Reading for Sanity: Naked Economics

Economists agree on more than they disagree. This might seem like an exaggeration, since the debates on policy are so heated. But policy debates are not about the resolved math or well-established theories within economics. Instead, policy debates are driven by value judgments. What economists and their colleagues in behavioral science, data science, psychology, linguistics, rhetoric (my little niche) and elsewhere can agree on are some rather basic tested notions. What we disagree on is what makes for a "good and righteous" society — and even if we want a values-based government at all.

Charles Wheelan's Naked Economics: Undressing the Dismal Science is 15 years old. Yet, the book reminds me that until recently there was generally more agreement than disagreement within the field of economics and its associated disciplines.

I'm rereading Naked Economics because the hyperbolic rhetoric from the left and right, which are not even that extreme in the United States, has made it seem like no areas of agreement exist. I needed to remind myself that there are core issues among economists. Among these areas of agreement:
  1. Property rights matter, since they allow for accumulation of wealth (not always physical wealth, either).
  2. Rule of law, in a predictable and consistent system, helps economies function. Governments should also be stable and predictable.
  3. Trade helps impoverished people in under-developed nations.
  4. Markets function better than central planning, though they inevitably cause disruption and creative destruction.
  5. Fiscal and monetary policies lag the economy, and can often do more harm than good.
  6. People are not logical, so models based on logical consumers and producers fail to adjust for wants (versus needs) and utility as people judge utility.
  7. Efforts to regulate production or consumption disrupt markets and "natural" technological evolution… but externalities require compromise.
Property rights begin with the greatest right of all: the sovereign self. If I own my body and mind, I should have the legal right to enter into labor agreements or to create value as a self-employed person. Nobody should be forced to buy my labor or the products of that labor, but I should be free to negotiate the circumstances of my work. Economists argue over how "free" someone is, and philosophers suggest there is always the choice of "nothing" over something. In the end, I might even "choose" to do what I hate because I value being alive. The theory is that government cannot take away my ultimate choice: to live and work from one day to the next. Very existential, I realize, as Albert Camus said the final choice is suicide in a bad situation.

Collective bargaining muddies the water a little, unless you believe that groups of people organized as a union also made a free choice to market their labor collectively. Or, you choose to work in a unionized organization. Again, it is all theory.

But, economists agree: the individual is the building block for all economic models and theories. People have to do something or make something to survive. Even self-sufficient people invest time and energy to the activities they consider most valuable.

From the notion that the self makes or does things of value, economists agree that the next stage is specializing. Specializing allows one person to be the blacksmith, one person to be the baker, one person to be the farmer, and so on. Specializing leads us to be better at one thing, which we can then do for other people. Society improves with specialists.

To make barter or money or whatever work between producers, you need laws. You need legally binding contracts. Without the peaceful, consistent resolution of disputes, you get chaos. Force should not determine who wins a contract dispute.

Governments that protect individual rights and ensure transparent legal systems are good for economies. They can differ on some matters, but a stable and trustworthy government gives people faith in their ability to conduct trade. Economic activity under corrupt governments is constrained. Corruption leads to delays, bribes, political favors, regulatory blackmail, and so on.

Wheelan cites economists from the "left" and "right" to show the consensus view that open markets with minimally intrusive regulation grow at the fastest rates. The debates in developed nations are, as I stated before, not on the economic theory but on the desired values and outcomes within nations.

We should generally agree that working more hours can enable someone to earn more money. Should we have mandatory caps on the hours people work? That's a value judgment. Should government set minimum prices or minimum wages? Economists know the minimum wage is all theory: how do you know what a minimum should be?

Price and wage controls are policies that distort the market, but we might agree as a society that we value a minimum wage more than a completely free market. Requiring companies offer unpaid leave is another policy that interferes with free markets. But, we have decided they legislate some values into law.

Economists cannot tell you what is right or wrong. They don't agree on these values any more than other people. An economist might believe it is wrong for anyone to earn more than $1 million. That's not an economic theory, though. It is a philosophical value judgment.

The value of Naked Economics is that it reminds me that Paul Krugman and Milton Friedman and a long list of winners of the Nobel Memorial Prize in Economic Sciences would likely agree on how core economic models function. What they don't agree on is what results are desirable.

Are there differences in economics? Certainly. Economists argue over the ideal rate of inflation, how currency exchange rates should work, and if central banks should be more or less independent. There are heated debates over when taxes hinder economic growth. How high is too high for effective total tax rates? Should wealth be taxed or only income? Is a sin tax, which tend to penalize the poor, good policy? These are genuine debates.

Still, two economists would agree there is a supply and demand curve. There are negative consequences to high national debts. Inflation and deflation can both destroy an economy.

In the end, economics is the study of resource allocation and scarcity. People will always disagree on how to use scarce resources. But economists will agree on the basic math.

Comments

Popular posts from this blog

The 90% Tax Rate Myth

Election Depression

Lousy Choices