Hippocratic oath…’first, do no harm’. I guess that makes me an Austrian!

      • Jason says:

        Yeah ,then we wouldn’t have such erratic.. booms and bust..I guess ,making us all Australian.
        cheers JR

    • The problem with this approach however is that if you take it you never get to the “what could be” stage.

      If we hobble our economic potential because we don’t trust the people who are supposed to govern it the outcomes will be less than optimal.

      So in my opinion there are two choices.

      1) restrain the system
      2) change the system

      I prefer 2, but maybe that is an ideology :)

  21. The Prince says:

    Well said Cameron.

    Funnily enough, I’m having a “discussion” about the MRRT with my colleague Q right now.

    He comes down somewhere near the Austrian side (i.e government can’t be trusted – I don’t blame him. My difference is I think the Coalition are worse at economics/fiscal management than the Labor/Greens – the lack of foresight by both – and by the public, who shoulder the blame, is coming home to roost.

    • Alex Heyworth says:

      The trouble is, it’s not only government that can’t be trusted to spend money wisely. The private sector has shown its shortcomings in this regard time and again.

      • Q Continuum says:

        At least the private sector generated the wealth in the first place.

      • Rusty Penny says:

        A person working on a farm or a mine owned by a government is capable of generating as much real wealth as one owned by the private sector.

        The difference here is which sector has claim the Return on Capital.

  22. Mark Pawelek says:

    There are a few misconceptions in that article.

    [quote]Given the every accelerating world of computational power it is unlikely, at least in my lifetime that anyone is going to get there[/quote]

    We have the computational power to solve any economics problem. We lack the models. Economists have no way to tie their models to experiments. Science is all about tying models to data; correlating. The shift to sujectivism on the one hand and mathing [crap models] on the other is a measure of their defeat and distance from science.

    On the Keynesian thing. Governments are applying anti-Keynesian economics. QE is trick-down economics in sheep’s clothing. Not that QE does nothing but spending the same on direct investment would’ve been far more beneficial to far more people. If economists can’t agree on that they’ll never agree on anything. Is that why Marx called it ‘political economy’?

  23. Seanm says:

    Bravo everyone.

    “Losing an illusion makes you wiser than finding a truth.” Ludwig Borne.

    Why?
    A man’s mind is so formed that it is far more susceptible to falsehood than to truth. Erasmus

    “Sapere aude!” Dare to know. Kant’s motto of the Enlightenment.

    Here’s something for the political economy. Something that both politicians and economists can grasp.

    Pareto’s 20-80 Law Still Applies Everywhere.

    This is the single most important social law ever discovered. It is probably the most important economic law. No one has explained it. It defies reason. So, academic economists ignore it. Pareto’s Cours has never been translated, despite being a universally acknowledged classic. It is arguably the most important still-untranslated book in the history of economic theory.
    No one wants to deal with the 20-80 law in a scientific fashion. Pareto could not explain it. He devoted the last decade of his life to a study of society, trying to explain it. Nothing came of this. His explanation is hardly known. Yet this exercise moved him from an economist to a sociologist.
    I list several academic discussions of the 20-80 law at the end of this article.
    Pareto’s law applies to society. It applies to biology. Pareto discovered that 20% of his garden’s pea pods produced 80% of the peas. Here is a summary, found on a site selling a book on 20-80. These observations have been discovered over the years.
    (a) 80 percent of the results are achieved by 20 percent of the group.
    (b) 20 percent of your effort will generate 80 percent of your results.
    (c) In any process, few elements (20 percent) are vital and many elements (80 percent) are trivial.
    (d) If you have to do ten things, two of those are usually worth as much as the other eight put together.
    (e) 20 percent of the tasks account for 80 percent of the value.
    Pareto analysis can be effectively employed for separating the major causes (the “vital few”) of a problem, from the minor ones (the “trivial many”). Such an analysis focuses your attention to tackling the major causes of the problem at hand rather than wasting time on the minor ones. The 80/20 rule has been tried and tested over the years but it has withstood the stringent scrutiny that it has been subjected to.
    …. In other words, this is a true sociological law. If sociologists were really serious, their discipline would begin with this law, for it really is a law. There is only one law of sociology that is more universal: Some do. Some don’t. Pareto’s is more useful. But the sociologists can no more explain it than the economists can.
    Sociologists are the most left-wing faculty members on any campus. This has been true for at least 50 years. So, their use of Pareto’s law is highly limited. They use it to excoriate their own nation’s wealth distribution. They produce detailed reports on this wealth distribution, but only for their nation, and only recently They never tell the reader that this distribution applies to every area of social organization. They do not tell the reader that it applies in every nation ever studied. They do not tell the reader that, after a century of government attempts to bring economic equality, the 20-80 rule has not budged. Yes, some society may get 30-70. The United States today is 15-85. But this is variation around the mean: 20-80.

    ….It is time to stop pretending that the inequality of wealth distribution can be cured by a flat tax or a VAT tax or any other kind of tax. The free market will not produce a society in which the top half of the citizens will pull in only half of the income and own half of the capital. The low-tax reforms will not work, any more than the Left’s “I like Ike” 91% top income tax bracket worked.
    Under the free market, the rich get richer, and so do the poor. The rich get far, far richer.
    Under Communism, the rich get a little richer, and the poor get a lot poorer, but the rich in a Communist society are poorer than the middle class in a free market society, and will be poorer than the bottom 20% after a few more decades. The top Communists figured this out in China in 1978 and in the Soviet Union in 1991. They have yet to figure it out in North Korea and Cuba.
    Conclusion: Until there is a cogent explanation for the existence of Pareto’s law, there can be no government policy that will overcome it. The explanation will probably be that nothing can change it. Get used to it.

    Source:Pareto’s 20-80 Law Still Applies Everywhere, Except When It Becomes the 20-85 Law, as It Has in the United States.
    Gary North http://www.garynorth.com

  24. Greg says:

    Hey Seanm. Thanks for the info, I didnt know Pareto had anything to do with the 80/20 “rule”

    I dont think this is anything which need “explaining” however. Its an observation of systems and how they end up being often times. What needs to be asked is what do we do with this information? If the farmer that notices his about his peas decides to cut down the unproductive 80%, he will still be left with the 80/20 division amongst the remaining pods so he hasnt solved anything, but he’s reduced his yield 20%. As usual people will take different things from this information. You and probably 80% of everyone will reach conclusions like you have and start labeling some things “vital” and some things “trivial”. This creates a reason to DO something TO the trivial 80%.

    While the other 20% of us, including those sociologists, will simply say hmmmm, interesting. Lets see if we can find something for everyone to become “their 20%” in. See, just because you are in the 20% in something doesnt mean you are in the 20% in everything. You may be in the 20% of doctors but in the lowest 1% in fathering skills. Is being a doctor waaaay more important than being a good father?
    How many times would being a good father have saved someone a trip to the doctor!?

    Youve taken an interesting phenomena and turned it into a political statement. Your reference to left wing sociologists is interesting because by the definitions of our society, those who even think collectively and wish to study collective behavior ARE socialists! Of course without these studies (observations) you wouldnt even have the ammunition you need for the perpetuation of your preconceived notions. You should be thanking those socialists!!

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