Wednesday, January 4, 2012

Economics: What's the Deal

Is what we think of as economics guided by fundamentally wrong principles? That’s the starting hypothesis for John Michael Greer in The Wealth of Nature. He goes back to Adam Smith’s original text, Wealth of Nations, to unearth popular assumptions based on the free market love of the times. The Scottish clergyman proposed that customs could be shed in favor of unregulated commerce, free of governments. Feedback loops of supply and demand would distribute necessary goods and production. Yet from the history of economics, we see how tribal chieftains maintained power by lavishing gifts upon the tribe, particularly in the custom of sharing big game hunts. This was a method of avoiding the bubble and bust cycle that results from the concentration of wealth in too few hands.

Ignoring economic history in favor of brilliant calculations turns out to be profitable business in the short term. Experiments showing how innovations in finance produce ideas for which individuals and businesses will pay good money, while advice that doesn’t promise pie-in-the-sky wealth---or even carries warnings---is rarely a way to collect bonus paychecks. The housing bubble in recent years is an example of past experience warning of an eventual loss of equilibrium, When the ideas go bust, however, as Greer observes, no one has money for an economist!

The profit of predicting profit is one fundamental problem Greer sites. The mentality since 1973 that has led to the gradual decline in median salaries for workers---while derivatives and debt-selling have created wealth that doesn’t depend on any useful goods or services have concentrated wealth in greater percentages into fewer hands. Basic assumptions about the unlimited supply of energy and materials from the earth itself have delayed alternative fuel development, the inevitable ends while we rely overmuch on tapping petroleum resources as our means. He likens the need to re-think economics as similar to the Copernican revolution: formulae that can be tweaked to serve a basic theory are not always supported by natural observation. The numerous variables cannot be controlled in the real world the way they can be in experiments, nor can people be counted on to follow predictions to make the most logical, self-preserving choices in the free market.

As an alternative to Smith’s school of thought, and the underlying assumptions made by modern economics (which Greer classifies as “neo-classical”), he presents the work of Ernst Schumacher.

In the introduction to Wealth, Greer presents four suppositions.

1. Distinction between primary and secondary goods. Conventional, people-made goods and services figure into conventional economics, but primary goods are raw materials from Nature. They prefigure production of any kind. Burning through non-renewable resources like they are unlimited capital will lead to the same problem as writing checks without regard to the balance! It’s silly to call any economy successful when it’s backing its productivity into a future corner, because some problems, we can’t buy our way out of.

2. Energy is the gateway resource; even abundant resources in the secondary goods process will just sit there without energy.

3. The cost per worker of establishing a workplace should figure in; replacing human beings with technology is not always good for the economy. For this reason, development schemes in countries new to industrialization work best with local human minds and hands focused on local needs provides the best employment scenario.

4. Fundamental questions about what exists and what is its value cannot be replaced by equations and mathematical models, disconnected from real world situations.

This book doesn’t rely over much on equations, nor was it composed by a Nobel laureate in economics; at the same time, Adam Smith was not a trained economist, himself, when he wrote Wealth of Nations, a book that doesn’t rely on tables and calculations for its observations. More than one of those laureates has served on the board of companies like Long Term Capital Management, which crashed in 1998. Schumacher’s real world qualifications in managing projects for developing countries are detailed here to establish the basis for his own observations. The book digs further into the failure of modern economics and examines some of the terminology and constructions which are the foundation of finance.

Questions about energy and the future complete his analysis, which we’ll revisit soon.

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