Mainstream Economics and Flying Unicorns: part 2

In the previous post we looked at a way to construct a common sense test: given an economic claim, we can try to see if this claim corresponds to our everyday experience.

We are not satisfied with scholastic, logical-sounding explanations such as “my spending is your income, therefore spending is good” – they may very well be true, but it is also possible to overlook some additional relevant piece of data. For example, it could be “my spending is your income, BUT …..” – and whatever follows the “but” may turn the entire conclusion upside-down.

We start with the claim that consumer spending is good for economy. The claim that spending is bad for the individual, but good for the whole has long been recognized as counter-intuitive. It is known as the “paradox of thrift“. Some point as far back as “The Fable of the Bees” (1714), but a real use in economic context does not really start before John M. Keynes in the beginning of twentieth century.

In simple words, we are taught from the childhood that savings and frugality are generally good. One who spends all the time will soon be ruined, but if you constrain your spending and save, you will grow prosperous. This is very intuitive and clear to us. However, mainstream economics teaches quite the opposite: when everyone starts saving, the economy experiences a crisis, therefore, saving is bad, and we must boost consumer spending so our economy can thrive. Then the economists go one step further and say that if consumers refuse to spend, the government must take their money away (as taxes or budget deficits) and spend it for them. Beyond “my spending is your income” explanation, a “fallacy of composition” is offered as an attempt to make our intuitions sound wrong a-priori. The rule says that “what’s right for the part is not necessarily right for the whole”. That would be true were we talking about rights and wrongs. But in our case, “what’s intuitive for the part may or may not be intuitive for the whole, depending on the case” – sounds like a more suitable rule.

Next claim on our list – accommodative monetary policy – is no less surprising, except it didn’t get its own fancy-sounding paradox name. What it tells us is that we can print colourful pieces of paper (or, “drop money from helicopters”) and magically end up more prosperous than before. It doesn’t make any intuitive sense – money itself does not create goods from nothing, regardless how much of it you print. Again, we are offered a very logical-sounding explanation, pointing to concepts such as liquidity trap. That explanation may be true, but it doesn’t settle the cognitive dissonance of the original proposition – cannot we be missing something?

The claim on immigration is particularly surprising. Imagine this: a man speaks to an immigration officer at the border crossing of a (western) country of your choice. The officer asks him: “what is the purpose of your visit to our country?” The man replies: “I’m coming here to find work. I am an experienced builder, and am going to build houses for your people”. “You cannot do that!” – exclaims the officer – “how dare you come here and tell me you’d be building houses for my fellow countrymen! Return to your own country at once!” – and the conversation is over. Again, a perfectly reasonable explanation: the man at the border will “take a job” that “belongs” to another builder in that country, and we must “protect our jobs” from foreigners taking them. But… cannot we be missing anything? Doesn’t this feel somehow a good thing when people line up at our borders to build houses for us?

And by the way, that unfortunate foreign worker would also be a consumer of his own, and of other people’s goods and services, creating that prized consumer spending we’re so bent on increasing – but that argument is somehow lost on job protection zealots.

And finally, the last claim is a total killer. We must have an advantageous trade balance, it says – we should export as much as possible, and import as little as possible. That way we will have all the jobs that are needed to produce the goods, and the rest of the world will have none! We will be working, and they will not! We will build goods for them, and they will consume them! A clear win for us! Or is it? On a personal level, when I’m working and someone else doesn’t, when I produce stuff and someone else consumes it, I’d see it as a clear disadvantage for myself. Why can’t I be idle and consume the stuff they produce instead? That would seem a much better proposition. The “official” explanation probably goes back to historical Mercantilism, but right now most of it is centred around the same idea of “protecting our jobs”.

Of course, none of the critiques above is a proof that these claims are false, or even slightly wrong. I only try to show how counter-intuitive they are. They could very well be right – our intuitions have been shown spectacularly wrong before. But before we accept a counter-intuitive claim, a proof must be offered that is sufficiently convincing for us to accept something that our basic life experience says is wrong.

So the next step will be to examine the proofs that are offered by mainstream economics to these counter-intuitive claims, and see if any of that qualifies as “extraordinary proof” that we are looking for.

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