Lesson
1: Why Is Economics So Dismal?
"It is no crime to be ignorant of
economics, which is, after all, a specialized discipline and one that most
people consider to be a 'dismal science.' But it is totally irresponsible to
have a loud and vociferous opinion on economic subjects while remaining in this
state of ignorance."
-- Murray Rothbard
Economics is truly dismal.
This is probably not what you were expecting from an opening, but there can be
no escaping this label, which was infamously decreed by the Scottish historian
Thomas Carlyle during the Nineteenth century. Despite the fact that most
individuals have never heard of Carlyle, its no surprise that they would agree
with his claim. Whenever I ask someone what they know about economics, the two most
common reactions I receive are not unlike the owls you see depicted above. Once
the initial dread and discomfort of this question wears off, the most frequent
response I am told is that economics has something to do with money, or financial markets. This sort
of answer is not necessarily incorrect; economics does have a lot to do with money, but the problem
is that this response is that is sort of like saying the ocean has something to
do with boats. Clearly, there is a
great deal missing if the only thing we know about the ocean is what takes
place on its surface. So despite the fact that I agree with Carlyle’s label,
the truth is that Economics is not dismal for the reasons he thought it was
then, nor for the reasons you think it is today. Economics’ alleged dismalness
in fact stems from several issues which this lesson will attempt to
address.
In sum, the reason why Economics is dismal is because it remains
one of the most painfully misunderstood subjects
known to man.
It problem isn’t that Economics is scarcely known. The problem is
that what little most of us do know about Economics is likely steeped in error.
For example, even though few individuals claim to be experts in Physics, nearly
everyone still possess a correct understanding
of many of the principles of physics, such as gravity. Most generally
understand that gravity is a universal constant in our world, one whose forces actively
guide our actions. As such, we do not find groups of individuals who claim that
the Law of gravity doesn’t apply to them. There isn’t anyone who flippantly denies
that gravity is a myth - for example, in the case of houses or automobiles - because
that would be demonstrably untrue. Yet these are precisely the sort of claims
made about the forces of Economics, even by individuals who actually claim to understand them.
Unfortunately, these sorts of errors in understanding are not
surprising. Most of us have had next to nothing in regards to an education in
the principles of Economics. Even those whose primary school actually took the
subject seriously enough to teach it are likely to have already forgotten
everything they learned - with the exception of the words Supply & Demand. Education in general seems quite intent on
pushing Economics off the table in order to make room for the seemingly more
important subjects of Art, Music, Agriculture, Technology, Architecture, History,
Medicine, or Engineering. For example, the American Council of Trustees and Alumni surveyed
100 leading universities across the country to identify which ones require
their students to take at least one introductory economics class. Only two institutions
- the University of Alaska in Fairbanks and the United States Military Academy
at West Point - have an economics requirement. The rest, including the entire
Ivy League, the top liberal arts colleges according to U.S. News & World Report, and the flagship public universities
in each of the other 49 states, are not doing anything to ensure that their
graduates are economically literate.
It goes without saying that the subjects above are indeed
important fields of study. No one would deny this. Yet while plenty of movements
and public cries can be found calling for students to enter into and preserve
these precious academic fields, economics has remained largely ignored. This is
profoundly ironic considering that Economics has been the catalyst through
which all of these other subjects have even been allowed to develop. Indeed, without the development of modern
civilization; without the creation of wealth with allows for greater and
greater accomplishment of goals (such as efforts that culminate in the creation
of the first computer) it is easily arguable to claim that none of the subjects
above would be as advanced as they are today. That understanding alone should
help us grasp just how important Economics truly is. Yet the reality is the
opposite. Practically no one hold Economics in high regard. But again, why
would anyone hold Economics to be critically important, when by its omission
alone, we have been essentially taught that the role it plays in our lives is
negligible?
However, as much as a lack of educational emphasis for economic
literacy remains a problem, it is only half the problem. The other half is that
those who actually come to recognize this importance and attempt to learn
economics find their first exposures comparable to that of learning an alien
language[1].
Just ask anyone unfortunate enough to stumble across a televised discussion on
economic issues, and they are likely to conclude that the panel of speakers all
sound remarkably similar to the “wonking”
teacher from Charlie Brown. In fact,
former FED Chairman and Economic guru, Alan Greenspan, fit this illustration frighteningly
well, as he was notorious for speaking on Economic topics with such obscurity
that even well educated listeners began dubbing his comments as “Greenspeak.” Additionally, most books on
Economics aren’t very helpful either. Many are filled with abstract terms and mathematical
models that often conflict, confuse, or read like VCR instructions. So while many
of the students who take classes in Economics find that they can memorize the
subject material, it is often given no practical sense of meaning, which is why
they often fail to apply it to the real world, and thus forget most of it by
the time they enter adulthood. Sadly Economic education has become the equivalent
of teaching cavemen how to operate an automobile. The cavemen might be able to
open the doors or operate the pedals, but they still possess no conceptual
understanding of what an automobile is or how it mechanically operates.
At the end of the day, widespread economic illiteracy is clearly a
problem, but the reasons for it are obvious. If abstract mathematical models and
Alan Greenspan have become the archetypes for all things Economic, how could
anyone come to the belief that Economics is one of the most important, if not
relevant subjects they could ever learn? Even if someone were to concede that economics
was important, most individuals would still claim that it wasn’t important
enough for them to understand it personally.
To most, the notion that everyone should possess some understanding of Economics
seems just as impractical as the idea that everyone should possess some understanding
of mechanical engineering. Most would say that Economics understanding is only
necessary for an eccentric few; inside the walls of a financial establishment
where groups of balding men with furrowed brows sit around a large table and
discuss interest rates[2].
The Importance of Economics
And thus we have come full circle: Economics is dismal for young
adults because it is often seen as complicated, boring, and insignificant –
which is why so few understand it. But the good news for you is that the imagery
depicted above is quite possibly the very antithesis of everything that
Economics is truly about. Economics is not difficult to learn, and in fact can
be one of the most interesting subjects you can learn. But sadly, much of what
makes much up the confusing and boring stigma attached to Economics today is
based less on what Economics actually is and more on what it has become[3].
In many ways, Economics has taken on a sort of ugly duckling syndrome in that it is regarded negatively (and thus
avoided) because it is not seen or understood for what it actually is. Because
of this, most individual have inadvertently dismissed any practical importance
that it has in our lives.
Yet as mentioned before, what Economics actually is, is
responsible for the existence of modern civilization. Indeed, apart from the
sound understanding and application of economics, civilization as we know it today would not exist. Now this is not
to say that civilization only came about by of the efforts of Economists and
their models: Men did not move from caves and loincloths to condos and skinny
jeans because Economists got together and engineered our modern civilization
from within some lab. Instead, our modern world of technology, irrigation,
electricity, arts, entertainments of every conceivable type, machinery, vast
arrays a food, air conditioning, the Shake
Weight and conceivably everything that we see around us, would not exist as
they do today were it not for the tools of social cooperation, capital
accumulation, division of labor, and exchange – all of which are purely economic. It has been only by the productive
ability of our economies to abundantly produce these goods and services that
our lives are even possible, let alone enjoyable. Even a typical day at the
beach would be awful apart from the free time, soft towels, comfortable chairs,
tanning oils, and skimpy bathing suits that make this experience so much fun!
However, this point goes far beyond the simple comforts of modern
civilization. It undergirds the existence of civilization itself. For
without the gains made through
Economics, it is an inescapable fact that most of the world’s population wouldn’t exist. Without the advances in
medicine, technology and the productive capacity of our economies to generate
the sort of wealth we have today, the plain and simple reality is that most of
us could not have been born, let alone well nourished, educated, and kept free
from disease. Without this productive capability, there would be nowhere near
enough goods and services by which the current population of the world could be
fed, kept healthy or even employed. If that wasn’t bad enough, those of us who did
managed to survive our birth and infancy would live far shorter lives comprised
of poor health, malnourishment, little to no education and backbreaking labor.
Brazen at it may sound, much of the reason why you are able to read these very words is owed largely to
Economics.
So if Economics carries any weight of importance at all, it does
so because it seeks to answer one of the most important questions of all
mankind: How do we create prosperity? Economics
asks how individuals might make the best use of what they have so that they
might increase their standards of living. It asks how humanity can progress
from the rural agrarian society, towards that of the industrial, technological
and beyond. The study of Economics should be considered a noble one, because it
is the study of how mankind overcomes
poverty – the single most destructive force on Earth. For whether it is disease,
starvation, low birth rate survival, malnutrition, general poor health or even
crime - poverty is either directly or indirectly responsible for more death and
suffering than any other force on Earth. Indeed, more so than any other factor,
how a nation understands and applies economics ultimately determines whether
that nation will look like North America or North
Korea.
We Don’t Understand Wealth Creation/Destruction
The biggest problem however, is that the weight of this importance
remains lost to most of us. Americans, students in particular, are so wealthy
that they have no idea of what true poverty is really like; the sort of
destitution experienced by Third-World nations,
like North Korea, India, parts of Africa, or Haiti. We have no conception that something
as simple as a cell phone, clean running water, or even a pen could depict radical economic progress because we are
practically born with them in our hands. In contrast, Journalist and author Barbara
Demick has often written and spoken of those whose lives are starkly different
than our own. On National Public Radio, Demick recalled one particular the
story of a North Korean man who fled his native country, at extreme risk to his
life, simply because he learned that the average citizens of South Korea had
access to cars and pens. Compare this to many of Americas
poorest, who still have a place to live, a television, phone, clean running
water, access to food, a microwave oven, a car and all the pens they could ever want. We have no idea what it is
like to endanger our very lives all
for the possibility of owning pens.
The point here is not to say that we should feel guilty for the
wealth we have created, quite the contrary. However, we should feel some guilt at the fact that we are an
extremely wealthy people who have no conception as to how that wealth was
created, how it can be preserved, or how it can be lost. It is only once we
begin to examine this ignorance that we begin to truly understand why Economics
is dismal.
For instance, historian Thomas Woods has cited several ironies
regarding our wealth ignorance, such as the fact that most Americans have to
come to assume that our standard of living is the standard that should
naturally exist everywhere else on Earth. Whenever Woods speaks on the topic,
he often jokes that Americans hold candle light vigils and awareness rallies to
spread the seemingly shocking
knowledge that poverty actually exists somewhere in our world – all the while vigorously
demanding that something be done about it. But the irony, Woods explains, is
that we have it completely backwards: Poverty
is the norm. What we would even label as extreme poverty today is the
standard by which most of the world has historically lived since the dawn of
time. It was only until very recently that practically every living soul fully
understood that their lives would be comprised of hard labor and grinding
poverty - followed by swift death.
Even if we were to historically turn the dial back just two hundred years, most
would like find the average Americans living standard to be practically
barbaric: There was no retirement, no pension plans, no vacations to tropical
locals and no instant micro-waved gratification - none of the luxuries we enjoy
today.
Unfortunately, many of us believe that wealth is something that
already exists: That wealth is the simple byproduct of hard work and
intelligent minds. However, this overlooks the fact that there have always been
hard working and intelligent individuals everywhere on Earth - even in the poorest of countries. Haiti
is one such nation which possesses an abundant labor force, a close proximity
to one of the richest trading partners in the world (the U.S.), and a tropical
climate that is ripe for producing crops. Yet even after receiving billions of
dollars in both private and public foreign aid for decades, rather than joining
the rest of the modern world, Haiti has remained entrenched in devastating poverty
for what seems like forever. Conversely, similar territories that were once
just a poor as Haiti, such as Hong Kong, have exploded from decrepit shacks
into Skyscrapers within mere decades – without
any foreign aid whatsoever. In just fifty years, Hong Kong was transformed
from abject poverty into a city that rivals New York despite the fact that it
possessed almost no natural resources and an even greater population density
than that of neighboring India – which has also possessed terribly poor economic
conditions for generations.
Our lack of economic understanding has also made us arrogant. Woods
adds that we like to sneer in disgust at the horrific practices made in the
past, such as the notion that children were made to work in factories or
fields. We see this act comparable to that of slavery and frequently decry
against any nation that allows for the existence of child labor. Yet despite
our good intentions, we fail to understand that throughout all of history, children have
had to work. We fail to understand
that the existence of child labor is not primarily the by-product of greedy
businessmen with long mustaches looking to shove kids down coalmines for pennies
a day, but because economies were so poor that if children did not add to the
productivity of their family - then their family would likely starve. By
working, these children actually set the groundwork to create enough wealth so
that their children might not have to
work at such a young age. It is this very productivity that eventually enabled
countries like the U.S. to grow wealthy enough that child labor became largely
unnecessary. In fact, by 1930, only 6.4 percent of kids between the ages of 10 and 15 were
actually employed, and 3 out of 4 of those were in agriculture.[4]
The sad truth is that in our ignorance, many
attempts to end legitimate child labor in third world countries has forced
those children into far more horrifying and illegitimate practices, such as begging,
crime and prostitution.
Finally and worst of all, because most of us do not understand
Economics, or Economic History, we fail to understand how wealth can also be
destroyed. For instance, most of us inherently accept the false notion that
Economics has historically moved along a continually progressing trend. That
once discovered, the knowledge for
creating economic prosperity cannot be lost or diluted. We believe that
each subsequent economic thinker throughout history has continued to refine and
espouse a greater understanding of the principles of economics. Its only makes
sense that mankind would only get better at understanding a particular realm of
science, after all, this is how all the sciences have more or less progressed
throughout time. Unfortunately, a reading of Murray Rothbard’s two-part tome, An Austrian Perspective on the History of
Economic Thought, thoroughly reveals
how history has been repeatedly plagued with societies whose fallacious notion continually
derailed, diluted or corrupted both the science of Economic Theory and its
application. The results of enacting these fallacies were civilizations that
halted technological progress, stifled economic growth, fell into poverty, and
destroyed themselves from the inside out.
Perhaps one of the clearest examples of this was that of the great
Roman Empire, a civilization that remains one of the most startling examples of
human prosperity and accomplishment. Indeed, throughout its reign, there was
nothing like the wonder, power and accomplishment that was Rome: It created
structures, such as the Colosseum and the Circus Maximus, which even to this
day remain architectural marvels, and also developed one of the first aqueduct
systems that brought clean water into the homes of Rome’s one million
residents. In its prime, Rome was the center of economic progress; art,
philosophy, military tactics, agriculture, mathematics and even entertainment
all made vast gains during Rome’s best eras. It has even been suggested that Rome
came incredibly close to creating the first industrial revolution, the gains
from which would have completely reshaped the world we see today[5].
Unfortunately, Rome never saw such a revolution, which then came about some
1200 years later, because it completely collapsed around the fifth century,
after having fallen from its high position and decayed for nearly four
centuries prior.
The question of what caused Rome to fall has been of critical
importance because it is key in understanding how wealth (and thus
civilization) is destroyed. The truth is that we already have its answer, as historians such as Michael Rostovtzeff and economists such as Ludwig von Mises, have demonstrated how
unsound economic policies played the primary role in the impoverishment, decay
and eventual collapse of the Roman Empire.[6]
And while Rome may have been one of the clearest
examples of how economic progress can be reversed and ultimately destroyed, Rome
was by no means the only example. Countless other
nations have faded away in exactly the same fashion - not at the hands of a
more powerful military adversary - but as a result of abandoning sound
economics, and thereby crippling these civilizations ability to even sustain
themselves.
Its true that the science of Economics has made advances over
time, but this does not infer that sound Economic theory and application cannot
be slowed, crippled or even reversed. In fact, real economic progress has only
occurred in small pockets of explosive growth within areas such as Ancient
Greece, the American and European Industrial Revolution, parts of Ancient China
and more recently, Hong Kong and Singapore. Generally speaking, true economic
progress has been an extremely rare event throughout history, and sadly, most
of the civilizations that have managed to create this explosive growth have
also managed to lose it.
Which bring us to today.
The West in general, and the United States in particular, show
lifelines that similarly reflect the life of the great Roman Empire[7].
Just a few hundred years ago, most of the world lived in what we would classify
as poverty. Yet somehow, America enabled itself to grow at such a startling
rate that those Americans who died at the end of the 20th century
died in a world that barely resembled the one they were born into. In the
measly span of roughly one hundred years, North America went from horse drawn
carriages to manned missions into Space.
This kind of technological progress has never
occurred in all of human history combined! Yet as expected, our lives of
intercontinental travel, instant worldwide communication, retirement, advanced
medicine, computer technology, and all manner of entertainments that can make
one blind - were all the products of employing sound economics.
Yet just like Rome, where we find ourselves today is a global
economy struggling to survive one of the largest economic shocks it has ever
experienced, the cause and duration of which are completely alien to most of
us. As the U.S. economy still remains stagnant as of the time of this writing
(2013), most of us have no clear answers regarding how we arrived at this
position, to say nothing about how or when we’ll get out of it. What we see
instead are answers and even entire movements that prey on the animosity we
feel from having lost our jobs or seen our standards of living reduced.
Unfortunately, such animosity merely reflects what Economist Thomas Sowell refers
to as our inability to see beyond “Stage
One”. Sowell correctly writes
that because individuals don’t possess an economic knowledge to understand the
causes for economic problems, they instead supplement causes that placate their
emotions. Ultimately lacking any depth of economic analysis, most simply claim that
“the economy crashed because [insert
people group] were greedy.” Empty statements like this are akin to
remarking that a plane has crashed into
the ground because of gravity. The answer may be fundamentally true, but
not only is it completely devoid of a thorough explanation; it also does
nothing to prevent another plane crash.
Economics and Your Life
As we will see, it is a general law of Economics that all humans
wish to improve their state of being. All of us want to have better, longer,
happier and healthier lives in some fashion or another. But despite the fact
that individuals are always working towards achieving better states, our
efforts for achieving the outcomes we wish to see are greatly hindered by the
fact that we do not understand Economics. Economics is not simply about what
takes place on Wall Street, it directly concerns every aspect of our lives.
This is why individuals, such as Robert Murphy, have sharp
criticism for those who continue to relegate the importance of economics off to
economists such as himself. Murphy asks how anyone could hold any interest in
the ills of modern life - energy scarcity, unemployment, quality of education,
outsourcing of labor, pollution, crime, endangered animals, lack of affordable
housing or transportation, traffic jams, gas prices, income inequality, the
falling quality of medical services, or the ever-rising costs of living – and
not realize that they have taken an interest in something that is inexorably
related to economics? How could anyone wish to see better medical services,
better job opportunities, better cell phone services, safer schools or
healthier foods without Economics? How could anyone desire an easier way of
life and yet still remain woefully oblivious to the role Economics plays in
these practical day to day issues? Worse yet, how is it that so many of us hold
strong opinions regarding these issues, as well as positions on how they should
best be resolved, yet based on no understanding of economics whatsoever?
This is the fundamental problem with Economics and the reason why
it has become truly dismal: We possess history-defying levels of wealth,
prosperity and abundance, yet most of us have no real clue as to how this
wealth was actually created, nor how it can be maintained. Instead, we have
been taught to ignore the very science that reveals to us how our world works;
how its manifold problems come about, and how they might best be resolved so
that individuals can create prosperity. While at its best, this ignorance robs
our complaints of any credibility, at its worst, this ignorance does nothing to
bring about the solutions we desperately wish to see in our world.
Therefore, since Economics is inexorably bound to the sort of
lives we will live, shouldn’t the general understanding of, and fervent
adherence to, that which enables us to create economic prosperity (and end
economic destruction) be nothing if not
our obligation to understand?
On this, Economist Ludwig Von Mises correctly answers;
"Whether we like it or not, it is a fact that
economics cannot remain an esoteric branch of knowledge accessible only to
small groups of scholars and specialists. Economics deals with society’s
fundamental problems; it concerns everyone and belongs to all. It is the main
and proper study of every citizen." [8] (bold added)
Yet even Mises understood that this is no simple (or welcome)
task, which is why he adds the following;
“the
flowering of human society depends on two factors; the intellectual power of
outstanding men to conceive sound, social and economic theories and the ability of these or other men to
make these ideologies palatable to the majority.”[9] (bold added)
Mises was right: The proliferation of economic understanding
doesn’t stand a chance apart from those individuals who can cogently explain it
without causing the rest of us to collapse from a brain aneurism. That is where
this work comes in. My purpose here is merely that of the translator; to convey
the theories and ideas which brilliant men, such as Mises, have conceived in
order that you might better understand and actively apply Economics to the
world around you. Understanding the difference between what Economics actually
is versus what is has become today is another main aspect of this work, because
it is a key factor toward understanding why the Economics you read here may
appear in stark difference to the economics you see in your classroom or
textbook.
In conclusion, if we truly possess any desire to have lives that
consist of relative peace and prosperity, then we would do well to acquire some understanding of the science that
enables us to bring such prosperity about. We would do well to understand solutions
that can help create a better world; one with newer technologies and
innovations that enable individuals to live longer, safer and more prosperous
lives. Perhaps most importantly, we would do well to learn about economic
fallacies; those policies and notions which - no matter how well intentioned or
wondrous they appear to be – destroy wealth and create misery and even death because
they ultimately ignore or reject the Laws that Economics is built on.
It is upon this very concept that our study will begin.
[1] This
comparison was taken from the authors personal experience.
[3] We will
examine more of this in later sections.
[4] See EH.net's
"Child
Labor in the United States" by Robert Whaples, Wake Forest University.
[5] If the first
industrial revolution had occurred during Roman times, it is entirely possible
that inventions such as the steam engine, the printing press, and the computer
could have been created over 1000 years before they eventually were. Just
imagine how the world might look if the computer had been created in
1000A.D.
[6]
Rostovtzeff, Michael. Social and Economic History of the Roman
Empire. The Clarendon Press. 1926
Mises, Ludwig von. Human Action. Ludwig von Mises Institute; 3rd edition (2010)
Mises, Ludwig von. Human Action. Ludwig von Mises Institute; 3rd edition (2010)
[7]
For other parallels between
America and Rome, see Cullen Murphy’s Are
We Rome? Mariner Books; Reprint edition (May 5, 2008)
