Another dull day on Wall Street yesterday. Nothing much to report.
So, let us return to the exciting place we visited yesterday: the world, red in tooth and claw, before historical records began. Ten thousand years B.C. Twenty thousand. One hundred thousand.
We continue our look at the difference between civilization and barbarism. But before we begin, let’s pause to gasp and wheeze.
That’s what happened to us when we read an op-ed piece in the New York Times, proclaiming “Economics Is a Science.” The author, Raj Chetty, tells us he is:
…troubled by the sense among skeptics that disagreements about the answers to certain questions suggest that economics is a confused discipline, a fake science whose findings cannot be a useful basis for making policy decisions.
It is true that the answers to many “big picture” macroeconomic questions – like the causes of recessions or the determinants of growth – remain elusive.
Elusive? They’re as elusive as a dead Abominable Snowman or an alive Elvis. They don’t exist. At least, not where these economists are looking. You can’t get reliable answers out of a quack science.
Chetty is a professor of economics at Harvard. Of course! Who else would believe there is anything the least bit scientific about economics? Chetty continues:
Consider the politically charged question of whether extending unemployment benefits increases unemployment rates by reducing workers’ incentives to return to work. Nearly a dozen economic studies have analyzed this question by comparing unemployment rates in states that have extended unemployment benefits with those in states that do not. These studies approximate medical experiments in which some groups receive a treatment – in this case, extended unemployment benefits – while “control” groups don’t.
These studies have uniformly found that a 10-week extension in unemployment benefits raises the average amount of time people spend out of work by at most one week.
This simple, unassailable finding implies that policy makers can extend unemployment benefits to provide assistance to those out of work without substantially increasing unemployment rates.
A Complex World
Science requires controllable initial conditions… hypotheses that you can prove untrue… and reproducible results. Economics meets none of these criteria. As practiced today, it is just opinions and guesswork that uses slippery statistics to justify sleazy policies.
For example, does Chetty mean a state can extend unemployment benefits and be sure to increase the length of average unemployment by a week? Or that a state can contract unemployment benefits and be sure to reduce the length of average unemployment by a week?
Not at all.
An economy – as most real scientists are aware – is a complex adaptive system. Cause and effect aren’t linear. Inputs don’t lead directly to outputs. Unintended consequences are common. Economies (like cultures) are a collection of interacting agents (people) – all with their own ideas, misunderstandings and foibles. It is not the kind of rational, mechanical world Chetty naively imagines.
In an economy there are thousands of influences on unemployment – the number and type of jobs on offer, real wages, demographics, inflation. No one can say which factor will come into play at any given time… or what effect it will have.
There are no discreet factors that can be isolated and studied. There is no way to build up a proven body of economic knowledge. And you can’t measurably improve the world based on the complex decisions of hundreds of millions of individuals. .
Real science can do amazing things – such as send a motorized vehicle to another planet and operate it remotely.
What can economics do? What has the profession ever done? Does our economy grow any faster with economists running the Fed? Do we recover from setbacks any quicker? Do people become wealthier?
The answer to all these questions is no. The US economy functioned better before economists began meddling with it.
Can you think of a single achievement of the economics profession?
From Win-Lose to Win-Win
Now, back to 10,000 B.C… or maybe 5,000 B.C.
Real money as we know it arose along with marriage and the golden rule. These innovations allowed people to live together peacefully and do business with one another. Trade, savings, investment, the division of labor – these are the bedrock innovations upon which modern capitalism rests.
For the first 195,000 years of his existence man tended to engage in win-lose transactions. Wealth could not be readily increased. There was only so much hunting territory. And only so many women. The way to get more was to take something away from someone else.
One person gained. The other lost. Naturally, the loser did not hand over his possessions without a fight. Typically, we guess, he was killed… or driven off… by the winner.
This is not to say that some people did not live peacefully. And it’s not to say that there weren’t nice people who did nice things. We don’t know. We weren’t there. But it is not hard to imagine that violence was as common as flint. Any major changes in the relative wealth, status or power of men – individuals or groups – had to be achieved primarily by violence. There was just no other way to get ahead.
There is nothing particularly shocking about this. Primitive man’s conduct was little different from any other predatory animal. All lived by killing. The more they killed, the more “prosperous” they were.
Nor was man the only predator who targeted his own kind. Recent observations show that chimpanzees in the wild conduct murderous wars against neighboring groups – organizing raids and ambushes to kill rival males.
Nor did the killing stop after the birth of civilization. Instead, it grew more sophisticated – with large, professional armies… and some of the sharpest minds… put to work on the challenges of military engineering and mass homicide.
But after civilization evolved – and it is still evolving, of course – killing needed a false mustache. It had to be disguised as patriotism… protecting the homeland… a fight for Lebensraum… Manifest Destiny… the War Against Terror… the Monroe Doctrine… making the world safe for democracy… or some such claptrap.
Meanwhile, the rate of return from fighting declined. You could still kill – we can deduce that nothing in pre-history came close to the death toll of World War I, for instance. But in the modern world homicide didn’t pay off as it used to.
Much of the fun and profit was removed. You could kill a man. But it was unseemly to take his property as your own, his wife into concubinage and his children into slavery. Instead, the rate of return turned negative.
You flattened an opponent – and you found yourself responsible for the care and maintenance of his widow! You had to come up with funds to rebuild your adversary’s economy.
The United States’ entire imperial enterprise has been a losing proposition. The Philippines, World War I, World War II, Korea, Vietnam, Afghanistan – the net return on investment was starkly negative, though probably none so deeply in the red as the war against Iraq, estimated to cost as much as $5 trillion – with no discernible off-setting gain of any sort.
But as the rate of return from violence declined, the rate of return from cooperation increased. The win-win deal did not simply transfer wealth. It added to wealth.
This is, of course, the world Adam Smith described in The Wealth of Nations. By specializing in what they can do best… and trading with others… individuals, and nations, grow richer. They don’t just move existing wealth around. They increase the world’s total wealth.
More to come…