Economic Theory, Is it Just Hogswallow?

I'm a voracious reader. It's true, I'm geeky like that. I think it's my mom's fault. She always had a book in her hands. Today, it's not just books or newspapers or even magazines that capture readers, it's also the web. I know, this is now surprise to you, the intrepid web-reader. But, I think it's still something that should be said, out loud.

Okay, so let's get to my point. Economics.

This theory has always been a complete mystery. It's this social science that seems to pretend to be more science than social study. It's as foreign to my thinking as say Physics. Funny thing is, that apparently, Economics is based, in part on Physics. So, when I read the recent Reuters piece on Economists getting it wrong, once again:

Factory activity surveys in the United States were also expected to show a steeper contraction in December, as demand collapses in the Western countries that developing nations rely on as export markets.

Economists and policymakers had seen China, Russia, India and Brazil, with their vast markets and rising wealth, as the engines of growth that could save the world from recession. Those hopes are fading fast and forecasts are getting gloomier.

I know, you're surprised, right? 'Cause Economists have gotten so much right lately, huh?

Well, this is where my voracious reading thing comes in.

Earlier this week, one of my all time favorite writers, Shirah (Unbossed and Dailykos) decided to take her knowledge of history and economics and combine it into a story about Massive Economic Experiments. Before I exerpt her, let me first say, you've got to head over and read the entire thing. My excerpt just doesn't do it justice. Okay, so let's just get to the meat:

What we have learned from these natural experiments is that regulations are helpful in safeguarding us - something markets are uninterested in- and they do so, in part, by providing needed information so we can protect ourselves. This is an interesting point, because market theory tells us you need complete information to have a functioning market. By removing regulations, the free marketeers took away something that supports a functioning market.

Now, obviously, I lied when I told you that we were going to test these theories. The truth is that the proponents of free markets never really test these big theories. Rather, they treat them as if they were religious dogma, something that need not be subjected to testing. The inadvisability of doing so can be found by looking at how classical economic theory developed. This article from Scientific American provides an overview:

The 19th-century creators of neoclassical economics—the theory that now serves as the basis for coordinating activities in the global market system—are credited with transforming their field into a scientific discipline. But what is not widely known is that these now legendary economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting equations from 19th-century physics that eventually became obsolete. Unfortunately, it is clear that neoclassical economics has also become outdated. The theory is based on unscientific assumptions that are hindering the implementation of viable economic solutions for global warming and other menacing environmental problems.

The physical theory that the creators of neoclassical economics used as a template was conceived in response to the inability of Newtonian physics to account for the phenomena of heat, light and electricity. In 1847 German physicist Hermann von Helmholtz formulated the conservation of energy principle and postulated the existence of a field of conserved energy that fills all space and unifies these phenomena. Later in the century James Maxwell, Ludwig Boltzmann and other physicists devised better explanations for electromagnetism and thermodynamics, but in the meantime, the economists had borrowed and altered Helmholtz’s equations.

The strategy the economists used was as simple as it was absurd—they substituted economic variables for physical ones. Utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. A number of well-known mathematicians and physicists told the economists that there was absolutely no basis for making these substitutions. But the economists ignored such criticisms and proceeded to claim that they had transformed their field of study into a rigorously mathematical scientific discipline.

Shirah goes on to discuss behavioral sciences and how the latest breakthroughs in behavior studies show that humans as well as numerous animal species work toward cooperation. Cooperation, not self interest is a much higher order concern or desire. Now, this was news to me. It's not like I just crawled out from under a rock, but what I always get from anti-union folks is that they think that human beings and especially themselves are held back by cooperation. That if they can work on their own, they'd be more successful. Given the opportunity, they could lead a team of folks based on their abilities alone, without the interference of cooperation.

now, anyone who's worked on or lead a project from building a house to designing a web site knows that no one works in a vacuum. That when we all work together, we are stronger, better, faster, more accurate and damn it, we get things done. Take the 2 hour house, yeah, I said it, 2 HOUR HOUSE:

The Two Hour House was a perfect mix of clear vision, a willingness to live big, the determination to manifest a dream, the power of group focus, systemic psychology, passion, and the recognition of the willingness to play the biggest game of your life. Volunteers came together across industry lines and together they created something amazing.

It's impossible to build a house in 2 hours. No, seriously, do you know what has to go right to make something like this happen? From the footers being laid to the concrete being poured to the dry wall, plumbing, electrical, roofing and everything else that needs to be done in so many different areas in the same moments in time. And you thought Extreme Makeover Home Edition was ambitious!



Sorry, had to add the promo video, it is a good show.

My point here is that we get the doom and gloom today about more issues with slow downs and how economists are worried because, basically, they didn't predict this to be the case. They had hoped that Russia, China and India could keep the world economy chugging along. Problem is that the folks buying the products in Detroit, Dallas, Atlanta, Chicago, London, Paris, Marseilles, Oslo and just about everywhere else in the "1st world" countries, aren't buying now. There's a glut of products (come on, we all know this) and with savings down, home process shot and little credit available, many folks aren't about to put themselves out further on the limb to bring home more stuff that they don't need.

I know this isn't anything you haven't heard before. But let me hazard a guess, if you're an American, you've never heard about Disney giving away vacations:

Offer valid for most Disney resorts at varying rates for stays most nights 2/9 - 4/4 and 4/19 - 6/27/09.


Sample 7 Night Package at a Value Resort as low as $1375 including 7 Day Theme Park tickets

For a family of four in a standard room

For stays most nights between 4/19 - 5/21/09
That's like paying $50 a night per person for this package
Total package savings of $416

Plus, when you travel between 2/9 - 3/29/09, you'll also get a $200 Disney Gift Card

and I suppose if you do it on your Birthday, you get even more, because you can head to Disney for free on your birthday.

I'm 39 years old. I have never seen Disney post vacation prices for a family of 4 at any of their resorts for under $1500, but to through in $200, well, this was the moment that I realized, something is really wrong.

So, the next time you hear about an Economist talking, keep in mind that they may be using formulas that Physics gave up on in the 1800's. That Disney is giving away vacations and that cooperation is way more important than self interest. Next time you look into the eyes of your kid, you'll really get that last one, because few parents don't think kid first themsleves second. Hell, don't we all know this when we're on an airplane and they tell you to put your mask on first before helping your child? They have to actually tell you this, because as a parent, you do the opposite, thus disproving what Economics is really based on and that to me also reminds me of exactly why Free Markets don't work. They don't take into consideration cooperation. And for a union girl, well, we call that sort of thing SOLIDARITY.