How Can Economics Mean So Many Things to So Many People?

During the first week of Amateur Economists, MJH raised the very real question of why there are such enormous differences and contradiction between economic theories and economists themselves.

“I am confused by people like Paul Krugman, and many of the left leaning economists. They seem to say that markets are good, but let’s use the government instead.

How is it that economists from Harvard, Chicago or George Mason all make radically different policy recommendations, yet are still all studying economics?”

No tongue-in-cheek intended, the answer in its simplest form is “people.”

If economics was, in fact, a pure, quantifiable science that could be proven one way or the other solely by mathematical or scientific formulas, it would be fairly simple to prove a theory as “right” or “wrong.”

Take, for example, the basic supply and demand graph. Under existing assumptions, supply and demand should behave in fairly predictable fashion. The general assumption, of course, is that people want more as price drops and are willing to supply more as price rises. All well and good in a fairly free society where such individual choices can be freely exercised.

However, if we look objectively at the current energy crisis, we quickly see that simple supply and demand do not necessarily result in the present price of crude. Rather, individual people rather than economic equations impose much more influence.

We know that a cartel controls output and prices of a commodity. This is a political question rather than a purely economic puzzle. Economics may explain what a cartel is and does so in terms of quantifiable data. In terms of efficiency, it immediately raises the question of “efficiency for whom?” You must decide whether it is for your interest or someone else’s.

Current versus future consumption factors into the equation. Economics may quantify for us that “what if?” question, but it does not solve the fundamental dilemma..

Increasing populations in newer markets increase the demand factor. Can these newer markets and populations be entitled to the same low prices the United States enjoyed for decades? The answer again is a political rather than economic question.

Existing technology hampers rapid expansion. That is a simple fact, subject to ceteris paribus. Lack of consistent and logical planning is a “people” problem. It becomes an economic one when dollars and cents, current versus future spending, and personal or national priorities come to the forefront.

The list is virtually endless yet comes down in each instance to people’s decisions.

That simple exercise of looking at the present energy crisis, however, is predicated on the general assumption of human nature. It intrinsically assumes that people will automatically want “more” of virtually anything. Whether that is true or not is certainly open for discussion.

While the majority of early philosophers and economists wrote reams of secular and religious treatises over the centuries, did the assumption hold equally true for Asia, Africa, or the various American Indian tribes? You can be sure that there are philosophers on all ends of the spectrum who will concur or dissent.

Equally philosophical is the argument about freedom in economics. The late Nobel Prize winner, Dr. Milton Friedman, made the case for human freedom in his book and PBS television series, Free To Choose. He lived to see the tremendous economic changes in China and the Soviet Union as elsewhere. A century and a half earlier, Karl Marx wrote an equally important work, Das Kapital. Both men, among many others, left an indelible footprint on the world’s social, political, and economic history. At debate was not really the structure of economic theories but rather the political structure of mankind in the then extant environment.

Is economics at fault for contradictory and dissenting opinions in textbooks, media, or even blogs on the Internet?

Rather than economics, it seems more that mankind’s outlook on its fellow denizens is slowly changing the world’s political makeup.

Logic, education, communications, and the unmistakable fact of scarce natural resources (ceteris paribus!) are some of the aspects that have brought the “dismal science” to the forefront of discussions from the classroom to the boardroom.

Unfortunately, the resolution of the fundamental questions of economics remains begging.

Should we espouse Friedman’s theories, we will undoubtedly follow his precepts.

Should we adhere to the philosophy that government can make better decisions than each individual in a marketplace, no doubt you will follow an economist (or political candidate) that will buttress your beliefs.

Adherents of either are apt to disagree or dismiss the other’s philosophy. In most cases, they tend to use normative judgments which stray far from the quantitative facts presented by pure economics.

In either case the arguments devolve to a perspective of mankind not unlike the classic Locke – Hobbes debate. Only you can decide where you stand.

Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.

2 comments to How Can Economics Mean So Many Things to So Many People?

  • mjh

    This is a very interesting answer. One that will require that I think about for a bit, then re-read.

    However, the first thing that comes to mind is that I don’t have a clear picture of where economics ends and people’s influence begins. If economics is a study of human behavior, how can it not include people’s influence?

    Your answer also suggests that I don’t understand what economic efficiency is. I think it means that no one can be made better off without making someone else worse off. If that’s a sufficient definition, then the answer to the question of “efficient for whom” seems irrelevant. But, it’s more likely that I don’t have a deep enough understanding of the term.

    I appreciate your answer. It requires more thought from me to fully digest it. Thanks.

  • mjh: Thanks for re-reading my previous answer. I did not intend to imply that you don’t know what Pareto Optimality is in standard economics.

    However, it raises the very point I make: Pareto Optimality may be “efficient” in a quantitative sense, but any decision made on the quantitative fact certainly makes assumptions about the nature of man.

    Do we try to assume optimality for everything material we do? To what does that outlook lead? Do we choose material well-being over alternatives? Should we?

    The questions it raises are endless.

    Too much of traditional economics is viewed as cast in concrete, as a “truth” unto itself. That alone provides a picture of mankind and an assumption about our natures.

    re Klugman: Perhaps you can choose a specific “for instance” how he seems to be at odds which the topic he discusses. The more specific, the better to help you understand any contradictions.

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