Sunday, February 01, 2009

OBSERVATIONAL ECONOMICS

Ever wonder why there seems to be no consensus about economic issues? Why it is that some economists advocate greater government control and others adovocate less; why some are Keynesians and others subscribe to the Austrian school? Shouldn't the proper relationship of deficits to tax rates and fiscal to monetary policy be worked out by now, instead of serving as the subject of very boring debate? I suspect that a large part of economics is tied up in what economists think rather than what they see. Even if they do see something worthwhile, like Pareto's observation that 20% of the land owners owned 80% of the land, they cannot help but letting their imaginations run wild, inflicting upon the dismal science all sorts of integral equations, probability distributions and theoretical gobbledegook. When economists do hit upon a valid observation, they tend to become like the blind men and the elephant, allowing their valid observations to lead them to specious conclusions.

The good news is that non-economists can traipse off on the same intellectual journeys. Non-economists like me can make basic observations and mar them up with wild conjectures about what they mean, and as it is usually the analysis that leads to folly, I should like to propose a few simple observations, which I trust will be largely non-controversial, and leave the theorizing as an amusement for others.

The first observation is that economics, as apposed to say biochemistry, is a discipline of no use to non-humans. Even the industrious creatures, like beavers, bees and starlings, go about their activities unvexed by supply and demand, and consideration of fiscal policy. Economics arise where human beings interact with each other, and economics is a characteristic of those interactions. The "laws" of economics are thus corrollaries of the laws of human nature, having as their objects very limited ends. It is human ingenuity that creates derivative markets, micro economies and loan to value ratios. The reason that humans need economics and bees do not is that bees build hives, collect pollen and make honey without fretting about how efficient they do those things. Humans however are concerned with progress, and progress requires efficiency. Thus, we have the secdond observation about economics.

The point of economics is to allow people to produce goods, perform services and exchange these among each other in the most efficient way possible. The most important word in the language of economics is "per" because all efficiencies are simply the amount of something per the amount of something else; the amount of corn per acre, the amount of dollars per hour, the amount of income per capita, the amount of healthcare per dollar, the amount of benefit per unit of risk, etc. The economist takes notice of a basic truth about nature: all progress is really just an improvement of the efficiency of something, and efficient organisms survive at the expense of the inefficient ones.

The observation that bees and beavers do not consciously alter their behavior as they adopt newer economic theories leads to the third observation: economics is really a subdisciplne of and an application of the principles of human behavior. It is possible to design economic policies and plot economic data because human beings do have at least a modicum of predictability in their behavior. The fact that there has been so much human misery and historical disaster as a result of overly-idealistic or utopian economic theories is testament to the fact that economists and politicians do not understand this nearly as well as they should. All economic reasoning should begin (but does not) from what observation suggests is the fundamental principle of economics: Human beings are tool users. They use thier reason and ingenuity to exploit whatever resources are placed at their disposal, including laws, policies and programs. This is the genetic material of the law of unintended consequences, and a primary reason why enterprises of noble purpose and great promise are brought to grief.

The observation that humans are tool users should be one of the most obvious and revered principles of economic thought, because evidence for it is everywhere. People use religion for non-relious purposes; they use principles of public benefit to private advantage; they exploit loopholes in laws and allow institutions to assume responsibility for matters that had previously been individual burdens. As an economic principle, it is irrelevant that some of these exploitations may speak of bad character on the part of the actor, because it does not necessarily have to be. The key characteristic is that it is foreseeable and should be expected. No one should really be surprised that black markets arise when products are prohibited, or that business executives engage in imprudent behavior when they believe that government policy will insulate them from the risks. It should not come as a shock when patients try to cram all of their elective surgeries into the last few months of the year, after their deductibles are satisfied, rather that subjecting themselves to pay more from their own pocket.

Practical economics is concerned with how to encourage particular behaviors (investing or spending or capitalizing businesses or using green technology, etc.) in ways that increase certain types of efficiency, often at the expense of others. The interesting thing is that there is no concensus on what forms of efficiency are most desirable, or whether the proposed policies will achieve their aims. The fallacy of modern practical economics is the belief that policies that change what economies provide somehow changes what people want.

1 comment:

Evil Red Scandi said...

The observation that humans are tool users is ironic when one considers the observation that many humans are, in fact, a bunch of tools themselves.