What is Economics About?
August 5, 2006
Textbooks are interesting because they are a distillation of
conventional wisdom. They represent "what we know," which is, of
course, "what we all agree on today." Thus, from my point of view,
textbooks are a handy encyclopedia of contemporary economic fallacy and error,
which begins at the most basic level.
What is economics, anyway?
I would say: economics is the study of how people make a
living.
In other words, economics is the study of how people create
the things that they need and want for survival and enjoyment. Look around you.
There is some sort of shelter, food, furniture, clothing, et cetera. How was
this created? How did you come to acquire it? In the simplest
man-on-a-deserted-island economy, the answer is: I made it myself. However, in
today's complex economy, the answer is: it was made by a multitude of humans
engaging in specialization, organization and trade. The way you personally came to acquire it is,
typically, that you provided some useful service to others, and received a
counter of value (money), which you then traded for whatever you wanted.
Thus, economics is the study of production, in the first instance, and how this production is
accomplished via specialization, organization and trade. Specialization,
organization and trade are now accomplished via a monetary system, involve markets
for goods and capital/asset markets, and a government framework of regulation
and taxation.
This focus on production is Classical in nature, and is the
reason why some people apply the term "supply-side economics" to
modern Classical economics.
Now let's see what the textbook says. From Economics:
Private and Public Choice, 10th edition. James Gwartney et. al,
South-Western, 2003.
"What is Economics About?
Economics is about people and the choices they make. The
unit of analysis in economics is the individual. Of course, individuals group
together to form collective organizations, such as corporations, labor unions,
and governments. Individual choices, however, still underlie and direct these
organizations. Thus, even when we study collective organizations, we will focus
on the ways in which their operation is affected by the choices of
individuals."
This is pure poofery. The authors have no idea what
economics is about!
They then spend several pages, as is typical, nattering on
about "scarcity and choice." We will just list the headings:
Scarcity and Choice
Scarcity and Poverty
Scarcity Necessitates Rationing
Competition Results from Scarcity
Then, under a heading "The Economic Way of
Thinking" lies the "Eight Guideposts to Economic Thinking:"
Thus, we conclude the first chapter with nary a mention of
the idea that economics is the study of a process of creation, and that this process of
creation involves specialization, organization and trade. Goods and services
simply appear out of nowhere, to be "rationed" via a process of
"choice." Modern economics is mostly about shopping! This makes some
sense, as the typical professorial mindset is diametrically opposed to the
capitalist/entrepreneur. The typical professor gets a fixed salary, which
magically appears in his bank account ,and goes shopping. This
shopping-centered outlook is known as "demand-side economics," and,
historically, emerged in the Great Depression.
Much of 20th century economics is focused on the
Great Depression, because that was the only event in which, it seemed,
"professional economists" were actually needed! Before then, the
economy more-or-less took care of itself, or seemed to, although that is never
quite the case. The Great Depression seemed to have been caused by a sudden
scarcity of shopping, or that was the common interpretation for many decades.
The Great Depression is better understood as a dramatic change in the conditions
of production, specifically the most
dramatic changes in tariffs, taxes, regulations, and monetary conditions, which
severely impaired the existing processes of specialization, organization and
trade.
Of course the textbook mentions Adam Smith, an economist people
like to refer to but don't like to read. Smith became famous for a book,
published in 1776, called An Inquiry Into the Nature and Causes of the
Wealth of Nations. Notice that he did not
title it: An Inquiry Into the Nature and Causes of the Shopping
Habits of Nations, or Scarcity
Necessitates Rationing. The early
economists focused on production,
not consumption. Adam Smith starts his book:
"Chapter I
Of the Division of Labor
The greatest improvement in the productive powers of labour,
and the greater part of the skill, dexterity, and judgment with which it is any
where directed, or applied, seem to have been the effects of the division of
labor."
In the following page, Smith uses his well-known pin
manufacturing example to show how the division of labor allowed vast increases
in pin production per labor applied.
Needless to say, I am much more in Smith's camp than the
lost souls populating economics departments today.
John Stuart Mill published his wonderful Principles of
Political Economy in 1848. In the
Preliminary Remarks, the very first words of the book, Mill lays out what he
intends to talk about:
"In every department of human affairs, Practice long
precedes Science: systematic inquiry into the modes of action of the powers of
nature, is the tardy product of a long course of efforts to use those powers
for practical ends. The conception, accordingly, of Political Economy as a
branch of science, is extremely modern; but the subject with which its
inquiries are conversant has in all ages necessarily constituted one of the
chief practical interests of mankind, and, in some, a most unduly engrossing
one.
That subject is Wealth. Writers on Political Economy profess
to teach, or investigate, the nature of Wealth, and the laws of its production
and distribution: including, directly or remotely, the operation of all the
causes by which the condition of mankind, or of any society of human beings, in
respect to this universal object of human desire, is made prosperous or the
reverse. Not that any treatise on Political Economy can discuss or even enumerate
all these causes; but it undertakes to set forth as much as is known of the
laws and principles according to which they operate."
After these preliminary remarks, Mill starts on Book I of
his opus, which is entitled "Production." The Chapters of Book I,
Production, are:
Chapter 1: Of the Requisites of Production
Chapter 2: Of Labor as an Agent of Production
Chapter 3: Of Unproductive Labor
Chapter 4: Of Capital
Chapter 5: Fundamental Propositions Regarding Capital
Chapter 6: Of Circulating and Fixed Capital
Chapter 7: On what depends the degree of Productiveness of
Productive Agents
Chapter 8: Of Co-operation, or the Combination of Labor
Chapter 9: Of Production on a Large, and Production on a
Small Scale
Chapter 10: Of the Law of the Increase of Labor
Chapter 11: Of the Law of the Increase of Capital
Chapter 12: Of the Law of the Increase of Production from
Land
Chapter 13: Consequence of the foregoing Laws
If you can understand the difference between the Classical
approach, which is production-focused ("supply-side"), and the
Mercantilist approach, which is demand-focused ("demand-side"), then
you are well on your way to understanding the true state-of-the-art in
economics today, which you will never find in a university.
Whoops, did I say Mercantilist? Do I mean to imply that
economics as taught in universities is clouded by heavily Mercantilist
thinking? Do I suggest that this influence comes from the Great Depression via
John Maynard Keynes? Did JM Keynes himself devote a whole chapter of his influential
General Theory (Chapter 23) to
describing how his ideas correspond to those of the 17th and 18th
century (and 19th century) Mercantilists?
Yes!