The Dirty Secret Of Economics

NEVER MIND about the debt ceiling. Here’s a more important question for you. How come after 235 years of modern economics we are stuck in a lackluster economic recovery from the worst business recession since the 1930s? On Friday the news came in that GDP growth was a mere 1.3 percent in the second quarter, and first quarter growth was revised to 0.4 percent. How is that possible?

Weren’t we told, over and over, that with modern economics we now knew how to moderate the business cycle? And weren’t we told that, even if a recession should occur, we now had the tools to get out of it, pronto? So what went wrong?

The answer is as old as the hills. Knowledge is a two-edged sword. It can be used for good: economics gives us the tools to understand the ways of commerce and guide businesses and consumers to non-inflationary growth. Or it can be used to game the system: to pile up bigger debt and more ingenious subsidies so politicians can do a better job of plundering the economy and rewarding their supporters.

When Adam Smith came out with The Wealth of Nations he advanced two startling notions. One notion was the “invisible hand,” that businessmen following their selfish interests seemed to be guided into benefiting others in order to benefit themselves. The other notion was a critique of mercantilism, the eternal idea that a state got strong and powerful by exporting goods and piling up gold in its treasury. On the contrary, Smith argued, it was labor that increased wealth, not gold and silver. Then along came David Ricardo and “comparative advantage.” He resolved the “make or buy” issue by arguing that we should only make what we are best at and buy the rest.

Notice what didn’t happen next. Governments didn’t say, OK, we get it. We’ll stop protecting domestic industry; we’ll stop worrying about exports; we’ll stop worrying about a strong manufacturing sector. We will just write the laws to help labor do its thing and comparative advantage work its magic. Not a bit of it.

Oh, the Brits eventually repealed the Corn Laws that protected the landed nobility with grain import tariffs. They lowered tariffs on manufactured goods too. And some governments followed their example.

But mainly governments continued their bad old ways of subsidizing the powerful and shoveling cheap credit at political favorites. It’s the way of the warrior. You gather up a raiding party with the promise of spoils and plunder, and then after the election, er, raid, and a nice little bit of rapine, you distribute the spoils among your supporters. Unfortunately the policy of plunder and cheap credit leads to runs on banks, panics, crashes, and the inevitable recession during which the suckers are gently relieved of their bankrupt assets, and bottom feeders build a new base for economic growth.

That’s when the politicians call in the economists, as the baseball manager calls in the relief pitcher: Get us out of the jam, they cry!

It’s the moment at which the economists could show what they are made of. They could tell the politicians that the only way to get out of the jam is to cut the spending, cut the subsidies, cut the tax rates, cut the regulation, stop the cheap credit, and get a life. But they don’t. They are seduced by the politicians, and by the prospect of power, fame, and the love of beautiful women, and they say to the politicians: how about more of the same stupidity that got us here in the first place? Here’s a cunning plan for more cheap credit, more construction contracts for the chaps that keep up to date on their political contributions, more targeted tax cuts for your supporters and maybe reelection.

Thus did economics get seduced into gaming the economy instead of growing it.

You are a genius; you need an increase in your research grant, say the politicians. You need a column in The New York Times, say the mentioners. And everyone lives happily ever after except the American people who get more lousy economic policy.

We complain a lot about the ways of corporations and politicians, and how they need more supervision. But there is a much bigger crisis. It is the moral bankruptcy of the experts. They will do anything for a government grant.

When Prussian Minister of Education Wilhelm von Humboldt funded the first research university 200 years ago, he struck political gold. Today the intellectual and scholarly elite is completely bought and paid for by the politicians, churning out endless politically useful research on demand for the practitioners of power. The climate scientists are the worst, but the social scientists, including economists, come in a close second.

Until we demand that economics serves the people, not the politicians, we can expect more big financial panics, more sovereign defaults, and more anemic recoveries. No secret about that.

Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.

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Ludwig von Mises, Human Action

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David Aikman, Jesus in Beijing

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Annie Dillard, Holy the Firm

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