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So it’s Econ 101’s Fault, Hey?

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“Forget the dumbed-down garbage most economists spew. Their myths are causing tragic results for everyday Americans.”

Source: http://www.salon.com/2013/07/08/how_%E2%80%9Cecon_101%E2%80%9D_is_killing_america/singleton/

Devil’s Advocate: Don’t tell me someone in the mainstream is agreeing with you, Dave. I feel sick.

Smiling Dave: Cheer up, Devil, he’s agreeing, but for all the wrong reasons.

DA: What do you think of his Ten Myths that Econ 101 teaches?

SD: I thought you’d never ask. He nailed some, and got a few wrong. All quotes are in italics.

Myth 1: Economics is a science.

But if economics is really a science – which implies only one answer to a particular question — why do 40 percent of surveyed economists agree that raising the minimum wage would make it harder for people to get jobs while 40 percent disagree?

That’s an easy one. Everyone agrees that Genetics is a science. And yet in Nazi Germany the scientists came up with some very shaky stuff [Germans superior, everyone else inferior]. How did that happen?

DA: As a friend of the Devil, I was there at the time. They were scientists, but they were saying what was politically correct. They knew on which side their bread was buttered.

SD: In the United States they don’t shoot you dead yet for having the “wrong” opinions, so economists are not yet 100% politically correct. But the pressure is immense, enough for 40% apparently to say stupid things.

Myth 2: The goal of economic policy is maximizing efficiency.

Say what? The goal of govt economic policy is to benefit politicians, just as the economic goal of every individual is to improve his lot in life. So I agree with him on this one, but not for the silly reason he gives.

Myth 3: The economy is a market.

Which is wrong, he says, because the govt spends about half the money in the country and employs half the people.

And I agree, sort of. The economy is not a free market, sadly.

Myth 4: Prices reflect value.

If the economy is a market, prices are what allow goods and services to be efficiently allocated. In Econ 101, because prices are set in “free markets,” the price of something must be a reflection of its real value. 

And he goes on to ask, so how did houses lose so much value when the bubble burst?

He’s right and wrong. He is right that prices do not reflect “real value”, because there is no such thing as “real value”. [Looking at you, Karl Marx]. As Mises taught, value is subjective, so there is no such thing as “real” value. But he’s wrong because he forgot [or never knew] that a price does reflect the subjective value of the moment that makes someone willing to pay that price.

He goes on to say that all Econ 101 is based on price reflecting real value. If that’s true how lucky everyone here is to learn real economics based on prices reflecting subjective value.

Myth 5:  All profitable activities are good for the economy.

He has a few objections to this.

First, what about hiring murderers? That’s profitable, but how can an “evil” be “good” for the economy?

I’m not sure how he made so many simple blunders in one sentence.

1. It’s profitable for the killer and the one who hired him, but not profitable for the dead man.

2. He forgot to add in the word “voluntary”. A thief profits plenty, but it’s not good for the economy, because the profits he makes are not voluntary payments.

3. He is thinking in silly abstractions. Economics is not about “the economy”, it is about people.

4. He is introducing value judgements. Economics is not about what is good or evil. It is a science [a point he doesn’t grasp, you’ll remember], and a science does not make value judgements. It merely states, “If people do X, Result Y will follow.” For example “If people raise the minimum wage, unemployment will follow.” Whether unemployment is “good” or “bad” does not change that simple fact, and it is not the task of an economist to decide whether unemployment is good or bad.

5. He is attacking something nobody said. Nobody said that criminal activities are good for the economy. Sheesh.

He also dislikes other profits, which he calls “pure rents”. There are a lot of different things he calls pure rents, and none of them help the economy, he thinks. Let’s see his list.

Profiting from real estate appreciation and the accident of owning mineral deposits that become more valuable. So if my property become more valuable, that’s bad for the economy? How? Maybe he means it’s not bad, but you can’t say it’s good. Or so he thinks.

Which shows he must have been daydreaming in his Econ 101 class when they taught about prices. The point of a price is to make sure things go to where they will do the most good. To use a simple example, if there is one bottle of milk left in the store, and some mommy needs it for her little girl, and someone else needs it to give a bath to his cat, how will the mommy make sure she gets the milk? By paying a higher price for it.

If land suddenly becomes more valuable, there’s a reason for it. A lot of people want it, and the high price makes sure the one who needs it most. so badly he is actually willing to spend a lot of money to get it, gets it.

Stock manipulation. I’ll take the easy way out and say he is talking about a criminal activity. As we mentioned earlier, nobody who said all profitable activities are good for the economy had criminal activities in mind.

DA: You are slipping, Dave. You are relying on what a politician decided is a good excuse to take someones money, declaring it  a crime, and basing your argument on that. What if stock manipulation was legal? What would your argument be then?

SD: OK, I’ll do better. First let’s look up what stock manipulation is. The internet says it’s dealing in a security to create a false appearance of active trading, in order to bring in more traders.

In other words, it’s a way of taking money voluntarily and honestly [it’s legal, now, remember?] from stupid people to give to smart people. And after it happens a few times, it’s a way of driving away people who don’t know what they are doing from investing in stocks in the first place. Which is ultimately to their benefit.

Financial arbitrage. Whoa, big words here. I think he forgot to look them up in Investopedia, or he would have seen why financial arbitrage is good for the economy.

The definition: The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.

DA: Sounds sneaky to me. What’s so good about it?

SD: We’ll  give Investopedia the floor:

Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.

DA: What does that even mean?

SD: Very simple. Once again, we have to understand what a price is. A price is a plea for help. When Mr A is selling his wares at a low price, he is in effect saying, “I’m stuck with a huge surplus and I’m so desperate for someone to take it off my hands that I’ll gladly sell it at a nice discount to the knight in shining armor who will save me.” And when B offers a high price, he is saying that he really really needs the stuff, so badly he will gladly pay a nice high price to attract some finder, anyone, to get him what he needs.

DA: So basically Mr. Arbitrage is helping them both.

SD: Exactly.

Exploiting crony-capitalist political connections. I’m with him on that one. Well said, Mr. Article Writer.

Myth 6:  Monopolies and oligopolies are always bad because they distort prices.

Totally agree that that’s a myth, and he more or less has the reasons right. One little quibble, though. Classical economics also agrees with him, it’s politicians that made up the anti trust laws. And Jeffersonian anti-trust policy is an oxymoron. Jefferson was for freedom, not for anti-trust laws.

Myth 7: Low wages are good for the economy.

Oh, dear. A straw man. The correct version is that wages determined by the free market are good for the economy. Not low wages.

Once we get that straight, all his arguments are exposed as missing the point. And they do not disprove the simple fact that if a law forces wages to be above what the free market would have them, then the people won’t get hired, because they just ain’t worth it.

Myth 8: “Industrial policy” is bad.

He argues that the govt must make good decisions, because the banks recently made bad ones. That’s like saying Curly of the Three Stooges must be a genius, because Shemp was a real dummy. Dude!

As for the banks making bad decisions, they were playing with other people’s money. They knew quite well the govt would bail them out, so what have they to lose taking reckless gambles?

Also, he’s missing the point. The govt is imposing its will by threat of violence when it “sets policy”. By definition, that’s hurting someone economically, limiting his freedom to as he wishes with his hard earned property.

Then he argues that “for many investments private and public rates of return differ, often quite significantly”. Well, I can’t disagree with that. The govt “invested” $500,000,000.00 in Solyndra. Rate of return: Zero. Not to mention that in the wild accident that some govt spending winds up making money, that money goes to the politicians, who did not invest a penny, not to the taxpayers. So the rate of return is again zero for the people who actually had to put up the money. So yes, it’s a quite significant difference.

His last argument is that the govt is just one big fairy godmother, spreading wealth to everyone by investing in “those activities where the public rate of return is higher (e.g., scientific research).” And if fairy godmother doesn’t do it, “growth will be less.”

Seriously? A politician knows better than a businessman how to increase growth? Why is he in politics then, and not in business? And the track record of all politicians in all countries through all time proves how wrong Mr Article Writer is. He quoted Gregory Mankiw making the same argument, but didn’t bother to refute it. As for research, I guess he doesn’t know that big companies have research departments that do, wait for it, research. Yes. Where do you think the govt got the idea from to begin with?

Myth 9: The best tax code is one that doesn’t pick winners.

He argues that giving a tax break to someone the govt thinks will benefit the economy must be OK. I mean, if the guy is doing research or buying new equipment, surely he deserves a bigger tax break than everyone else, no?

I’m reluctant to argue here, because any tax break is good, for whatever reason. If the thief steals from one less person, that’s good. So although his reasoning is flawed, we’ll put this one aside.

Myth 10: Trade is always win-win.

He saved the best one for last. And by “best” I mean “biggest blunder he made in this article that if accepted will do the most harm”.

And why is it a myth? Plenty of reasons, we are assured. F’rinstance:

But Econ 101 never explains how nations like America, Britain, Germany and Japan have used national industrial policies over the past century to become industrial powerhouses.

What? Britian became a powerhouse because it was the first to get rid of mercantilism and start a free market. That got them some capital accumulation, which the article writer himself understands very well when it suits his purpose, having mentioned it as being a cause of high wages. Then Germany and America got rich because Britian had so much moolah it invested in those countries. History, my man, history.

And Econ 101 never explains how foreign mercantilist practices, like those China is embracing, can hurt the U.S. economy.

Now there’s a stunner for you. China is indeed being mercantilist, exporting like madmen and accepting paper money in return that they don’t spend, but that’s hurting the foolish Chinese, not us. Take away what China sells us, and our cupboards will be bare. Tell you what. Pick some item in your house at random, anything. Where is it made? I thought so.

 …the Koreans and Japanese are not good at making flat panel displays because they have a lot of sand, they are good at it because their corporations and governments targeted it for competitive advantage.

What a foolish statement. It doesn’t matter why the comparative advantage is there, what counts it that it’s there and thus benefits both parties. For example, it doesn’t matter why I write sounder economic articles than the author [blind luck in discovering the Mises site], and why he is probably a better burger flipper than me, it just matters that that is the case. And that being the case, I should write the articles and he should flip the burgers. Otherwise we get burnt burgers and articles like the one he wrote.

Moreover, corporations locate their subsidiaries in particular nation-states to take advantage of local government subsidies and tax breaks or increasingly because of government requirements to produce locally. Econ 101 to the contrary, the location of factories and innovative research complexes is not determined by comparative advantage.

Notice how he contradicted himself? The first sentence explains what the comparative advantage is [tax breaks etc], the second denies its existence.

To bring this home clearly, if one guy has a neighbor [=govt] who routinely steals half the loaves of bread he bakes, would he not be better off letting someone else do the baking while he works on something that’s harder to steal? Sand has nothing to do with it. Any advantage counts when we talk about comparative advantage. That’s why it’s called comparative advantage, not comparative sand, or whatever he thinks.

Increasingly it is the artificial outcome of negotiations among multinational corporations and territorial states.

What is artificial about it? What are you saying? Are all negotiations artificial? Or just the ones you don’t like?

And the outcome of this “free trade” can be detrimental to the U.S. economy if it hurts, as it has, key U.S. high value-added industries.

Talk about looking through the wrong end of the telescope. Why are these supposedly “key, high value-added” industries “hurt”? Because the consumers, meaning everyone in America, is getting a better deal not buying from these unprofitable, supposedly key, high value added boondoggles. He wants to make sure every last American will not be able to support the profitable American businesses, because he wants everyone to give more to the unprofitable American boondoggles, whose workers cannot even compete with Chinese unskilled labor. Every dollar going to the boondoggles means one less dollar in the wallet of the average American, meaning one less dollar to support the profitable American businesses who don’t need artificial tariffs to survive.

Conclusion. In his conclusion he proves he does not know physics either, when he writes “relying on Econ 101 is like a physicist today relying on Newton”. Newton had it right for 99% of reality, and his insights are taught in every university in the world. It’s only nuclear physicists who have to modify very slightly what Newton wrote [from F=mdv/dt to F=dmv/dt].


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