Wednesday, May 6, 2015

Economics is a Mankini

To steal a line I heard somewhere recently (don't quite remember where): economic theory is like a mankini: it shows you everything except what you actually want to see. A case in point comes from commenter MikeNY at the Naked Capitalism blog {waves}:
In theory, all else being equal, I can’t argue with the efficiency of comparative advantage (i.e., that the sum of output should be higher).
An analysis of this one sentence can reveal a lot of what's wrong with economic theory. 1) "all else being equal"--of course, all else is never equal in the real world. In the real world you have things like environmental damage (from intensive industries and long supply-chains), over-dependence on single industries (aka Banana Republics) and national security/sovereignty to worry about (import dependence limits political independence).

2) "efficiency"--economists define efficiency in a way that is far different than the normal understanding of the word, and rather naive from a purely technical standpoint. To wit, there is no place for ideas of sustainability in the economic usage of efficiency. Anything that increases the monetary value of the goods produced (amt. of goods X price of goods) is considered efficient, and therefore good, even if the method of increasing the value of goods is itself destructive and unsustainable. It would be like a driving instructor saying that anything that makes the car go faster is "efficient" (i.e. good), without consideration for things like sharp corners or pedestrians.

On the technical side, highway designers discovered long ago that a road operating at "maximum efficiency"--i.e. moving the greatest amount of cars/minute--was also extremely likely to experience a catastrophic breakdown (traffic jam) because when the highway is packed with traffic, just one person making a mistake can cause a huge pile up and completely stop traffic. If, OTOH, a road is functioning below it's max. capacity, someone can drive into the median divider and everyone else can just...go around. So "efficiency" actually turns out to be inefficient, in the real world. It all works great, until it doesn't work at all. This is a fundamental finding of complexity science, imho, and is widely applicable

3) "the sum of the output should be higher"--again, maximizing the value of Number of Goods (sold) X Price of Goods is not anything we should necessarily be concerned with. Numbers like GDP and trade volumes are nothing but proxies for what we are actually concerned with--which I would sum up as quality of life--but they are horrible proxies. It's like trying to gauge your health by looking at how much you're spending on health care (more money spent on health care means more health, no?) instead of looking at what you're resting heart-rate is or calculating your BMI.

 And that's before we even get to the question of distribution that MikeNY rightfully highlights in the next sentence of his comment.

These same logical inanities pop up again and again in mainstream economic theory...which, btw, is not even worthy of the name "theory," scientifically speaking. "To become a scientific theory, an idea must be thoroughly tested, and must be an accurate and predictive description of the natural world."