At my new job, I’ve been reading a lot about economics. Along with a bunch of articles and white papers, I’m working my way through Beinhocker’s (very readable) The Origin
of Wealth, and after that I’ll finally tackle Piketty’s Capital, which I have only up ’til now experienced through the lens that is Charles Mudede’s genius.
Learning about economics, it turns out, is great fun. Most of the modern texts are entertaining as hell, the concepts are fairly easy to grasp, and economics influences and is influenced by everything on the planet, so it gives you a new framework with which to perceive the world.
Maybe the most surprising fact about this deep dive is that the stuff I’m learning delivers a positive message. Unlike the vicious world presented by Ayn Rand and her legions of acolytes, the economics I’ve been reading about is inclusive: if businesses pay their workers more money, for example, the workers will spend more money, thus growing the economy for everyone. If you don’t just focus your growth on a tiny portion of the economy—like, oh, the 1 percent, for example—the money circulates outward and upward and downward. If everyone does better, it’s better for everyone. See? Positive!
Today, the New York Times published a piece by Adam Davidson titled “Debunking the Myth of the Job-Stealing Immigrant.” It looks at immigration from an economic perspective, and it’s packed with good news: Davidson writes, “the economic benefits of immigration may be the most settled fact in economics.” But what about the conservative notion that immigrants are taking our jobs?
The chief logical mistake we make is something called the Lump of Labor Fallacy: the erroneous notion that there is only so much work to be done and that no one can get a job without taking one from someone else.
What’s the problem with this fallacy? Well, it’s, uh, false:
Immigrants don’t just increase the supply of labor, though; they simultaneously increase demand for it, using the wages they earn to rent apartments, eat food, get haircuts, buy cellphones. That means there are more jobs building apartments, selling food, giving haircuts and dispatching the trucks that move those phones.
The more people in the workforce, the bigger the workforce needs to be. So not only is the Republican fear-mongering against immigrants racist and hateful—it’s economically unsound, too. Go read the whole story.
And they pay more taxes. Taxes on those haircuts and Social Security, which we need for the boomers retirement. We need more people and this is a way to get them without crowding the planet. But the right only understands fear. Everything with them is about fear. It’s fear borne of a willful ignorance.
The most important thing to remember about economics is that it studies human behavior, therefore is a social science, not a “hard” science. The fact it relies heavily on statistics and masses of data confuses some people, especially those prone to simplistic thinking. Economic “laws” don’t always work the way they’re “supposed” to. Markets don’t necessarily self-correct the way theory predicts.
Many a dogmatic has embarked on a fool’s errand by questing for mathematical certainty and predictability in the workings of economies, not least those who believe fiat currency is the root cause of all economic ills and restoring the gold standard is the cure for everything.
Paul,
Give “The Road to Serfdom” a read.
A good example of one of economics’ most immutable “laws” is falling flat on its face right now in the U.S. fracking industry.
Theoretically, when the price of something goes down, producers should produce less of it, and when its price falls below the cost of producing it, they should stop producing it altogether.
The exact opposite is happening in the U.S. fracking industry.
The average production cost of U.S. fracked oil is roughly $62 a barrel. It’s true the drill rig count in America’s fracking fields has fallen by 2/3rds since oil began its freefall last summer. But the production from those fields is UP, and will continue to go UP, because once you’ve spent $12 million (average cost) drilling a fracked well, you get no benefit from leaving the oil in the ground even if you have to sell it for only $6 million. (The logic is pretty simple: $6 million is more than $0.) So, even though realized oil prices have fallen below average fracking costs, fracking production is growing and is expected to continue growing and force oil prices even lower.
You could argue that market forces eventually will “correct” both supply and price by forcing money-losing oil production off the market, but that’s not a given. It certainly isn’t happening so far. There are numerous reasons why producers may continue pumping oil and selling it below cost.
In fact, it’s a rare company that hasn’t operated at some time during its history. If you review the earnings reports of large well-known corporations, nearly all have lost money at times (i.e., sold their products and services below cost), sometimes for years running. These companies are managed by people who can do math, are motivated by profit, and aren’t crazy. There are lots of reasons why they choose to lose money rather than shut down the company, close the plants, and fire the employees — such as not being able to restart the business when they can sell their product profitably again.
Which points out that economic decisions, and the functioning of economies, are affected by too damn many variables to be predictable according to some sort of textbook formula. It’s not like weather, the predictability of which also suffers from variable overload; weather always obeys the physical laws of the universe, and those laws don’t change. Economics is different because you’re dealing with human judgment, human irrationality, and human error, plus economic decisions are always made with incomplete information, plus a bunch of other things including the fact that what motivates humans is subject to change.
The most famous economic “law” of them all is supply and demand. We can have a lot of fun with this “law” because it doesn’t always work when it “should.” Inexplicable oversupply appears, demand mysteriously vanishes, and so on. You can get lower oil prices driving up production and driving down demand, etc., in fact that’s exactly what’s happening right now.
And don’t even get me started about how the banking system works (it doesn’t collect money from depositors and lend it out; it creates money in the form of credit from thin air, and most inflation comes from increased lending activity, not government money-printing, but don’t try to explain this to a conservative), or Monetarists vs. Austrians, or Keynesian stimulus (which seems to work) vs. austerity (which fails miserably every time it’s tried, but conservatives keep trying it anyway), or whether gold is the only true money (some ancients didn’t think so; they lined their latrines with it) or even money at all (it isn’t unless you believe it is, and accept it as tender of payment on that basis; otherwise, it’s just a metal with a limited number of practical uses). Getting back to supply and demand, when it doesn’t work, economists rationalize away its failure to work by injecting another variable, “elasticity” (and its counterpart, “inelasticity”), into their equations. Armed with elasticity, they don’t actually make supply and demand work, they merely rationalize why it doesn’t work when irrational humans decide that raising the price of something makes it more desirable.
I experienced this when I owned a mail order business some years ago. If a product wasn’t selling, we raised its price, and then it flew out the door. Sounds weird, but if something is too cheap, people assume it isn’t any good. A $1.50 can opener may be a much better product than a $10.00 can opener, but people won’t buy it unless you charge $15.00 for it. You stupid humans are funny about things like that, and economics is a product of human psychology, not the physical laws of the universe.
Once you understand this, and grasp the fact that economic “laws” merely describe tendencies of human behavior and everything in economics is merely an approximation, then you’re in a position to understand that economics is probabilistic in nature. Once you get that, you’re on your way to dealing intelligently with its uncertainties and vagaries.
@3 What for? Reading is no more likely to lead him to economic salvation than reading the Bible, Quran, or Torah is likely to lead him to spiritual salvation. Hayek, like many prominent observers of economic behavior, latched onto some “economic principles” that sometimes work and sometimes don’t work. If your goal in citing Hayek is to promote a particular political agenda, then I would argue that his generally non-interventionist approach to markets (with certain exceptions) doesn’t lead to greater individual freedom for the person who finds himself/herself working brutal hours for low wages in a dirty and dangerous sweatshop.
In fact, a libertarian economist with a specialty interest in sweatshops named Benjamin Powell, who currently teaches at Texas Tech and is a fellow of the Independent Institute, an Oakland-based libertarian think tank, actually argued in a 2014 book titled “Out of Poverty: Sweatshops in the Global Economy” that sweatshops are a good thing. I suppose they are, compared to laboring in a rice paddy or North Korean coal mine. But I would argue that decent-paying jobs with First World working conditions brought about by progressive legislation and labor unions are a much better thing.
Granted that much of humanity remains mired in grinding poverty, nevertheless, shoveling the world’s poor into sweatshops is not the path I would chose for their betterment. Among other things, I would use the power of government to shut down the kind of sweatshops that kill 1200 workers at a crack when they collapse or burn down, including those existing in the Third World. I also would prevent the importation of goods made in those hellholes into my country, and as a consumer, I would avoid buying such goods to the extent I could. If this is non-libertarian big-brother intervention in markets, so be it. There are few aspects of human welfare and well-being that I’m willing to entrust to the gentleness of unfettered capitalism.
Don’t get me wrong. I’m not accusing Powell of being an unabashed Hayekian, nor am I laying his sins at Hayek’s doorstep. I’m merely pointing out there’s more to economics than squishy theories and data crunching. Ethics ought to enter into it, too. In my thinking, an economics theory that maximizes production and efficiency by reducing workers to penury and slave-like working and living conditions is not useful and is no damn good. Where free-market and libertarian thinkers go astray is the range of their thought process isn’t broad enough; they too often exclude important human values from their thinking.
@5,
I recommended “The Road to Serfdom” as a bit of an antedote to all that Keynesian crap Paul mentioned.