The Biggest Lesson Everyone Should Learn from the Economy

Given the track record of economists, the wonder is that anyone pays any attention to them anymore. Their predictions are usually stated as loosely as possible, and even then they usually turn out to be wrong.

Correct predictions are as random as human behavior itself — which isn’t surprising, considering that predicting human behavior (more precisely, particular results following from human behavior) is exactly what economists attempt to do. There is, however, one hugely important, completely definite, very practical lesson that we can learn from economics.

Economists base their predictions on models. Those models are collections of variables that the economist has surmised are pertinent to the prediction at hand. Those variables are various aspects of the economy that can be quantified. So if an economist wants to predict what the GDP will be next year, the variables will include interest rates, incomes, employment, etc. Those variables are then fed into a computer, and some result is obtained.

The important point for us is what happens when the economist runs the model. One of two things will happen. Either the model will tend toward equilibrium or it will not. If it does tend toward equilibrium that does not mean that the result is ‘correct,’ but it does mean that the model itself is well-constructed.

If the model does not tend toward equilibrium, it means that the model is not well-constructed. A model which is not well-constructed is one in which the variables are not independent enough of one another — they are interdependent.

That is the lesson for us. Anyone who has ever thought about the functioning of the economy at all has almost certainly realized the interconnections among the different factors and forces in the economy as a whole. Each responds to changes in any of the others.

That is why our economy tends toward disequilibrium. It is always on its way to an explosion of hyper-inflation or an implosion of depression.

Since the Great Depression/World War II, nations have attempted to use the fiscal policies of government (taxing and spending) and monetary policies (mostly higher or lower interest rates) to ‘manage’ the economy, in order to avoid either of those extremes, at least.

The lesson that appears or be trying to beat its way into our brains is that, given the systems we have, the economy is a beast that is too strong for governments or banking systems to control indefinitely, even if the goal is down to avoiding the very worst. Given the systems we have, in the end all we can manage will be to choose (more accurately, blunder into) the raging fire of hyperinflation or the bottomless pit of depression.

What the economy needs is one big, important, ubiquitous variable that is independent of any other variable. It would not be affected by changes in any or all of them. It would be, as economists say, exogenous.

The best candidate for such a variable is money. More specifically, the key is the size of the money supply. If the size of the money supply were to be determined by, say, demographics, it would be independent of the rest of the economy. The rest of the economy would then adjust to the size of the money supply. The economy would be saved!

I have figured out a way of accomplishing that very thing. A presentation of it can be read in the IVN article, “A New and Different Monetary System for a Better Economy.”

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