Friday, November 21, 2008

Apparently I Don't Understand Economics

We all know inflation is bad. Rising prices devalue our money and make it harder to buy things. Apparently the opposite is also bad. Deflation - falling prices - is also bad for the economy, at least according to economists quoted by MSNBC.

“A benign decline in prices amidst a sluggish but recovering economy would be unwelcome but tolerable,” Merrill Lynch economist David Rosenberg wrote in a note to clients this week.

Unwelcome to whom, Mr. Rosenberg? I know plenty of people who like to pay less for goods of all types. I've heard of weirdos who like to pay more, but they're much more rare.

“But the price slashing now under way as the consumer beats a hasty retreat could allow that corrosive deflationary spiral to take hold — something the Fed wants to avoid at all costs.”

The Fed wants to avoid falling prices "at all costs?" boy, with friends like that, who needs enemies?

As I said, I'm not an economist, but perhaps someone who is could answer this question for me:

If inflation is bad and deflation is bad, then what, precisely, do you expect prices to do?

Should a pound of cheese always have the same price? If so, then the USSR had this economics thing all figured out. They just printed the price right on the label. Year after year a jar of tomato sauce was 40 kopeks. Your parents paid 40 kopeks and, by darn, your children would pay 40 kopeks. Is that the answer?

The problem I have with this idea is that (as I have learned both in life, and in school), in a market, there needs to be a mechanism to balance supply and demand. That mechanism is price. If I want 40 dollars for a widget, and you don't think it is worth 40 dollars, guess what? No sale. Deflation has to occur to meet your demand.

At this point any "real economist" is probably either rolling on the floor laughing, pulling out his hair in frustration, or muttering incoherently about Econ 110 having no relationship to "real economics."

Well, maybe not - but the economists in the MSNBC story seem to have nothing but contempt for consumers. They give the distinct impression that they believe the average of consumers' judgments about the worth of goods (otherwise known as the 'market price') is wrong, and that they, the "elite" know what things are worth.

Pardon my skepticism, but are these the same "elite" who have guided our economy to it's current prosperous state? The ones who never saw the housing bubble coming? Who watched house prices rise 10% per year as wages rose 2% and saw nothing to worry about? Who thought sub-prime mortgages were a terrific idea? Or, a little farther back, thought stratospheric stock prices for unprofitable .com businesses were just the "new economy?" Or thought that Pres. Bush's tax cuts would unacceptably reduce govt. revenue? or that Reagan's tax cuts would do nothing the stimulate the economy? Or thought that Sweden was a model of a well-run economy?

Now who should be laughing?

I'll say it again. Economics is not a science. It is a pseudoscience. Any claims to truth or predictive ability that it makes are a fraud.

Economics is a descriptive art - like psychology. Also like psychology, it has no power to predict future behavior because every person in the system is an agent unto herself, and not an automaton. This is why no one saw this crisis coming. Economists admit that this is unprecedented and was almost completely unforeseen - and they are right - they just don't see it as a failure of their 'science.'

Economics is (at best) a social science, a descriptive study of human behavior. It is individual psychology mis-applied to huge groups of people, and it goes through fads just like any other field of study. It also has its quacks like any other field. Keep this in mind next time an economist claims to know something.