17 Dec 2008

Rebunking Five "Lies" of Economists

All Posts No Comments

They are trying to debunk the lies, so I am rebunking… Now I’m no fan of mainstream economic orthodoxy, but the critiques on this (spooky) page are childish. I must be brief–my corporate masters want output output output from me!!–but let me at least deal with two that jump out:

DELIBERATE LIE #3. People are “rational utility maximizers”.

Although even economists admit this is a lie, [7] it is still boilerplate economic theory. Economists MUST lie about this because if people are being manipulated by marketing, then the so-called “free market” obviously requires government intervention.

In a Liberal Democracy, tax payers are ultimately responsible for an individual if that individual becomes destitute or a criminal. Economists use the “rational utility maximizer” lie to prevent government intervention in markets when intervention would serve the common good.

The mistake here is so elementary that it’s comical. If people are manipulated by advertising (and they certainly are to some extent), why in the heck would liberal democracy “work”? Wouldn’t you get ridiculous (and “wasteful” in this site’s horrified sense) political campaigns that appealed to the basest of passions? In short, wouldn’t you end up with the lousy politicians we currently have?

This is the problem with any solution that relies on a benevolent government. E.g. if you think a country is horribly racist, then the last thing in the world you want to do is give the majority more power through the government. Duh.

DELIBERATE LIE #4. Money is just a “medium of exchange”.

Money is literally “created” (and backed by consumer debt) every time a bank makes a loan. At the time the loan is made, not enough money is in circulation to pay the interest on the loan, so more money must be eventually “created”, by more consumer debt, to pay back the interest on the loan.

I’m answering this one because I think someone in the comments here at Free Advice asked this a few weeks ago. Anyway, it is not true that if a bank makes a loan, then there necessarily needs to be further creation to allow for the interest repayment. This is partly because not every bit of money is due to a loan that must be paid back with interest to the bank, but more fundamentally the website is wrong because the same piece of money can change hands more than once during the year.

For example, let’s say there are two neighbors, Bill and John. John asks Bill for a loan of $100, to be repaid with $110. Bill agrees, and gives John the money. John uses the $100 to buy materials, such as a canvas and paint, from Sally. Then John combines the materials to create a nice portrait, which he sells for $120 to Sally. Then John pays the $110 back to Bill, keeping $10 for himself. It is clear that what has happened is that a net $10 went from Sally’s cash balance to Bill’s, and another $10 went from Sally to John. Everybody is happier than without the voluntary transactions. The universe didn’t blow up.

But let’s really push it to see what’s fundamentally wrong with the website’s analysis. Suppose there are just two people, and Bill starts out with all the money. (This way we can’t get the net interest payment by reducing someone else’s cash holdings.) John asks to borrow $100. Bill says, “OK, but I charge 10% interest per month.” John agrees.

Near the end of the first month, John makes his payment of $10. But then he cuts Bill’s grass for $10. Thus John’s cash balance is restored to $100.

John does this every month. When he decides to pay off the principal, he does the same thing: He pays the installment, then cuts Bill’s lawn to get the $10 right back, and then hands over the $100 to pay off the loan. Once again, the universe does not blow up.

Last way to see it: Suppose we had a society with 100%-reserve banking on a gold standard, and the mines were empty. Would the nominal interest rate necessarily be 0% in this world?

Comments are closed.