Economists and astronomers: Why are the former lost in space?
from Dean Baker
It is remarkable that the public has been convinced that the earth revolves around the sun. This is remarkable because we can all look up in the sky and see the sun revolving around the earth.
Most of us are willing to believe the direct opposite of what we can see with our own eyes because we accept the analysis of the solar system developed by astronomers through many centuries of careful observation. The overwhelming majority of people will never go through the measurements and reproduce the calculations. Rather, our belief that the earth revolves around the sun depends on our confidence in the competence and integrity of astronomers. If they all tell us that the earth in fact orbits the sun, we are prepared to accept this view.
Unfortunately the economics profession cannot claim to have a similar stature. This is both good and bad. It is good because it doesn’t deserve that stature. Economists too often work as hired guns for those with money and power. It is bad because the public needs expertise in economics, just as it needs expertise in medicine and other areas.
Theories for sale
If you head a big pharmaceutical company and you want to strengthen your patent monopolies to allow you to charge more money for your drugs for a longer time, there is no shortage of economists who are willing to argue your case. If you run an investment bank and you want to avoid regulations and oversight, there are plenty of economists who are willing to attest that government interference will slow growth and cost jobs. If you own a gas or oil company that wants to frack without paying for the damage done to farmland and drinking water, you can find economists to back you too.
In short, in keeping with economic theory, there are plenty of economists who, under the influence of moneyed interests, are willing to put forward arguments that don’t fit the data. For this reason, the public has rightly grown skeptical of economists.
The problem is that the public desperately needs economics knowledge now, when there is a strong need for measures by the government to boost demand and create jobs. The public needs to have economists it can trust to make this case because it involves measures that are counterintuitive.
The basic point is that the government must deliberately spend more money than it takes in from taxes — in other words, run large deficits — in order to create enough demand to get the economy back to full employment. This is counterintuitive because running deficits has the appearance of being irresponsible.
It is only natural that people would extrapolate from their own experience with borrowing and debt to conclude that the government should not spend more than it takes in from taxes. This is where it would be useful to have an economics profession that could explain to the public that the situation of the government is fundamentally different. It does not face the same constraints on borrowing as a household, and it has a responsibility to sustain demand in the economy, which certainly no individual household shares.
The fact that governments with their own currency, like the United States, do not face any near-term limits on borrowing is easy to show. The ratio of government debt to GDP in the United States is just over 100 percent. By contrast, the United Kingdom had debt-to-GDP ratios over 200 percent through much of the 19th century. Japan has a debt-to-GDP ratio of 250 percent and can still borrow long term at less than 1.0 percent interest. Clearly there is no basis for concern that the United States is about to hit some debt cliff at which point it would no longer be able to borrow.
Economists should be able to explain the other side of the story. Since the collapse of the housing bubble, the economy has faced a severe shortfall in demand. There was no plausible source of demand that could replace the $600 billion in lost construction demand when the housing bubble burst or the $500 billion in consumption demand that was fueled by massive amounts of home equity created by bubble-inflated prices. When the bubble burst and house prices fell back to trend levels, consumption fell back to more normal levels.
The combination of lost construction and lost consumption created a massive drop in demand in the economy that could be replaced only by government spending. This is the reason the federal government must run deficits; there is no other plausible way to compensate. In this context the decision not to run large budget deficits is a decision to leave millions of people unemployed or underemployed and to forgo trillions of dollars in potential output.
Inflicting needless suffering on tens of millions of people cannot be viewed as responsible. If economics had as much standing as astronomy, economists would be explaining this point to the public. They would be telling them why the rules for responsible household budgeting are not the same as the rules for responsible federal-government budgeting.
But economists are not scientists like astronomers, perhaps because there is so much money at stake. As a result, the United States and much of the rest of the world is likely to needlessly suffer from the collapse of the housing bubble for many years into the future.
Dean Baker is co-director of the Center for Economic and Policy Researchand author of
The End of Loser Liberalism: Making Markets Progressive.
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You are on the right track but you are still tangled up in the debt conundrum.There is no reason why a government,sovereign in its own fiat currency,has to borrow in that currency.
The fact that they still do is a hangover from the gold standard era.That is an ideological hangup.They also issue bonds as a favour to people with money so they can park it where it is safe and get some return.
That is not “debt” in the same sense as private debt. The government can redeem those bonds any time it likes.
Responsible economists should be educating the citizens about the real nature of modern money. But that means they would have to understand the subject themselves. In many cases I doubt that they do. But,as you say,in many cases it is wilful ignorance.
Is it a myth that mounting deficits cause future generations to fund our current consumption? Or that deficits now **increase** income inequality and standards of living in the future? Mr. Baker is the exact partisan hack economist he seeks to call-out in this post. I trust more the economists on the take for money, rather than political Liberal values.
Here is the dominant way the people are deceived — keep selected history out of sight! For example:
http://patrick.net/forum/?p=1230886
” anyone who believes in indefinite growth of anything physical on a physically finite planet , is either a madman or an economist
Kenneth Boulding Economist 1910-1993
Hi kiwichick
Neat! May I ask if the chart here
http://www.showrealhist.com/3warnsRD.html
is readily clear to you. Thank you.
Dean:
I have been an “expert” witness against the major oil companies for decades. In the summer 1974 issue of the Brookings Papers on Economic Activity, I even wrote up a study done with two graduate students [who received joint authorship] on the fact that the oil price spike of the 1970s was not a n indication of a Malthusian shortage –while other economists were predicting the world would have to pay over 100 per barrel [in 1974 dollars] before the turn of the century.
In fact since I had worked for an oil company in the 1960s and had many discussions with petroleum geologists during my work there, I felt confident we were not running out of fossil fuels — and even mentioned in the Brookings article all the oil trapped in shale which could be liberated given the growing technology in the petroleum industry. [My work with oil company resulted in my publishing an article (when I returned to Academia) in the 1963 American Economic Review entitled “Public Policy Problems of the Domestic Crude Oil Industry”].
. In the Brookings Paper my students and I even went on to predict what the price of oil would be in 1974 dollar some decades ahead given what we knew about oil resources, shale oil, etc. Although our forecast indicating that the US could be virtually independent of foreign oil supplies before the 21 century, most professional economists dismissed our arguments –and instead argued that the price of oil spike was merely the market knowing how to efficiently allocate oil over the next few decades..
In my discussions with those on the other side, I did not think most were influenced by the money the oil industry would pay for their “expert” testimony , advice, etc. I truly believed they were captures of the efficient market analysis– propagated not only by Chicago — but also Arrow-Debreu, etc.. So , in my opinion it is not the money that captures the mainstream economists but their wrong theory. The problem Dean is not the money — although I am sure some economists, who have been sponsored by money making firms, have gained the public spotlight by having their words quoted in the media–perhaps with the help o of corporate PR people. The problem is that the economic establishment of our profession refuses to even consider their basic classical , neoclassical analysis is not applicable to the world of experience where the future is generated by a nonergodic stochastic process.
Paul Samuelson, in print, insisted that if economics was to be a true science [like astronomy] then economists must base their theory on what Samuelson called “the ergodic hypothesis”. Consequently even the old Keynesians as well as the New Keynesians , if they are going to be logically consistent, must base their arguments on self -interested decision makers making decisions on the basis of their having some ergodic predictability of the future.
My recent work on Keynes and the liquidity analysis underlying Keynes’s theory of money, for example my book THE KEYNES SOLUTION:THE PATH TO GLOBAL ECONOMIC PROSPERITY (2009) and my 2007 book entitled JOHN MAYNARD KEYNES — in the Palgrave/Macmillian series “Great Thinkers in Economics” — have never been reviewed by any orthodox economics journals– not the Journal of Economic Literature, not The Economic Journal, etc. Why?? Because my writings argue that the basis of Keynes’s revolutionary thinking was the future was nonergodically uncertain and therefore the only way decision makers could hope to protect themselves from making ruinous decisions was through the use of money contracts to assure legal cash inflows and outflows.
The ergodic hypothesis is just that. An hypothesis. It seems that Samuelson wanted to reify this hypothesis. He was lost in space.
“The basic point is that the government must deliberately spend more money than it takes in from taxes — in other words, run large deficits — in order to create enough demand to get the economy back to full employment. This is counterintuitive because running deficits has the appearance of being irresponsible.”
There speaks another economist. Demand comes from desire, and since human desires are unlimited, lack of demand can not be the reason for unemployment. Historically, unemployment has arisen when land has ceased to be freely available at the margin. If you think about it, this is both obvious and intuitive, because no economic activity can take place except at a place somewhere on the surface of the planet. As soon as all land was owned by somebody, those who did not own were at an immediate disadvantage since they were unable to produce anything to satisfy anyone’s demand, and were not, in turn, able to demand anything themselves. “Lack of demand” comes from lack of supply, due to people being literally locked out of the economics process.
Very simple, obvious, and it owes nothing to Keynes.
thanks ed
i’m not invested in the us stock or housing market
nor in any of the “fashionable” australian stocks or the housing market here
i’d suggest we are in the calm before the next storm
which i’d guess is only 2-3 years away
To claim that government deficits are helping the situation is ignoring the effect of the government debt. Yes, government debt can recreate the false demand that the private debt hasn’t been providing lately. But it has costs of its own. Currently, the US spending and QE are preventing consumer price deflation while putting more money in the hands of the financial industry.
What knowledgeable people must admit is that there is no pretty way out of this. And the longer you deny that, the more violent will be the result (violent numerically and physically, most likely). The attempts to save the poor are not extracting money from the 1%, they are destroying the middle class and adding more to the poverty roles.
Of course, the truth will not be politically accepted so the best you can do as individuals is to convince a handful of people to pay off their debts and grow food.
As an economist, you could however stop contributing to the delusion by suggesting government spending can painlessly return us to prosperity.
Why “lost in space”? Perhaps, because they cannot perceive the difference between models and realities, because their favorite model is subconsciously installed as a defensive barrier to perception of threatening information about reality, etc.