Economics – the great pseudo-science

It’s neither a science, nor an art. Economics is its own form of black voodoo magic, often with less chance of success than a witch-doctor’s blood sacrifice of a young virgin has of appeasing the thunder gods. There’s that particularly pith saying that “economists were invented to make weather forecasters look good”.

Merriam-Webster defines economic as: “a science concerned with the process or system by which goods and services are produced, sold, and bought”. Oxford, on the other hand, waters it down to: “The branch of knowledge concerned with the production, consumption, and transfer of wealth.” That’s a bit closer to mark, in my opinion. I’d go further and substitute “branch of knowledge” with “system of educated guesswork”.

Science, by definition, requires theory, experiment and repeatable observation. Modify the theory based on observation, and experiment again. Economics certainly has no shortage of theories, many of them polar opposites, as can be witnessed in contrasting countries today (China and the USA for instance – ee below for more on this), and even the contrasting policies of any democratic country’s political system (Australian Greens v the LNP Coalition).

Experimentation, on the other hand, is a bit trickier to manage. It has to be done full scale, in real time. If it succeeds, fantastic! Everyone’s happy, although nobody really believes that an economic decision made three years ago resulted in today’s situation. If it fails – tough! That brings about negative ramifications for just about everyone, and there’s simply no going back. And in that case, people do believe that it was bad decision back then.

There’s no way to build a scale model in a lab somewhere, quarantined from the rest of the country/world, and run a short-term study. While computer models may seem like an alternative, they always rely on a vast set of assumptions not actually tested in exactly the same scenario before. And scenarios are always different to a greater or lesser, maybe even tiny, extent – making predictions notoriously inaccurate. After all, the main factors in any economic experiment are people – lots of them – and it’s absolutely impossible to make assumptions there. The public mood is driven in large part by economic conditions, and economic conditions are driven in large part by the public mood. Good luck trying to pin down a moving target like that.

Something similar happens in the observation stage. Every observer has his or her own set of beliefs, preconceptions and prejudices with which to colour the data. Depending on their training, employment situation and/or aspirations, political needs or leanings, personal vested interests, etc, economists will interpret information in any of a thousand ways, making selective comparisons with history, and dubious contexts, to arrive at an “answer” that suits their purpose.

Even the observable information itself is woolly and unreliable. It’s largely compiled from broad surveys and government data, much of which is imperfect, subject to revision, and often is weeks or months behind the times that it’s trying to reflect. And there’s certainly no way to repeat an experiment and observation because all surrounding factors, by their very nature, have changed.

When it comes to national economic systems, there are as many flavours as there are countries on earth. Further, in large, diverse countries there may be regional economies working differently within the whole. Australia is a perfect example, with the recent boom / bust resources cycle affecting Queensland and Western Australia in particular, drought and flood having an entirely different impact on agricultural industries in the eastern states, and the demise of manufacturing industries changing the face of South Australia. Tasmania has been in the comparative doldrums for years. In many countries there are unmeasured, unregulated black market economies having a profound influence on those nation’s situations.

In the sixties and seventies, Australian school textbooks used four countries’ economies as examples: The USA, Australia, Yugoslavia and the USSR – listed in order of the economic control exercised by government. The USA was the most laissez-faire; Australia had a “mixed” economy, with more government-owned enterprises and regulatory institutions, but still largely private enterprise; Yugoslavia (notionally communist) was also mixed, but skewed in the opposite direction; and the USSR’s economy was entirely dictated by Moscow. The word “dictated” was bandied about a lot.

The intervening years have seen some interesting changes. The USA is arguably even more laissez-faire, and has spread investment and influence globally (many would argue that the concept has gone too far); Australia has substantially deregulated, and privatised government-owned asset and enterprises ; Yugoslavia has disintegrated entirely; and the USSR has morphed into a loose Russian Federation with a “capitalist” system that, in some respects, puts even the USA to shame when it comes to deregulation. The black market is also alive and well.

Now here’s the connection. All of these economic systems exist within the physical environment of planet Earth, as discussed in the previous post. The other common factor that they share is growth in consumption – controlled growth, but nevertheless relentless, never-ending growth.

https://ourworldindata.org/gdp-growth-over-the-last-centuries/

It seems that we can’t have prosperity without it, and property is what we’re all after. Indeed, if consumption fails to grow, the system collapses with catastrophic consequences. There are plenty of factors driving that, and they are all explained by Tim Jackson, author of “Prosperity Without Growth”. For a thought-provoking and easily-digested twenty-minute summation, see here:

http://www.ted.com/talks/tim_jackson_s_economic_reality_check?language=en#t-883448

The crux of the matter is that a finite planet, obviously, cannot sustain infinite growth. That’s not rocket science, it’s just plain logic. Western economics has a blind self-belief that, when the sustainability crunch comes, markets and human innovation will create a solution, so everything will be alright. That’s fair enough, up to a point.

For instance, advanced economies have done a great job in fixing old-fashioned “air pollution”. No longer do we see every big city full of chimneys belching black smoke skyward. Regulations have reduced (but by no means eliminated) noxious vehicle emissions. The classic London pea-soup fog (actually caused by coal smoke) is virtually a thing of the past, and Los Angeles has reduced its smog alert days from over 200 in the 1970s to less than 70 per year today. That’s 70 too many, so they’re still working on it.

So far, so good, except that some of the effects of all that continued growth can often lag decades behind the cause, so by the time we understand that actually have a problem, it’s far too late to fix it. Global warming and climate change are currently are currently the prime example. Decimated fisheries are another.

Carbon dioxide (along with methane) is invisible, so it’s not an obviously-visible smudge as it’s pumped from power stations into the atmosphere. It’s not a like a traffic-crippling London fog; it doesn’t stink, or cause nausea and respiratory illness like its motor vehicle-produced carbon monoxide cousin. And its climate-changing effects, given that they may be decades away yet, are invisible, too. Because they don’t impact today’s population on a gasping daily basis, there’s little imperative to reduce emissions, but the future social consequences of such inaction will be just as catastrophic to the global economy as sustained recession.

In fact, if CO2 emissions are left unchecked, and climate change evades humanity’s control, the economic costs are inestimable. Adaption, mitigation and population movement measures will be required to cope with rising sea levels. More extreme weather events, crop failures, water scarcity and so on, will draw enormously on the resources of every economy, no matter what its system. The financial resources required may well be economically unsustainable. So here we see economics negatively affecting the environment (we’ve known about that for a long time), and then a new phenomenon of the environment negatively affecting economics.

Tim Jackson encapsulates our future in a few words: “Prosperity consists in our ability to flourish as human beings – within the ecological limits of a finite planet”.

He offers a solution that doesn’t rely on dismantling the current system, doesn’t require the breaking down of capitalism. It involves refocussing our personal and community priorities, and shifting our investment focus to areas that achieve a positive change for our environment. And not only to the physical environment, but our living, community, humanity environment – away from bigger and bigger individual kudos-generators, and into shared things of beauty. How about shared open spaces, cultural events, art and music festivals to go along with wind farms, solar installations, improved irrigation, etc?

That will require two major changes. One is a change in culture and community attitude, and I sense that happening right now. It is manifest in the politics of the UK, USA and Australia, and other countries are making similar noises. The second is the political will to drag the unwilling masses along at first. Many will not like to change their comfy status quo until circumstances force them to, but if they are allowed to stall the necessary change long enough, it may be too late for everyone. Once critical mass of opinion is reached, though, it will take less than a generation to make a new paradigm a reality. Will the political winds of change blow hard enough to dislodge establishment detritus?

Most importantly, can the global community of nations co-operate well enough to make this happen? Can international politics be put aside for the common good? Can we all, for instance, try decreasing military spending in favour of water resources, poverty alleviation, public housing? The “not until you do it” attitude that has continually derailed universal environmental action may well be the undoing of our greatest economic experiment. We can live in hope that we observe successful outcomes.