Friday, August 19, 2011

The Dismal (Pseudo?) Science

Fancy theories of macroeconomics defy basic common sense








Many consider economics to be their least favorite subject. Why? Because too often economic theories defy common sense. Indeed, economic bimboism (in the form of attractive but empty-headed theories) is rampant.



So, how did modern economics fly off the rails? The answer is that the "invisible hand" of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes.


Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy. This is a perfect Keynesian answer, and also a perfectly nonsensical answer.



As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: "Macroeconomics was nothing more than a dismissal of the rules of economics." Over the years, this has led to some horrific blunders, such as the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high: To encourage food production, destroy it.



Ultimately, the pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy.


Nevertheless, as Arthur Laffer reminds us, "All economic problems are about removing impediments to supply, not demand." Most modern economists ignore this simple fact. And that is why Americans hate economics.


--WSJ

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