Part 1: An Introduction to Uncommon Sense

I am an economist. I have chosen this controversial title and sub-title to point out the lack of common sense in mainstream economics. That is, the economics as is taught at the majority of colleges, universities and MBA programmes.

Economists trained by this system all too often lack a serious sense of perspective. Economic reality appears very different to them than to the common man. They view the world through mathematical formulae.

In a mathematical equation you could write:
                Common Sense + Mainstream Economists < Common Sense

Nassim Taleb, author of The Black Swan, has a valid point when he says that “The tolerance for nonsense in economics is monstrously high. In engineering it is close to zero. If a bridge collapses, economists would spin a story. In engineering you build another one.”

A terrible disaster wreaks havoc and ruin. It is followed by an expert insisting that the devastation will be good for the economy. A classic example, mainstream economists want people to believe that World War II got America out of the Great Depression. Steve Keen, an economics professor who sees himself a contrarian, had no qualms saying such during an interview with The Big Picture RT.

Bombing and destroying things. Conscripting 11 million people – men between the age of 18 and 40 are drafted away. They are replaced by older men who aren’t as physically productive and by young people and women who have never been in the labour force before. Who have no work experience. On top of that, the entire economy is being subject to abrupt and extreme resource constraints. And these are the conditions in which America recovered? Isn’t there something fishy here?

New York Federal Reserve President William Dudley said recently in an interview that “Hurricanes Harvey and Irma will lead to increased economic activity... it actually lifts economic activity because you have to rebuild all the things that have been destroyed by the storms.” I am not sure Sir Richard Branson and the 1000s of other people will agree they actually had a great day when Harvey and Irma visited their houses and destroyed everything.

No, terrible disasters like wars, hurricanes and other catastrophes are not good for the economy. Vast sums of money may be splurged to repair and rebuild, but every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the economy’s reservoir of material assets. Instead, it has to be spent replacing what was lost. It is the tragedy of vanished wealth and opportunity, to say nothing of immense human suffering!

Common sense in economics may be in dire straits, but fortunately never was lost entirely and never will be. A story goes that Gaston Eyskens - Dean of the economics faculty at the University of Leuven in the 1950s - addressed students at the start of every academic year with following words:

“Young Ladies and Gentlemen. Economics is the study of people competing for scarce goods to fulfil their needs and wants. Scarce goods are categorised under Land, Labour and Capital. There is however one very scarce good that people do not compete for, because everybody believes they possess enough of it. That scarce good is ... the Common Sense.” Now, that makes sense to me!

This is the first of a series of articles I wrote to highlight some of the many subjects where mainstream economists - even those who call themselves contrarian - have lost their common sense and get things seriously wrong.

In the next article I will explain how mainstream economists create a lot of confusion on the very essential concept of Productivity!


Sources:
Albert Hahn, Common Sense Economics (1956)
Jeff Jacoby, Beware of the Broken Window fallacy (September 11 2017, FEE.org)
Henry Hazlitt, Economics in One Lesson (Chapter 3 The Blessing of Destruction)


 
Bart is the Founder of Economica Action Pte Ltd, an international coaching and strategy provider. He also advises on the economics of climate change as a director at Climatekos. His specialties are in economics, business strategy, coaching and digital marketing. This article was first published here: https://www.linkedin.com/pulse/common-sense-mainstream-economics-part-1-bart-remes/
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