Preface: Economics, It’s Not Rocket Science... Is It?
Brain surgery, higher mathematics, quantum mechanics; everyone knows they’re hard. If you ask someone in the street for their opinion on those disciplines, the most likely answer is: “I haven’t got a clue, leave it to the experts.” Very few people are embarrassed to admit that they know little of such things. Economics, however, does not appear to be in that category. Economics seems to have a characteristic it shares with driving skill. Surveys of drivers show that the majority of people think that they are more skilled than the average. On the surface, running an economy does not appear to be so difficult. If we all work hard, get the unions out of the way, have low taxes and invest in industry, the economy should get along just fine. It’s all just common sense, isn’t it? The evidence would suggest that there is something wrong with this view. The economy appears to do crazy things. There are wild booms and busts, periods of seemingly out-of-control inflation and other periods of high unemployment. The busts are often not predicted, even by the most esteemed economists. Indeed a report produced by the International Monetary Fund concluded that the world economy was in great shape in April 2007 only for the biggest economic crash since the Great Depression to happen just months later. A symptom of this “it’s all just common sense” attitude towards economics is that the most unlikely people are selected to run the economy in various countries around the world. People who have shown little sign of mathematical or scientific prowess are selected on the basis that they are good, honest people, or they are great orators, or they ran a successful business. Looking at the academic backgrounds of the past ten people placed in charge of the British economy in recent years, we find that only three of them had some degree level training in economics and the remaining seven had the following backgrounds:
It should be noted that none of the ten had any degree level education in mathematics, physics, engineering or any other hard science. Just at the time of writing a new politician, Alan Johnson, has just been selected by the leader of the main opposition party in the UK to be the shadow chancellor. It is interesting to note his credentials. He left school at 15 (even earlier than John Major), then stacked shelves in a supermarket before progressing to become a postman at age 18. If the position of “head of brain surgery” at a major hospital became vacant then there is no way Alan would even get an interview, let alone the job. But somehow, for the post of “head of economics”, Alan is deemed suitable. So what is it within economics that trips people up? What features of it lead politicians and bankers to get things so badly wrong time and time again? The answer is that it’s not “common” sense at all. Economics is deceptively hard. There are several counter-intuitive aspects of our economic system that are either not widely known or are generally misunderstood. Most, if not all, university-level economics textbooks have inadequate, out-of-date or misleading information about a variety of critically important phenomena: · fractional reserve banking (ill-understood/ignored) · Keynesian beauty contests and their consequences (largely ignored) · Ponzi dynamics in asset pricing (largely ignored) · the paradox of thrift (ill-understood) · inflation (ill-understood) · the invisible hand (overestimated powers). Hopefully by the end if this book you will have a good grasp of all of these things and will be in a position to understand our economic situation better than many professional economists. A quick test: If you know someone that claims to know about economics and you are uncertain as to whether they really do or not, then try this test on them: Ask them to explain how money gets created and destroyed by the banks. If they cannot do so, then it is inconceivable that they could properly understand our current economic situation. |