The Economics of Economists
May 22, 2009 by Will Marre
A paradigm is a mental framework. It’s a set of mostly unexamined assumptions that create a story of why things are the way they are and the causes and effects of life. A powerful paradigm in medicine was broken only a few hundred years ago when doctors began to understand that invisible agents called germs spread disease. Before “germ theory” was accepted doctors thought washing their hands between treating patients was a royal waste of time. People died of infections faster than a forest fire in August burns down trees. All paradigms, such as the earth is at the center of the universe or that the rich make investments that create jobs, die hard because the status quo is a force of gravity that sucks new challenging ideas into a black hole of opposition.
So let’s look at the paradigm of GDP, our gross domestic product. This is a measure of all the financial transactions in our economy. One way economists decide we’re in a massive recession is that our GDP (about $12 trillion a year) has stopped growing. Maybe it’s even shrinking. But few people are asking, so what? Or even more importantly, is the GDP a measure of economic health at all? Herman Daly, an economist of the University of Maryland has been questioning this paradigm for two decades. You see, our GDP increases based on any financial transaction. So legal fees for lawsuits and divorce count as much as fees to file patents. Money spent buying cigarettes counts as much as money invested searching for a cure for lung cancer. And as the cost of school tuition and health care soar, it’s adding to our GDP. Our GDP ironically does not count saving as a positive economic decision, only spending. Spending on anything from pornography to gambling. So, I wonder, how do you build the best society we can imagine with this as our primary economic paradigm? You’re right, we can’t. But the reason we try to may be both deep and invisible…kind of like germs we cannot see.
Last week I was speaking to a group of European business leaders. My remarks were followed by David Frost and then John Cleese. (They were both far more funny than me.) John Cleese is of course most famous for Monty Python and A Fish Called Wanda. He also attended Cambridge and has a very big brain to go with his comic genius. Giving Cleese an opportunity to speak to business leaders was like giving a 12 year old water balloons on a hot day. He started hurling research data concerning the current economic free fall spatting the audience with comic criticism that left them both laughing and pondering their responsibility in all this.
One of his most insightful observations is research conducted comparing graduate economic students with graduate students studying a wide variety of other subjects. This Cornell University research ran the students through various assessments, scenario games and interviews of personal habits and attitudes. Here is what they found. Students training to be economists tend to be lower on empathy (the ability to understand others) more money motivated, more self-interested, less generous (giving smaller amounts to charity) and less self-reflective than the general population. These are the same people who either run or advise our financial institutions, our government and our major corporations. It’s no wonder they measure things like the GDP as a measure of our economic health as if all spending were morally neutral. Yet these economists control our underlying assumptions of how to run nearly everything. It’s no wonder few of them could predict our recent meltdown.
Economists generally believe in the magic of competing self-interest creating the greatest good perhaps because they are preoccupied with their own self-interest. As Oscar Wilde famously commented they seem to know “the price of everything and the value of nothing.”
What all this adds up to is that we most likely have the wrong people telling us what to do while they advise our political and business leaders. Over centuries we have adapted a faulty paradigm of men being in the center of the universe armed with their self-interest and competitive drives to accumulate at all costs. The idea that there could be “moral economics” that differentiated between spending that benefits humanity and spending that threatens our well-being is dismissed as unscientific and even dangerous. Given the mental and emotional make up of economists this should not surprise us. But isn’t it time for a revolution of new thinking and new leadership of this entire profession?
So what’s the best thing we can do? Don’t allow an economic paradigm of spend and accumulate dominate your life. Use your financial life to act as a moral agent. And remember, economists know less about the real world than you do.
So what do you think? Do you believe faulty economic thinking and value-less leadership have got us stuck?
Nicely done Will. I wonder what Gates, Oprah, Bloomberg, Buffett, et al were meeting about in NYC. It’s no longer the economists that drive policy, it’s the uber rich as well, abrogating through their influence, any kind of democratic process, which now seems to be some quaint trivilaity that’s rapidly becoming irrelevant.
In my book – The Happy Minimalist, I challenge the validity of measuring the progress of a nation by GDP. I share the speech Robert Kennedy made on the shortcomings of GNP at the University of Kansas on March 18, 1968. Besides pointing out the flaws of GDP, I also provided alternatives for us a nation to consider. None of the alternatives are revolutionary – they are already out there. It just needs to get more attention and fine-tuned. It would not get the attention it needs as long as our Government is run by the corporation and for the corporation. As long as profits remain the primary concerns of corporations without any regards to how it is made and why it is made – it becomes in their best interest (albeit myopic) to keep GDP as the measure of progress because that encourages more spending & consumption by the people and hence more profits for them. President Eisenhower in his farewell speech to the nation stressed the importance of an alert & knowledgeable citizenry. When we have that in good numbers, then we would once again be able to have a government that is truly formed of the people by the people and for the people. An alert and knowledgeable citizen knows that sustainable happiness cannot be achieved by frivolous spending.
Economists also believe in supply and demand, ignoring limits on supply. i.e. a high enough price will always raise supply. On things like oil and dodo birds.
Well done and very thought provoking ideas… The world is changing and the old ideas or ways of doing business will have to step aside. I understand that companies want to make a profit, provide excellent service and support… but how?
In all fairness to our economists there are several industries that need complete revisions. I remember Will Marre speaking at the AMA and talking about, “Dinosaurs creating dinosaurs and not understanding why they are going extinct.” I laugh now when I catch my thoughts fitting into a box…
The real estate, banking, credit card industry and other corporate giants all need a shift. For example, a real estate broker used to be a trusted professional in the community and in many ways they have become sales agents with catchy objection handling skills. In my office real estate agents ask me, “How many transactions are you doing?” I reply, “I am helping four people/families right now.” To the credit of real estate agents, this is what they are taught… it’s all about how many transactions they can do or what they can say to get people to buy or sell! I saw a post the other day that stated, “Learn NLP to help manipulate your buyers and sellers.” This came from one of the largest real estate companies in the world.
Have great inspiring minds been taught a painful and objectifying way to do business? Have new comers to industries been taught that it is all about the money?
I believe that the shift in this process comes from within the individuals… and for those that understand how to be compassionate while doing great business must teach others to do the same.
Operating from fear, scarcity and greed will continue to be a downfall in our lives until we are able to be abundant with our compassion, wisdom, and love for others.
Tim Ney
The culprit is the reductionist analysis of the world. If you cut down the details and convert everything to simple numbers, then you can plot the trajectory of life in a chart. This is routinely done as a scholarly exercise in universities and colleges, from economists to any other profession that one can think of. Our mind and its constructs can slice the reality into a single dimension or a small set of dimensions and talk about it. However it fails utterly to grasp the enormity of life with its unlimited complexities. Just as the analysis is dumb, the control actions derived from the analysis are also ineffective and useless leading to more dumb analysis.
As an undergraduate during the early 1970′s majoring in Development Planning Economics, much of the academic content made me question the reasoning behind the accepted economic theory of supply and demand and its applied practices. Not enough to change my major, but enough for me to question what I considered the madness, greed, shortsightedness and lack of concern or compassion for the have-nots — those everyday hardworking people upon whose backs economic progress rides. To the delight of my professors then, I learned the principles and theories; became very adept at coherent discussion making cogent observations both in the classroom and in one-on-one discussions with my mostly white male professors their offices. I answered questions correctly on exams and graduated with honors. However, most of what I’d learned about the area of study gave me pause — Why do those in power do what they do with what they have to the detriment of the majority of the world’s peoples? Some legally sanctioned governmental and corporate practices were unsavory and unscrupulous. Banking regulations, fees and transactions amounted to blatant usury fueled by outright “bait and switch” customer service. That information coupled with employment and military conscription policies, bordered upon modern day slavery and/or serfdom making me shudder as to where we were headed as a nation.
Marvin Gaye’s seminal album “What’s Goin’ On?” with his powerfully rendered song –”Inner City Blues” — was the perfect anthem describing the plight of blacks and the urban poor then…. While listening to it on my CD player this morning, I began to better understand that Marvin was our contemporary prophet, a male “Cassandra” who told the truth and nobody listened. Oh, but how we loved to dance to that song! “Make me wanna holla throw up both my hands…” And please don’t get me started on the ecological warnings he sung about in “Mercy, Mercy Me”… “Oil wasted on the oceans and upon our seas fish full of mercury…”
I must add the saving grace of my university study were two professors: my advisor, a Black man born in South America, who had earned a PhD in Development Planning Economics from Oxford, worked as an advisor to the World Bank. He’d actually set up the economic and banking systems of one of the wealthiest African Third World nations when it gained independence in the 1960′s after a bloody war of independence against a colonizing nation. Before him, I’d studied with another professor: a White, red-headed, retired Air Force Colonel who taught both Macro and Micro Principles of Economics classes while holding a golf club. That was so he could go directly onto the golf course after teaching class. He was the one who stopped me from changing my major in my freshman year by telling me that he would not allow me to quit! “You listen to me young lady.” he said to me, “No one does well in Principles — they don’t make sense standing alone. After you apply the theory then the principles begin to make sense. You can do this work. Take both classes with me over again in summer school. You are going to continue with this major and I’ll tell you why — as a young Black woman with a degree in economics from this institution, you can write your ticket to work and live anywhere in the world!”
I remained a student in the department, believing in his faith in me until I could feel it for myself, which happened quite quickly and easily. At graduation four years later, I was appreciative of everything they’d given me and definitely proud of my accomplishment. Twenty years afterward, the university recognized me with their “Distinguished Scholar Award”. It is only given to one alumnus each year.
Interestingly, though the degree and the award really look good on my resume, I never used the economics degree in the unfolding of my career choice which has aspects of the arts, education, spirituality and work that fosters cultural literacy and competencies. From my background and experience, I highly recommend you read this article. It speaks volumes about the present day situation that Americans (as well as citizens of other countries) are enmeshed in.
I love that Cornell researchers were prescient enough to actually study economist’s personalities against other students. I don’t know when it was conducted, but their findings are so telling. Bravo to Ms. Whitis for going her own way. You sound too good for that bunch.
On another note, this crisis will hopefully cause those who influence economic policy to rethink their methods. But considering their lack of real insight into the lives of “the rest of us” it’s probably just a pipe dream. Maybe in 5-10 years when the next generation will start to have access to power things will change for the better, but it’s still hard to say if the basic make-up of any future economics graduates will be any different. I’d like to think we’re evolving even in that respect. The agenda of the New World Order folks has gotten in the way of anyone who might have tried to change things over the past 50 years or so. At least we’re waking up to the realities now. Thanks Will and team for fighting for change in this wonderful country of ours and providing this forum.
Supposedly, universities have a so-called ‘core curriculum’ that, at minimum, exposes all students to our global civilization’s ongoing values conflict (I call it ‘conflict’ because the values of this or any civilization have never been a settled thing, which is why ethics/morality is a perennial concern). Some universities do a better job than others at this notion of a ‘core curriculum’, and I wonder if the smaller, liberal-arts colleges do any better.
Whether studying to be a lawyer, a doctor, an engineer or some kind of analyst (economist, programming, organization administrator– business or otherwise), the human factor beyond (or prior to?) the profit motive (self interest) gets short shrift, or indifferent treatment, or inadequate regard.
Is it a structural failing somewhere in some institution of society, a lack of insight about how to transmit concern for the dilemma (philosophy and/or spirituality?) of human nature (biology and psychology) and the human condition (sociology and history) to newer generations, or has an answer been chosen and all of us didn’t know a decision had been taken (because of the relative weakness of ‘democracy’– which needs broadly savvy people, it very well could be that)?
or are people who cast moral judgments idiots? the idea of a better measure of economic health is clearly desirable, I just fail to grasp what is the categorical measure of such health. When you attempt to re-focus GDP measures away from morally reprehensible economic generation activities such as lawyer’s fees for divorce or lawsuits, or gambling or vices, you create a moral cluster-f*ck that isn’t going to help any more than the system we currently have. Is a donation to a church sponsored meals program for the ill and elderly better than one that goes to advocacy opposing abortion? Is putting more criminals to death a socially beneficial policy and should it be included as part of the economic health measure? it certainly costs more than keeping a criminal in prison for life by most measures.
Furthermore, if you measured economic health by spending on schools and healthcare, it’s very possible that we would not appear to be in a recession right now. Would this new measure be accurate? i’m sure that the millions of people who have lost their jobs might beg to differ if it turned out that the morally acceptable measures of economic health dictated that we are in a healthy and growing economy.
My point is, that GDP didn’t get us into this mess and shouldn’t be faulted as an accurate or inaccurate measure. In fact, it’s more often used as a measure in hindsight rather than a predictor, and the estimates are basically wild-assed guesses that get updated months after the estimates are presented. While the Cornell research you reference offers some interesting facts about economist opinions, I don’t think that moral economics is the answer. I believe in improving society, I believe in helping people, but I also believe in a free-market economy. To suggest that, that is what has created these problems is casting a broad stroke over what has occurred in terms of debt, spending, and fiscal checks and balances over the past decade.
I just wrote an article on questionable economic paradigms for my blog. Here is an edited extract from it listing some of these paradigms.
1. “There is not enough to go around (scarcity) so we must compete for what there is”. Most economic textbooks state this as the basic premise of economics. The industrial and technological revolutions have made this scarcity a thing of the past, yet we still persist in acting as if there is not enough.
2. “Increasing production is good, decreasing production is bad”. A corollary of this is that “recession is bad”. At the present time we constantly hear that world consumption and production have gone down, therefore we are in recession (which is bad) and we need to get out of it as fast as possible. Looking at this paradigm through new eyes, it is obvious that we are producing enough to satisfy our needs. If there is a possibility to cut back on production and still meet our needs this is cause for celebration not hand wringing.
3. The phrase ‘the bottom line’ is an accounting derived expression meaning the basic underlying truth or determining factor. In our world there is a paradigm that “the bottom line (availability of money) is the bottom line”, rather than being things like truth and goodness, or even from an economic perspective, that we have a technologically created abundance which enables everybody to be materially well looked after.
4. There is the paradigm of consumerism that advertising so persavisely promotes. “You won’t be happy unless you have more things”.
5. One of the most powerful and least recognized economic paradigms is; “money is a reality”, rather than it is an abstract concept we have invented, as a tool to help us distribute the fruits of our labour. It is not a hard and fast reality, so if it has shortcomings it can be reinvented or even dispensed with to suit our needs. What often happens is that we have to detrimentally adjust our lives and the well-being of our world to fit in with the structure of money. I am reminded of the saying; ‘Only when the last tree has died and the last river been poisoned and the last fish been caught will we realise we cannot eat money’.
5. There is the paradigm which my blog is named after “Unemployment is bad”, versus unemployment is good. Which does not mean that the suffering of individuals put out of work is good, but rather that if we can reduce the total amount of work needed to supply our living needs, then surely that is a good thing. There is great scope for reducing our working hours. This could release enormous amounts of time to do things that could contribute to a flowering of our civilisation – things such as the ending of poverty and hunger in the world.
As I read your original article and some of the resulting posts, my interest was peaked because as a business administration major during the 2008 U.S. presidential election and as an American citizen interested in my own personal long-range financial plan, I have a better understanding of what now seems the apex of this recent global economic crisis.
Then, I wondered how could the world’s best and brightest have miss-calculated this catastrophic detriment that has clearly effected most economies of scale over the last few decades. Congress passed “Title XVII and Title XIX of the Social Security Act, extending health coverage to almost all Americans 65 or over. For example, it included those receiving retirement benefits from Social Security, or the Railroad Retirement Board), and providing healthcare services to low-income children deprived of parental support, their caretaker relatives, the elderly, blind, and individuals with disabilities” under Medicare and Medicaid.
Both programs were started in 1966: “Medicare (July 1, 1966) and the Medicaid (January 1, 1966) (Source: [Web] Healthcare Financing review/winter 2005-2006/Volume 27, Number 2, at URL: http://www.cms.hhs.gov/HealthCareFinancingReview/downloads/05-06Winpg1.pdf). Therefore, better healthcare for these groups steadily increased because there was a greater demand for economical group healthcare insurance policies by workers in both large and small businesses.
According to exhibit 11-1 in chapter eleven of our textbook entitled, “Personal Finance, 8e” written by Kapoor, Dlbaby, and Huges (McGraw-Hill/Irwin, 2007), the chart of “U.S. national healthcare expenditures” (337) shows GDP was relatively constant between 1960 and 2005 in terms of government spending percentages and dollar amount of the gross domestic products (GDP). The increase in healthcare spending over the past five decades not only accounts for the high cost of new technologies etc. but also, “the high and rising costs of healthcare that was attributed to many factors including the use of sophisticated, expensive technologies, medical equipment, duplication of tests that often yielding duplication of the results, etc.. includes negligence and oversight by unregulated financial institutions (337). Those responsible for such blemishes on our economy should be held accountable and prosecuted to prevent future global economic downturns.
Most economist seemed baffled.
Moreover, as a student, I did not know the answer to a discussion board question until now… thanks to reading your article and subsequent postings on this site. My understanding of personal finance and the stock market seem better, definitely clearer thanks to lessons learned in Professor Wiedefeld’s online Management Course in Financial Planning and Investment at Prince George’s Community College in Largo, MD, and provided as follows:
In reviewing Annelena Lobb’s article entitled, Dow 5000? There’s a case for it, written on 03/09/2009 in the Wall Street Journal, ( C1), she interviews a number of Wall Street stock analysts and investors. They either think the market will not be able to fix itself. While some don’t have any idea where the Market is going, others do not have much confidence for the market to recover very quickly, as there are mixed feelings among all of them that it might this year. Lobb reports that these “market watchers” believe that the current mixed trends of the DOW (Dow Jones Industrial Average) and the S & P (Standard & Poor) will probably see more declines than increases.
In Lobb’s article, these market experts seem stumped, as the DOW (Dow Jones Industrial Average) and the S & P (Standard & Poor) take investors for a roller-coaster ride, up and down, without a clue! It might not make any difference whether the indicators used to measure and report values revert to 1995, pre-Depression totals, or not. No one knows when, or if the Market will plunge below the present limits. On the other hand, the increasingly unstable stock groupings will not give any nation economy advantage because these economic changes will affect all financial economies, not just those in America.
In conclusion, the WSJ article written by Annelena on 03/09/2009 entitled, “Dow 5000? There’s a case for it.” reveals how different Wall Street strategists are crunching the numbers, while sticking to forecasts of a second-half rally.” There seems a consensus of many that today’s volatile market characterized by rapid, unexpected changes were mainly caused by uncontrolled growth in unregulated financial systems. I’m not sure if anyone has definitive answers because the nature of the stock market depends on the demands of consumers.
One of the landmarks of the prior administration and controlling political party was their use of Fear, Mis-Information, Doubt, Uncertainty and Sensationalism. If we are to be different, If we are to work to solutions, If we are to have creditability, and if are really trying to work for a better future, we need to behave differently than they did. I can understand the frustration and pain that many are experiencing, for I personally experience it also.
But to characterize Economics and economists this way puts us in no better camp than the prior administration. We can do better than this. We can write better material, have better discussions, provide better solutions and get better results.
First, a paradigm (according to Webster) is “a philosophical and theoretical framework of a scientific school or discipline within which theories, laws, and generalizations and the experiments performed in support of them are formulated”. The idea that “most of the assumptions are unexamined” does not fit with the data. Actually, quite the opposite is true and the amount of extensive substantive statistical analysis over historical data is voluminous.
GDP is a measurement. Like any measurement, it can be misinterpreted and misused. But, knowing what it’s short comings are, one can use it for a valid indicator. It uses a common measurement, $, to allow output to be measured across products and services, not subject to someone’s moral valuation, which varies by individual. Economists work with what can be measured objectively, and all of us would like to have better and more complete valuations, but we do have to work with what we have or can get.
A key concept in introductory economics is the production possibility frontier. Here we see that investment and technological advancement shift the capacity of an economy to produce more (or less). And here is where questions about how much to consume today versus tomorrow come into play. And here is where one type of investment can be traded off against another.
While price hikes in education and health care may raise nominal GDP, they do not increase Real GDP (RGDP) as it is price adjusted. Business cycles, and the defining of recessions and expansions, are based on RGDP and are not influenced by these price hikes.
As a people, we have desires and wants that exceed our resources. So we make choices. Economics is the study of choices and outcomes. Like any science, or study, one can distort pieces to suit one’s own ends. Normative Economics just lays out the relationships between choices and outcomes, or what “is”. Positive Economics takes the stance of what “Should Be.” And as with any profession, this can be hired, and is hired by individuals and organizations from all sides based on their positions and vested interests.
The two biggest contingencies that employ positive economists are groups trying to bias outcomes of decisions to benefit their group by gaining more resources, and groups that try to bias outcomes of decisions to align with their moral beliefs (and thus impose their beliefs around morality on others.)
I leave you a final comparison to think about. We have made great advances in medicine and our understanding around the working of the human system. The profession and science is generally highly regarded. Yet no one berates physicians because they are unable to tell you when you will get sick. And as well see with the H1N1 virus, they are not sure exactly how virulent it is, who will be affected how, how the virus may mutate, what complications it may cause, etc, etc. Yet economists are expected to expertly predict the complicated and ever changing economic systems we live in with only hindsight data.
Making broad based character attacks on this profession does not serve the interest of our party or county. It does not facilitate constructive credible discussion. We can do better than this.
We can go round and round about all aspects of what goes into economics. It’s really very simple. The privately owned “Federal” Reserve will ALWAYS do what they want. They simply print more money then the GDP = Inflation. A perpetual cycle of debt. Until people realize that the “Federal” Reserve is the first and foremost problem in all of this, everyone will continue to waste their breath, typing, energy. The game is rigged folks. It’s a very small club, and you are not in it. These are very compartmentalized relatively “smart” people. This has been the only subject they’ve ever studied in great depth, the supposed “best”, and we find ourselves on a merry go round of economic instability. But they’re really smart ! Right ?
It’s not hard my fellow brother’s and sister’s. This is MOST DEFINITELY not about morals whatsoever. In the finance world, the way you climb the ladder is by being an absolute cold blooded leech, sucking the life and cash, out of anything you come across.
Why would you buy something for full price, when you can purposely shift the economy to whatever situation you want, and buy the same thing for pennies on the dollar ? This is PURE consolidation. This whole economy talk is nothing but a dog and pony show, while the top dogs sit back and laugh. The joke is on us, and they know we can’t do a damn thing about it.
This is about one thing…..The centralization of power.
I just want to leave with one thing for everyone to ponder. Please please realize, there are “good” and “bad” employees in EVERY career field. Don’t you think if a certain field became so big, so strong, with absolutely no oversight it would become corrupt ? Pretty good chance it would. I’m asking everyone to get rid of a possible notion that this whole situation is LEGIT, because it is 100% absolutely NOT.
Godspeed.
I’d like to respond to Terry Eberhart’s comment (the one before the last)
I agree it’s unproductive to base a dialogue on personal attack. But it’s important not to throw the baby out with the bathwater.
There is a very serious point being made here about the danger of the moral vacuum that economics operates in. The comment that GDP allows “output to be measured across products and services, not subject to someone’s moral valuation, which varies by individual” suggests that this moral vacuum has been justified as the virtue of being objective and scientific.
As far a unconscious paradigms go, there is a sizeable group of people who are saying there is something critical that economists are by and large blind to, which the well being of our world depends on their seeing.
In brief the point is this;
GDP is the standard by which economists measure the health of our economy. Any increase in GDP is seen as good and any decrease as something to be avoided at all costs.
Just say that peace were to finally break out in this world and we stopped producing weapons and bombs. There would then be a massive reduction in GDP. By current economic theory this would be seen as disaster. Instead of celebrating our new-found peace and the side effect of enormous amounts of free time that was previously spent making bombs, economists would advise us to urgently find other replacement things to produce – whether those things were needed or not, or even whether they contributed to an actual deterioration of our lifestyle.
I would vigorously argue that less free time is a lowering of living standard.
Without getting into the debate, let me just throw out two recommendations for your reading pleasure and true economic education based on the real world.
1) The Shock Doctrine(The Rise of Disaster Capitalism) by Naomi Klein
2) Confessions of An Economic hit Man by John Perkins
Then let’s look at the banking/mortgage crisis – which has merely turned into a massive transfer of public wealth(taxpayer money) into private hands by turning a private sector problem to a public sector problem. With the elites and responsible parties continuing with business as usual with total impunity and continuing to exert heavy lobbying power in favor of themselves and fully intending to maintain their poor me status.
This is just one of a continuing series of bohica (bend over here it comes again) moments brought to you by our highly collusive government/Congress and their elite, campaign contribution bunkmates.