This is Not the Study of Economics
By Jason Hughey, Capitalism Institute staff writer
Individuals who lack a solid understanding of economics generally make a plethora of errors in reasoning, particularly when they are faced with the opportunity to articulate their viewpoints on contemporary economic issues.
While this problem may be true for individuals who lack an understanding in other fields of study (i.e. calculus, physics, biology, philosophy, etc.), the glaring holes in reasoning become much more apparent in economics because they are manifested in every day public policy.
Usually, when an individual fails to understand the reproductive system of an extinct lizard, it will not have any bearing on how he votes. However, when individuals vote for political leaders based upon faulty misconceptions of economics, such errors will eventually become manifest in ruinous policies that negatively affect our jobs, our income, and our overall standard of living.
Thus, it is important to cleanse our thinking of the faulty ideas about economics that dominate the minds of many people (including political leaders). All of these misconceptions are highly tempting at first glance because they over-simplify economics to make it something that it is not. However, with some clear thinking, it is possible to reject these misconceptions in favor of a more holistic view of what economics really is all about—namely, the study of human action.
Economics is not about money
People very easily fall into the temptation of equating economics with money. This could not be further from the truth. Although economics does teach us about the nature of money, how it is used in economic transaction, how changes in its supply affect productivity, etc., economics is not simply about money.
Money by itself is static, boring, and completely worthless. It is human action that imputes value into money as a medium of exchange, that determines how it should allocate goods and services, and that uses it in trade. Viewing economics as simply about money completely removes our ability to understand how money really should function in a society.
In public policy, this error is manifested whenever people assume that providing more money for a particular project will result in its success. Consider the following example:
Some people would say that if students in a particular school are getting Cs, Ds, and Fs, then that obviously means the school needs more money than it had before. There’s obviously no way teachers could have been ineffective and no way students could have been unwilling to learn. There’s no way that the money from the school’s previous budget was mismanaged behind a veil of inefficiency and corruption. Therefore, the solution is simple! Give the school more money and grades will surely rise.
Reality, however, teaches us that this is completely false. The goal of economics with regard to money is not to make us worshippers of money so that we can throw it at our problems like a magic spell. This is a gross oversimplification of economics that can lead to poor policy outcomes.
Economics is not about jobs
This second error is as prevalent and malicious as the first. Many people look at the economy and think it needs to provide us with jobs. Yet, economics, rightfully understood, does not even really bother with this idea.
You see, jobs are easy. In fact, when an economy is in trouble, jobs might be one of the easiest problems to fix. Simply give everyone a shovel and have them dig a trench. Then have them refill the trench they just dug. Repeat ad nauseum and your country will have full employment.
If economics were primarily about how to maintain high employment, we could be done studying it at the third grade. It would also make economics absurd and useless. Admittedly, economics does cover issues of employment/unemployment, however this can never rightfully be the focus of economics. As with the issue of money, economics teaches us about jobs because it teaches us about human behavior. In relation to jobs, it also teaches us about what constitutes real wealth, about the importance of productivity (as opposed to just being “busy”), and much more.
Yet, today, politicians discuss high unemployment as if it were a unique economic problem unto itself—its own separate field of study. As far back as 1946, Hazlitt observed that “Wages and employment are discussed as if they had no relation to productivity and output” (p. 72). When this type of attitude guides economic policy, it results in “domestic job-creating” regulations (e.g. minimum wage, tariffs, subsidies) which eliminate the competitiveness of poorer laborers, both in the United States and abroad. Not only that, but such programs minimize efficiency and nullify productivity simply for the sake of “doing something.” In education, that’s called busywork, but in our government, it’s called a stimulus job.
Economics is not about math, graphs, or statistics
Many people think of economics as purely statistics and graphs. As a result, they perceive economists as being obsessed with supply-and-demand graphs, GDP, average income, interest rates, equations, formulas, and a host of other mathematic concepts. While some economists have done nothing to mitigate this misperception, it remains a misperception.
It is simply impossible to make economics into the kind of mathematical science that many believe it to be. As I previously stated, economics simply is the study of human action. The problem this poses for mathematically-minded economists is that human action carries with it a virtually limitless amount of variables that cannot be controlled. This makes economic research impossible to repeat (as we can do in scientific research).
Admittedly, some graphs and statistics are useful both to the economist and the student of economics, but one cannot overemphasize the fragility of mathematical models in economics. A supply-and-demand graph only represents a brief snapshot of a conglomeration of human action. In reality, this conglomeration will always be in flux as each new variable comes into play. It is easy for markets to adapt to these variables, but the same cannot be said for the mathematical models.
In public policy, this misperception of economics as a mathematically precise science has resulted in a glut of central planners who regulate economic activity according to their highly limited economic models. They assume that economic growth is a mathematical formula that includes some quantity “C” for private consumption, some quantity “I” for gross investment, and some quantity “G” for government spending. Somehow, it is assumed, that if we can just increase these values (by the force of government), then we can achieve growth.
Unfortunately, economics is not nearly this simple. Even more unfortunately, the cost of reducing economics to this level of mathematical simplicity in public policy has been high. The Great Depression, the Dot Com bubble, and the housing bubble are just a few examples of what happens when we allow central planners to make policy according to preconceived mathematical models of what the economy should look like.
Admittedly, each of the above concepts coincidentally fall under economics in some respect or another. However, that does not mean that any of them should be considered as the foundational paradigm by which economics should be studied. Properly understood, economics is the study of human action, which causes it to rise above minute details regarding money, jobs, and graphs. Admittedly, the focus of human action which economics deals with tends to relate to things such as trade, labor, money, interest rates, business cycles, etc. However, all of these issues are informed by the holistic view of economics as the study of human action, not the other way round.
This is not meant to disparage the importance of thinking about these concepts rightly. Economics has valuable insights to give us about money, labor, and statistical findings. Yet, we cannot force economics to become something that it is not. We cannot add to economics by subtracting its most essential tenet of human action.
“Economics, as a branch of the more general theory of human action, deals with all human action, i.e., with man’s purposive aiming at the attainment of ends chosen, whatever these ends may be.” – Ludwig von Mises, Human Action (1949), p. 880.
Hazlitt, H. (1946). Economics in one lesson. New York: Three Rivers Press.
Mises, L. (1949). Human Action. New Haven: Yale University Press.
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