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Textbooks are interesting because they are a
distillation of conventional wisdom. They represent "what we know,"
which is, of course, "what we all agree on today." Thus, from my
point of view, textbooks are a handy encyclopedia
of contemporary economic fallacy and error, which begins at the most basic
level.
What is economics, anyway?
I would say: economics is the study of how
people make a living.
In other words, economics is the study of how
people create the things that they need and want for survival and enjoyment.
Look around you. There is some sort of shelter, food, furniture, clothing, et
cetera. How was this created? How did you come to acquire it? In the simplest
man-on-a-deserted-island economy, the answer is: I made it myself. However,
in today's complex economy, the answer is: it was made by a multitude of
humans engaging in specialization, organization and trade. The way you
personally came to acquire it is, typically, that you provided some useful
service to others, and received a counter of value (money), which you then
traded for whatever you wanted.
Thus, economics is the study of production,
in the first instance, and how this production is accomplished via
specialization, organization and trade. Specialization, organization and
trade are now accomplished via a monetary system, involve markets for goods
and capital/asset markets, and a government framework of regulation and
taxation.
This focus on production is Classical in
nature, and is the reason why some people apply the term "supply-side
economics" to modern Classical economics.
Now let's see what
the textbook says. From Economics: Private and Public Choice, 10th
edition. James Gwartney et. al, South-Western,
2003.
"What is Economics About?
Economics is about people and the choices they
make. The unit of analysis in economics is the individual. Of course,
individuals group together to form collective organizations, such as
corporations, labor unions, and governments.
Individual choices, however, still underlie and direct these organizations.
Thus, even when we study collective organizations, we will focus on the ways
in which their operation is affected by the choices of individuals."
This is pure poofery.
The authors have no idea what economics is about!
They then spend several pages, as is typical,
nattering on about "scarcity and choice." We will just list the
headings:
Scarcity and Choice
Scarcity and Poverty
Scarcity Necessitates Rationing
Competition Results from Scarcity
Then, under a heading "The Economic Way
of Thinking" lies the "Eight Guideposts to Economic Thinking:"
- The use of scarce resources is
costly; trade-offs must always be made.
- Individuals choose purposefullyãthey try to get the most from
their limited resources
- Incentives matterãchoice
in influenced in a predictable way by changes in incentives
- Individuals must make decisions at
the margin
- Although information can help us
make better choices, its acquisition is costly.
- Economic actions often generate
secondary effects in addition to their immediate effects.
- The value of a good or service is
subjective.
- The test of a theory is its
ability to predict.
Thus, we conclude the first chapter with nary
a mention of the idea that economics is the study of a process of creation,
and that this process of creation involves specialization, organization and
trade. Goods and services simply appear out of nowhere, to be
"rationed" via a process of "choice." Modern economics is
mostly about shopping! This makes some sense, as the typical professorial
mindset is diametrically opposed to the capitalist/entrepreneur. The typical
professor gets a fixed salary, which magically appears in his bank account ,and
goes shopping. This shopping-centered outlook is
known as "demand-side economics," and, historically, emerged in the
Great Depression.
Much of 20th century economics is
focused on the Great Depression, because that was the only event in which, it
seemed, "professional economists" were actually needed! Before
then, the economy more-or-less took care of itself, or seemed to, although
that is never quite the case. The Great Depression seemed to have been caused
by a sudden scarcity of shopping, or that was the common interpretation for
many decades. The Great Depression is better understood as a dramatic change
in the conditions of production, specifically the most dramatic
changes in tariffs, taxes, regulations, and monetary conditions, which
severely impaired the existing processes of specialization, organization and
trade.
Of course the textbook mentions Adam Smith, an
economist people like to refer to but don't like to read. Smith became famous
for a book, published in 1776, called An Inquiry Into the Nature and
Causes of the Wealth of Nations. Notice that he did not title it: An
Inquiry Into the Nature and Causes of the Shopping Habits of Nations, or Scarcity
Necessitates Rationing. The early economists focused on production,
not consumption. Adam Smith starts his book:
"Chapter I
Of the Division of Labor
The greatest improvement in the productive
powers of labour, and the greater part of the skill, dexterity, and judgment
with which it is any where directed, or applied, seem to have been the effects
of the division of labor."
In the following page, Smith uses his
well-known pin manufacturing example to show how the division of labor allowed vast increases in pin production per labor applied.
Needless to say, I am much more in Smith's
camp than the lost souls populating economics departments today.
John Stuart Mill published his wonderful Principles
of Political Economy in 1848.
In the Preliminary Remarks, the very first words of
the book, Mill lays out what he intends to talk about:
"In every department of human affairs,
Practice long precedes Science: systematic inquiry into the modes of action
of the powers of nature, is the tardy product of a long course of efforts to
use those powers for practical ends. The conception, accordingly, of Political
Economy as a branch of science, is extremely modern; but the subject with
which its inquiries are conversant has in all ages necessarily constituted
one of the chief practical interests of mankind, and, in some, a most unduly
engrossing one.
That subject is Wealth. Writers on Political
Economy profess to teach, or investigate, the nature of Wealth, and the laws
of its production and distribution: including, directly or remotely, the
operation of all the causes by which the condition of mankind, or of any
society of human beings, in respect to this universal object of human desire,
is made prosperous or the reverse. Not that any treatise on Political Economy
can discuss or even enumerate all these causes; but it undertakes to set
forth as much as is known of the laws and principles according to which they
operate."
After these preliminary remarks, Mill starts
on Book I of his opus, which is entitled "Production." The Chapters
of Book I, Production, are:
Chapter 1: Of the Requisites of Production
Chapter 2: Of Labor
as an Agent of Production
Chapter 3: Of Unproductive Labor
Chapter 4: Of Capital
Chapter 5: Fundamental
Propositions Regarding Capital
Chapter 6: Of Circulating and
Fixed Capital
Chapter 7: On what depends the
degree of Productiveness of Productive Agents
Chapter 8: Of Co-operation, or
the Combination of Labor
Chapter 9: Of Production on a
Large, and Production on a Small Scale
Chapter 10: Of the Law of the
Increase of Labor
Chapter 11: Of the Law of the
Increase of Capital
Chapter 12: Of the Law of the
Increase of Production from Land
Chapter 13: Consequence of the
foregoing Laws
If you can understand the difference between
the Classical approach, which is production-focused
("supply-side"), and the Mercantilist approach, which is demand-focused
("demand-side"), then you are well on your way to understanding the
true state-of-the-art in economics today, which you will never find in a
university.
Whoops, did I say Mercantilist? Do I mean to
imply that economics as taught in universities is clouded by heavily
Mercantilist thinking? Do I suggest that this influence comes from the Great
Depression via John Maynard Keynes? Did JM Keynes himself devote a whole
chapter of his influential General Theory (Chapter 23) to describing
how his ideas correspond to those of the 17th and 18th
century (and 19th century) Mercantilists?
Yes!
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset management.
Lewis has written for the Financial Times, the Wall Street Journal Asia, the
Japan Times, Pravda, and other publications. He has appeared on financial
television in the United States,
Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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