Fad Economics

Some of you have heard Economics described as “the dismal science,” and may find truth in the phrase. The origin, though, speaks to a less obvious intent. Scottish historian Thomas Carlyle came up with the phrase in the mid 1800s, but his reason for it was rather specific. He was opining on Thomas Malthus’s theory that population growth would outstrip our ability to feed ourselves, and lead to mass starvation and other forms of economic/societal collapse. Thus, we can infer that Carlyle was blaming the messenger (economics) for pointing out the doom of the human race. Malthus was wrong, of course – thank you, technology – but Carlyle’s clever phrase persists.

Its original intent has given way to a broader interpretation, i.e. that economics is the study of scarcity. All the fundamentals of life: food, water, clothing, shelter, iPhones, deodorants, hair styling products, skinny jeans, açaí smoothies, massages behind dubious storefronts, etc, are “scarce” in that there isn’t an infinite and infinitely accessible supply of them available to everyone. What happens, how people behave, and how matters should be handled as a result of this scarcity is what economists argue about.

The countless different resources, needs, wants, products, services, out there, and the billions of independent and interdependent actors involved, makes the subject complicated. The difficulty in testing theories with the rigorous, controlled, scientific methodology applicable to fields like physics makes for a lot of disagreement and a lot of competing ideas on how to best manage matters.

Many of these ideas appear and have appeared wonderful on paper, but have proven disastrous in practice. Some have been abandoned, either because they’ve failed or (more often) because other factors (e.g. evolving human society) have shown then to be immoral. But, some failures continue to be championed, often because their promise is seductive. Various forms of central economic planning continue to be touted, for example, despite the horrific body count of its numerous incarnations over the past century-plus.

Failures aren’t repeated whole-cloth. They’re always repackaged and remarketed, purportedly with changes that will turn them into successes this time around. Usually, this happens because people aren’t willing to accept the fundamental lesson of economics: that you can’t have everything, that you can’t create a perfect and scarcity-free society, and that everything comes at some cost. The idealist in each of us cries out for making things better than they are, and our natural human instinct towards controlling things drives us toward ideas where we “do something” rather than letting things go as they will. And, our hopes and positive human instincts often outweigh skepticism and critical thinking.

Just as people are susceptible to miracle cures, snake oils, and big promises from big personalities (the Elizabeth Holmes Theranos saga is stunning to read in hindsight, for example), people are often willing to hitch their wagons to alternative ideas if they promise to give more and take less.

In the words of the great Milton Friedman:

the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.

Despite this reality, people leap onto “alternative ways” with the barest of rationales and with a handwaving dismissal of all contrary logic, evidence, or history. The repackagers always give them enough scraps to feed their motivated reasoning.

So, we have the advocates of Bernie-nomics, branded as “democratic socialism,” explaining how the nation can achieve the outcome of the Nordic states while following the policies of Venezuela. And, we have the latest in economic fads: Modern Monetary Theory (MMT).

In the incarnation espoused by socialist politicians, MMT says that we can keep spending without regard to the accumulation of debt, because, since the debt is in our own currency, we can always pay it back. Therefore, we can build a society that gives everything to everyone.

This carries enough “truthiness” to satisfy the motivated reasoner, but it doesn’t pass any sort of skeptical sniff test. Too good to be true? Usually turns out to be wrong, often catastrophically. MMT says that money itself is not a scarce resource – that there’s essentially no limit to how much we can print, because we are different than Venezuela, than Zimbabwe, than Weimar Germany, than Greece, than Yugoslavia, than Hungary, than China, than Peru, than France, than Nicaragua, than Poland, than Austria, than Brazil, than any other country that has tried to print its way to prosperity.

MMT’s defenders argue that, indeed, America is different, and strictly speaking, that’s true. Every instance of history is unique in its own way. But, every watermelon smashed by Gallagher in his long history of demonstrating the Sledge-o-Matic has burst in different ways. Yet, they’ve all been destroyed.

If the sniff test isn’t enough for you, if you think that the counterintuitive notion of printing money ad infinitum may have some merit, I offer critiques of MMT here, here, here, here, here, and here, and Google will find you many more.

The supposed mildness of inflation in the first world is often cited as proof that MMT is a viable theory and an improvement over both current monetary/fiscal policy and that which free traders and people who think that debt matters advocate. These folks don’t think to question the government’s inflation figures, even as we witness life around us getting more expensive. They do question the government on countless other things. Or, more specifically, they don’t trust the government when people they don’t like are in charge. The government calculates inflation, in secrecy and without offering either raw data or methodology, and the government has substantial interest in seeing that inflation remains low. See any problem there? Housing and college tuition are but two of a number of fundamentals whose cost growth has outpaced reported inflation. Food and energy are routinely excluded from inflation measures. There are many reasons to believe, both analytic and “your lying eyes,” that we’ve witnessed more inflation than has been reported. So, the common “aha!” that MMT’s defenders use to justify the contrarian and contraintuitive notion that we can have our free and easy society simply by printing all the money we need is a weak and sandy foundation.

Build on a weak and sandy foundation and you might manage to end up with something magnificent… for a while. But, a day of reckoning will come. Some stress will appear, some flood or storm will wash into the foundation, some externality will give the inevitable nudge. What happens if the rest of the world decides that the US dollar isn’t worthy of being the world’s reserve currency? Certainly, the EU or China would love for their currencies to take over that role, and if we started printing money like mad, they’d have a better chance of convincing everyone to make the change. What happens if our borrowing costs suddenly go up, or if we can’t borrow in our own denomination, or if people and businesses in other nations suddenly expect us to do business in Euros or Yuan?

A great failing in the teaching of economics in America is the lack of emphasis on behavioral changes in response to rule changes and the failure to emphasize the importance of unintended consequences. MMT’s supporters, in my experience, suffer this failing. They’re buying into a fad and a novelty that promises what everyone else tells them is impossible. It’s understandable, human nature being what it is, but that doesn’t mean we shouldn’t challenge it. It’s not like they’re simply spending their own money on foolishness.

Politics matters, and policies matter. Give the reins of power to fools and to those who press for destructive policies, and destruction will ensue.