It seems that everyone is a self-proclaimed expert in economics, fully certified by Google and Wikipedia.
My own education is in business and economics, having studied at UMKC for economics (one of the few heterodox economic schools in the nation) and a Master’s in Business Administration from FHSU (an ardent subscriber to Chicago-style economics and business). My answer to these types of comments is always the same: ‘It’s usually not so simple.’
Economics is an ideal, an attempt to rationalize a perfect action/reaction for something that was already taking place.
When the economic greats — Smith, Malthus, Say, Bentham, Ricardo, and Mill — wrote their literature, they were trying to explain and justify the transition from mercantilism to capitalism, usually justifying the latter at all costs.
But there are a few things we always need to remember, because economics really isn’t ‘so simple.’
1. It was Physicists, not Economists who Developed the Mathematical Models for Modern Economics
Economists long knew that there was a relationship between prices — that prices could be expressed as ratios of another — yet they were frustrated by the inability to create an overriding mathematical theory with explanatory power.
It was physicists, with the new mathematical branch of infinitesimal calculus that gave the answer, and embedded into the theory all kinds of future problems.
Calculus works great when explaining tiny changes that can be represented by infinite divisibility, but who in their right minds would be satisfied with three-fourths of a television (or any other number of partially distributed non-working products)?
Life, for most people, takes place in whole units. We want a full car, house, appliances, and such — not representative ‘units’ of such that make a cool looking calculus curve.
When people throw about the ideals of the laws of supply and demand, they misunderstand that those ‘laws’ lose all explanatory power when dealing with whole units of real products.
2. The Markets Never Adjust Instantaneously
Economic theory states that the signals between buyers and sellers creates a marketplace that instantaneously adjusts to the current needs.
This is of course idealized nonsense.
An oilfield worker with a lot of vocational knowledge is not going to find an equivalent paying new job without considerable retraining.David Yee, IVN Independent Author
All too often people have the ho-hum attitude that, ‘Oh well, markets adjust — they will just have to find something else to do.’
Markets can, and often do adjust without outside intervention, but it’s the lag in time that hurts real people who need real jobs and incomes.
An oilfield worker with a lot of vocational knowledge is not going to find an equivalent paying new job without considerable retraining. Likewise, capital, not stocks, but real capital, is not moved around like playing cards when things go bad — often it can sit idle for years before someone finds a new use for it (look at the Rust Belt for instance).
During the times that markets adjust, real people have to ride out the storm, and play the waiting game for the dust to settle and rebuild.
3. The Economic Idea of Spending and Saving Doesn’t Quite Work in the Modern Consumer Market
In one recent article, a comment stated something to the effect of ‘if money is saved because of a lower price, that means it’s invested somewhere in the market.’
And of course, that is the economic theory: you can either spend or save.
In the modern consumer market there is option 3, one that was seen widely during the Bush-era economic stimulus scheme, as well as today with the lower prices at the gas pump.
In many ways, this is a win for the individual, and a net loss for the economy. In fact, an investment is being destroyed by paying down the debt (from the bank’s perspective).
2015 closed out with $900B in credit card debt alone in the United States, the highest level in 5 years.
The point of this is that there are really three things a person can do with their incomes: spend, save, or pay down debts.
Paying down debts is not really spending — the spending took place when the debt was created — so it really deserves a category of its own. It does appear, according to Federal Reserve data, that several categories of consumer debt are being paid down, while a few more or growing at a much slower pace.
This is one of the reasons why we are not seeing the major boost to our economy that people originally thought when the gas prices dropped. People have used the savings at the pump to pay down their debt, something that technically shrinks the economy.
Real People’s Lives and Finances are on the Line
The Royal Bank of Scotland has predicted 2016 to be a financially bear year due to Chinese instability and suppressed oil prices, urging investors to move toward liquidity.
When stocks tank or a company ‘dies,’ it’s not just the rich that are hurt. Currently, about $24 trillion is being held in retirement accounts, mostly tied to stocks and private bond performance.
This is money that average America is counting on at some future date, not money that is the playground of the rich. Economic decisions and consequences hurt average Americans often in the worst way — in our ability to fund our retirements.
Be Careful When Throwing About Economic Terms
The whole point is that we need to be cautious when we throw about economic terms, because life really is ‘not so simple.’
There’s an old adage that you can ask 25 economists for their opinion on something and you’ll get 40 different answers. It’s not because economists are absent-minded or wishy-washy; it’s because it can be almost impossible to give an opinion or answer to anything in the economy without lining it with caveats.
And therein is the advice we should all take: We should understand the limitations to economics’ ability to explain real life–and not use it as a tool to advance our already preconceived political notions.