Economics

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This website is an archive. It ran from 2006-2010. Virtually everything on here is outdated or inaccurate.


Economics is Utopian
for J.M.H.

Economics is a scheme to reduce suffering. The principle of economics is that when two parties make an exchange, and both parties wanted to make that exchange, then they both benefit. This is a utopian description of exchange which does not usually match up to reality.

Let's say I have a strong desire to get places quickly and a friend sells me his old car for $500. At first I am overjoyed about the good deal. But then the car breaks down, it doesn't fit in my garage. I had incomplete information about this exchange. I thought it was mutually beneficial for a couple of hours, but it turned out my friend ripped me off.

The generic transaction described in economics provides benefit to both parties only in the instant it happens. You guard against buyer's remorse by gathering information about the item of exchange, but there is no such thing as perfect information. Even if you don't come to regret your decision, sometimes your children will regret it for you. Regret is therefore not only possible but probable. Even with mutual consent there is suffering.

Contents

The magical thinking underlying economic "science"

Magical thinking is any sort of action that people take where the link between cause and effect is not evident. The follies of this kind of thinking were famously summarized in an episode of South Park in which a race of gnomes was hoarding children's underwear. Their business strategy ran as follows:

  1. Underpants
  2.  ???
  3. Profit!

A joke is ruined in its explanation, but you see that this is funny not because it is impossible to turn underpants into profit (they do have some value, after all), but because the idea that hoarding underpants will somehow create profit is so transparently magical that it is absurd. Magical thinking is predominant in all human cultures, and you don't need to consult an anthropological text for the obvious example:

  1. Recite magic spell.
  2.  ???
  3. Healing!

We would call the "???" here a placebo effect which cannot heal amputated limbs. But someone who believes in the magic may very well say that the "???" is the mysterious intervention of spiritual beings which works as a direct effect of the spell. Any ad hoc explanation is fine. So, how does an economic transaction work?

  1. Consensual transaction.
  2.  ???
  3. Long-term benefit!

In this scheme benefit is expected by people making the transaction. But benefit is not a direct effect of the transaction. If you ask an economist how it works, they will not admit that they don't know why perceived benefit would automatically lead to real benefit. They'd say something like, "Obviously if you perceive a benefit it's because you know a benefit will come." Yes, obviously... if you have a magical, economic mindset already in place and are blocking out all the times lack of information led to regret. This is how magical thinking works. Just ask your local witch doctor why he's so sure he can heal people: it's because it worked in the past.

Links

This guy realized the same thing as me and he got a Nobel Prize for it. Life ain't fair :)

Austrian economics

Austrian economics is far better than the economics taught in schools, as a science.

In Austrian thought, the fundamental role of the entrepreneur is to improve information. Because no single person can have complete information (which Hayek set forth in his essay "The Use of Knowledge in Society"), markets will have imperfections. The entrepreneur, in the course of calculating and bearing risk, and performing arbitrage, has a very real economic incentive to correct those imperfections: profit. By introducing better information, he will be more competitive than others and, in the absence of coercion (i.e. government regulations), be more successful. Should his information happen to be imperfect (like Coca-Cola's expectations of New Coke), then unless he commits coercion or gets others (like government) to do it for him, he will eventually fail. Failure is the free market's self-correcting "Darwinian" mechanism, which is why Austrian economics doesn't see recessions as inherently bad. [1]

The trouble with this adjustment is that knowledge is rewarded too slowly. As you can see, the main idea here is that "if things go badly, it is a natural adjustment." But that means that bad things were happening before knowledge was rewarded (e.g., too many SUVs were sold before gas prices went up), and bad things happen after the knowledge is discovered (the price of SUVs crashes; their owners lose a significant amount of money). If we take Austrian economics at its word, it cannot be used to reduce suffering at all.

Economics and nature

Think of any good or service provided by nature – from topsoil to oceanic fish stocks, from the pollution-absorbing capacities of rivers to the storm-buffering properties of wetlands, from breathable air and drinkable water to the mineral stocks and fossil fuel reserves that keep the entire system running – and you’ve just identified something that’s being used up rapidly by industrial societies, with no thought of the potential costs of substituting something else for it, much less of the hard fact that nothing we can possibly do can provide a substitute for some of them once they’re gone.
The Archdruid Report

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