The Economy: Time to Rethink and Get it Right
Updated: Feb 16, 2019
If architects design a major project that costs billions of dollars, say an extensive bridge or a high speed railway network, and for some reason they miscalculate a minor detail and the project falls apart, not everyone in the country will suffer the cost and negative consequences of such an expensive mistake.
But if a government, based on fallacious economic thinking, implements misguided policies, rest assured that the whole nation will eventually bear the cost and suffer the harsh consequences of those mistakes.
Understanding and getting economics right is, therefore, vital because, as history keeps showing us, the consequences of getting it wrong, however long it may take to come back and bite, are devastating. Recent examples being Venezuela, Zimbabwe, Argentina, Greece, etc.
British economist John Maynard Keynes, whose thinking still dominates today’s economics, wrote that:
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.”
To consolidate his point Keynes added:
“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
Keynes is right. Because, whether we are aware of it or not, we, I mean humanity, might already be slaves, or at least serfs, to some defunct economic thinking.
Modern economics is filled with complex statistical and mathematical computer-based modeling and sophist technical terms that scare off the average person from trying to understand it. But more detrimentally, the fallacies and misunderstandings that plague mainstream economic thinking for decades now, have become so imbedded into all layers of society that questioning today’s economic and monetary systems is a revolutionary act.
Since the 2008 Global Economic Crisis, the general public distrust and apathy for economics and, perhaps particularly for the centralized economic and financial institutions, have increased and for a fair reason. The masters of the global economy and financial system have been unable to explain, in plain terms, let alone resolve the underlying issues, that caused the 2008 Global Economic Crisis.
Since the underlying causing issues haven’t been resolved, should we then expect a larger, nastier global economic crisis?
But wait, the show goes on right?… As long as the system benefits us today, we don’t care about the high cost and dire consequences the present and future generations will, inevitably, have to face as a result of the current unsustainable debt-fueled keynesian economic system.
There’ll be a day of reckoning though, no matter how much we look the other way. Like Ayn Rand said: “we can ignore reality, but we cannot ignore the consequences of ignoring reality.”
It seems that despite the super technical quantitative models and highly revered economic “experts”, the fundamentals remain frail and economies chronically sluggish. The funny (well not so funny) fact is, the more technical and quantitative those models of the economy get, the more detached they seem to be from the real, human and fundamental economy.
This fact is becoming apparent to even non free-market economists and observers. For instance, Greek economist Yanis Varoufakis, who is known for having been finance minister of the radical left (socialist) Siryza government, said it well when he wrote:
“The more scientific our models of the economy became, the less relation they bear to the real, existing economy out there.”
I totally agree.
But why is that? You may ask. Why the detachment?
Well the answer isn’t that straightforward and volumes can be written about it. But for the sake of simplicity in this post, fundamentally, it boils down to the fact that mainstream economics is inspired by fallacious and misguided thinking. And so it approaches economics with a faulty premise, short-term mentality and a quantitative methodology that is more applicable to natural sciences as opposed to social sciences, where economics more appropriately falls into.
Economics is not a natural science. It is fundamentally a social science because it deals with social organization, cooperation and actions of human beings. It deals with purposeful decisions of individuals and firms as they seek to trade, produce, consume and allocate available resources to satisfy needs, desires and attain goals.
So as time passes and the combination of a debt-based monetary system, a maths-driven methodology plus protectionist and keynesian-inspired economic policies take deeper roots, the end result is what we see already. Ailing economies with a detachment between centrally imposed economic policies and a deteriorating reality on the ground.
In this context, because economic policies directly or indirectly, negatively or positively affect our living standard and that of the people around us, I’d say it is important, perhaps necessary, that we question and rethink an economic system that is hurting us all globally.
Even the unborn will bear the negative consequences of our current system. Instead of leaving healthy and strong economies, we may well have the coming generations inherit chronically sluggish, ailing economies with debilitating tax and debt burdens.
Time to rethink and redesign our monetary and economic systems, anyone?
Since this post is introducing the Basic Economics Series, let’s see what the economy really is. But before that, let’s clarify what a human society is.
Often “society” is seen and presented as an entity or structure separate and above the individual. In reality it is not. And that is a misconception that, has history proves, can be dangerous. Because states that radically upheld the “collective good” above the individual rights have been oppressive and economically backward.
At its core, a society is just a combination of individuals who share a sense of togetherness, belonging and common links with one other within a certain territory. Those common links include family, language, culture, history, values, etc.
Even in a closely knit family context or under the harshly repressive hand of a marxist socialist state, the unique characteristics that make human beings individuals such as dreams, aspirations, preferences and choices cannot be ignored or erased.
I said that to say this: policies that defend and promote the economic rights of individuals will logically and naturally defend and promote the well being of society. The opposite is also true, repressing individual rights for “the good of the collective” have often led to totalitarian regimes, socioeconomic backwardness and avoidable human suffering.
Knowing now what society actually is, it becomes easier to see the economy for what it really is. The real economy is what goes on daily when some people are producing, others are consuming, other are saving, otters spending, others are buying, other are selling, others are traveling, some are trading and so on and on.
The purposeful and voluntary exchange of products and services by individuals or groups of individuals (like firms and organizations) seeking to achieve an end certain and benefit from their actions or transactions is really what the economy is.
Hence, the key objective of implementing economic policies should be to facilitate, promote and maximize the production and exchange of goods and services within and between nations. Thereby elevating living standards and fostering peace and cooperation among all people.
Austrian economist Ludwig von Mises insightfully defined what the economy is when he wrote in his great book Human Action (p.258) that:
So it boils down to freedom of choice and mutually beneficial voluntary transactions.
I have been interested in economics for 6 years now and still haven’t found a more precise, more insightful and more beautiful definition of the economy than that of Prof. Mises. That’s why I choose to share it here.
Having been born and raised in a marxist socialist country that, after the fall of the Soviet Union, transitioned into a pseudo “market economy” and considering that I have had the opportunity to live in developed countries like the United States and Switzerland, which historically was pretty close to a pure market economy, and after doing some research and my own thinking, I say, without any hesitation or reservation whatsoever, that the market economy (not to be confused with today’s fiat-currency-keynesian economies) is, however imperfect it may or may not be and despite today’s antagonism toward it, a social system morally, sociologically, economically, technologically and environmentally superior to available alternatives.