Is Economics Destroying the World?
Ronald Bailey | April 11, 2008, 12:40pm
George Mason University English professor Robert Nadeau has a silly article in Scientific American in which he "proves" that economics is not a "science." Amusingly, Nadeau seems blissfully unaware of the fact that his preferred "science," i.e., ecology, is rife with metaphors stolen borrowed from economics, beginning with Darwin's use of Malthus in formulating the theory of natural selection. Darwin, in his Autobiography wrote:
In October 1838, that is, fifteen months after I had begun my systematic enquiry, I happened to read for amusement 'Malthus on Population,' and being well prepared to appreciate the struggle for existence which everywhere goes on from long-continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. The result of this would be the formation of new species. Here then I had at last got a theory by which to work...
As it turns out, Malthus's description fit the natural world, but failed when it came to describing the activities of human beings.
In 1992, at the first Earth Summit in Brazil, I listened to environmentalist dim bulb, Hazel Henderson, declare to a crowd of activists that "economics is brain damage." Henderson went on to suggest to the hooting and hollering delight of the crowd that all economists be rounded up and put into re-education camps.
Another idea adopted by ecologists from economics is the tragedy of the commons. The concept was made famous in ecologist Garrett Hardin's 1968 article of the same name. But Hardin did not originate the concept-it goes all the way back to Thucydides. One modern economic formulation of the concept appeared in the 1949 treatise Human Action, by economist Ludwig von Mises, where he described the tragedy of the commons (and I maintain that all environmental problems occur in open access commons) in this way:
If land is not owned by anybody, although legal formalism may call it public property, it is used without any regard to the disadvantages resulting. Those who are in a position to appropriate to themselves the returns — lumber and game of the forests, fish of the water areas, and mineral deposits of the subsoil — do not bother about the later effects of their mode of exploitation. For them, erosion of the soil, depletion of the exhaustible resources and other impairments of the future utilization are external costs not entering into their calculation of input and output. They cut down trees without any regard for fresh shoots or reforestation. In hunting and fishing, they do not shrink from methods preventing the repopulation of the hunting and fishing grounds.
Of course, economics can and should be critiqued - that's how errors are corrected and new discoveries made. Nadeau's biggest error is that he fails to understand that economics is a positive sum game, not the negative sum evolutionary game played by most other creatures. In other words, Nadeau, like most ecologists, is still stuck with economic ideas that are over two centuries out of date. We now know that most of the human economy is in fact intangible.
In any case, I invite you to take a look at Nadeau's "critiques." From the article:
- The market system is a closed circular flow between production and consumption, with no inlets or outlets.
- Natural resources exist in a domain that is separate and distinct from a closed market system, and the economic value of these resources can be determined only by the dynamics that operate within this system.
- The costs of damage to the external natural environment by economic activities must be treated as costs that lie outside the closed market system or as costs that cannot be included in the pricing mechanisms that operate within the system.
- The external resources of nature are largely inexhaustible, and those that are not can be replaced by other resources or by technologies that minimize the use of the exhaustible resources or that rely on other resources.
- There are no biophysical limits to the growth of market systems.
All of the above statements are false, or misleadingly incomplete at best. On the basis of them, Nadeau goes on to assert:
If the environmental crisis did not exist, the fact that neoclassical economic theory provides a coherent basis for managing economic activities in market systems could be viewed as sufficient justification for its widespread applications. But because the crisis does exist, this theory can no longer be regarded as useful even in pragmatic or utilitarian terms because it fails to meet what must now be viewed as a fundamental requirement of any economic theory—the extent to which this theory allows economic activities to be coordinated in environmentally responsible ways on a worldwide scale. Because neoclassical economics does not even acknowledge the costs of environmental problems and the limits to economic growth, it constitutes one of the greatest barriers to combating climate change and other threats to the planet. It is imperative that economists devise new theories that will take all the realities of our global system into account.
For some real information on economics see Stanford University economist Paul Romer's excellent article on economic growth. For my non-technical take on the alleged limits to growth see my article The Law of Increasing Returns. As for Nadeau, I hope that he will some day soon walk across campus and talk to some his colleagues at George Mason's excellent economics department.
Hat tip: Charles Masoner
joe | April 11, 2008, 3:32pm | #
Whatever, Reinmoose. Since there seem to be any number of other people who managed to figure out my argument, it might be best for you to drop out at this point, and lurk for a while.
TalllDave,
That assumes Susie will go hungry in the absence of gov't aid.
No, it assumes that SOMETIMES a Little Susie will go hungry in the absense of government aid.
One could argue that by seizing wealth from the productive and inefficiently distributing it, government will actually reduce the amount of aid Susie gets, by reducing the incentive to produce and waste/corruption.
Certainly, but let's leave aside the pragmatic argument for now; there is actually a philosophical argument that people are making, quite apart from what does the best job of protecting Little Susie.
kinnath,
If you are arguing that wealth allows people to influence the direction of government and thereore "regulate by proxy", then I agree. The solution to that is to limit the regulatory power of government. And then put it in a magical government stasis box, so that the people who had the power to bend the government to their will will be rendered utterly incapable of englaring and changing the government.
That is the purpose of a free society with a free economy It is not the purpose of a decent society. Most of us have values other than "let the guy with the money do what he wants."
And if a person holds the view that poverty is an indicator of moral decay, then forcing that person to support the poor would be a moral violation. No, it is not. The mere fact that somebody could not do what they wanted is not, necessarily, indicative of the fact that they have been violated.
You cannot assume that all free people believe that the "moral" solution to poverty is to use to the government to redistribute wealth.
The problem is that your point of view assumes that your moral view is correct and that people that oppose government redistribution of wealth are moral failures.
I realize that we disagree about what is moral, and how to weight different moral concerns. As it was in the beginning, is now, and ever shall be, world without end, Amen. That's show biz, kid.
robc,
God has chosen my as steward of this money/goods/property LOL! I could not make up a better parody of the libertarian mindset. "I don't know what moral significance is, but God chose me to be rich."
Pete Murphy | April 12, 2008, 9:16am | #
I don't know if economics is destroying the world, but an overly simplistic, flawed economic theory is certainly destroying the economy of the United States.
Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $9 trillion. What will happen when those assets are depleted? Today's recession may be just a preview of what's to come.
Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.
Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?
At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." To make a long story short, my theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China's. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one sixth of the world's population.
Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.
If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface for free, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)
Please forgive me for the somewhat "spammish" nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.
Pete Murphy
Author, Five Short Blasts
Daniel Reeves | April 13, 2008, 11:27am | #
Our enormous trade deficit is rightly of growing concern to Americans.
By the definition of what a trade deficit is, you have a trade deficit with your grocer, but nobody's complaining.
It doesn't matter if you're trading iPods for IOU's. Trades only take place when the two consenting parties believe that they'll benefit; this perception is almost always true and usually benefits others, as well. If anything, since we've got the hard goods, we're better off.
I thought the notion of gold-hoarding was defeated when mercantalism died.
Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat.
1) So we're not the wealthiest? That's news to me.
2) In 1947, the debt was a higher percent of GDP than it is today: both in terms of debt held by the public and gross debt (the latter being a stupid way to measure debt, I might add).
What will happen when those assets are depleted? Today's recession may be just a preview of what's to come.
Sorry that I'm being dismissive, but I must say, "groan, another doomsday theory."
The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.
That's because all of those things are stupid measures.
First of all, trade deficit is a stupid measure of anything.
Secondly, while the real median wage has been falling, the real median personal income has been rising-- rapidly over the last thirty years, I might add. In addition, both of these do not tell the whole story. There are in-kind transfers. One study I discovered says that between 4/5 and 3/4 of the total income of the poor take form in in-kind transfers. There is also immigration: most immigrants, for obvious reasons, enter our country in the bottom quintile of income and wages. Lastly, more people have been entering the labor force as part-time workers.
At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." To make a long story short, my theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products.
Oh, I remember you. You're just a spammer who goes around espousing you book with copy-paste messages. After this point, I'm just going to stop responding; you're a waste of time.
What I see as the major flaw with that """theory""":
People choose to live in crowded spaces. We can't simply blame government intervention in real estate markets, which drives up costs: Texas, with very few interventions and cheap houses all over the place, still has many crowded areas. So there must be a reason why people choose to live in crowded areas.
There once was a very good reason for the existence of cities. Most cities were developed before the car existed. Back in those days, it was simple to understand that there was a fixed cost in running a shop, and that the average fixed cost would steeply decline if you were in a city where more people could buy your goods. For example, Ancient Rome had a population the size of Dallas but was 1/50 the size of Dallas.
So as noted, there is a fixed cost in distributing resources. Water requires pipelines. Food requires shipment. People can better bear these costs when they are living closer together. For example, Wal-Marts must operate in locations where the most people will come. This means operating by major roads, in suburbs and cities, and out of poor neighborhoods. That, by the way, is why good in poor neighborhoods cost more money. It's not exploitation. That in itself is a silly theory because one can better exploit the rich than the poor because they have more money. The stores in these neighborhoods actually receive the same or less profits than stores that sell cheaper goods in better neighborhoods because of the fixed cost in operating in poor neighborhoods. It should make sense that less people will come to stores in bad neighborhoods. So it should also make sense that stores and shipping companies pay a smaller average total cost per unit when operating in more crammed areas.
But that's not always exactly true, else products in cities would be so much cheaper. What offsets what I described are the negative externalities such as the bad quality of neighborhoods (as already mentioned) and the "spillover effects" of the income of the people in that area. For example, in New York City, the rich people's demand for theater has allowed the slightly lesser off to also enjoy that commodity. Usually the positive spillover is for luxury goods; necessity goods are income inelastic, so spillover effects for things like food in big cities are negative. That means that food items will cost more in bigger cities. You could say that it's "exploitation" of the rich that negatively effects the poor, but it's more complicated than that: more demand for goods also means a higher demand for what little supply of land there is in cities. The landowners in cities make a ton of money. (There was an article in the NYT I read awhile ago that confirmed my armchair economics, but I'm not sure what it's called.) Put that in reverse by saying that land prices are so high because of the high demand, and the demand is high because you can make a lot of money from the number of consumers in a city. It makes sense, and it proves you wrong.
There is definitely a lot of consumption in crowded cities. That's mainly why land prices are so high in cities. But the benefits of being crowded together, whether in a city or a suburb outweigh the costs, whatever they are: it means a smaller average total cost for people who make and distribute goods.
Sorry that this writing is so bloated; I would have written it shorter but I have better things to do than respond to you. Just writing whatever comes to the top of my head. Hell, you're probably not even going to respond. Damn spamming idiot.
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