I think of all the education that I missed. But then my homework was never quite like this. Got it bad, got it bad, got it bad, I’m hot for teacher. Immortal words sung by David Lee Roth in this classic Van Halen hit. Teachers are important people, and I owe a tremendous amount to Mrs. Hanson who encouraged me to read everything that I could get my hands on in 2nd Grade, and to Mr. Evans who taught me the importance of questioning things in the 6th Grade, and to Mr. O who taught me to love the power of mathematics back in the 8th grade. We all owe a lot to these important people in our lives. It’s unfortunate that so many of the people who teach economics have such a limited understanding of the topic.
I have talked a lot in this blog about the doctrinal way that some economists approach the topic. I have found that the blind reliance on one approach to anything usually leads to bad decisions, and the same is true of economics. Unfortunately, on top of this there is an almost complete lack of understanding among most of the economists that dot the airwaves and halls of Congress about the basic underpinnings of the discipline. This is truly unfortunate because the philosophy behind economic theories is the most useful and interesting part of the discipline. This is also why presumably smart people can disagree so completely about how policies can impact the economy.
I have often heard it said that economists are physicists who are not very good at math, and I think there is a huge amount of truth to that statement. Unfortunately, I also think economists are physicists who are living in the age of the Ptolemaic system that viewed the earth as the stationary center of the universe, with stars and planets embedded in crystalline spheres that rotated in a complex system where planets revolve in a small circle or epicycle around a larger circle. This concept was much more complicated than the real structure – where the earth and the planets revolved in an elliptical orbit around the sun.
Economics as it is taught today is very similar – particularly at the graduate level. The focus is more and more on complex statistical modeling, and mathematics, and there is little if any discussion about the why’s and how’s of where economic theory comes from. Because of the nature of economics education, people can gain PhD’s, Nobel Prizes and seats on the Federal Reserve Board of Governors having never read the economic theory that they believe they are relying on. Simply put, the most wizard like mathematical model of the economy is basically worthless without a thorough underpinning of the theories and ideas of people like Adam Smith, Karl Marx, Alfred Marshall, Fredrick Hayek and John Keynes.
In approaching any economic question it is essential that a general theoretical framework be developed and then tested. It is not enough that a correlation exists, or that someone believes something to be true, but rather that a general theoretical underpinning be developed based on the general principles of economics – principles that have been developed and tested over hundreds of years. By understanding the theoretical underpinning of how the machinery of the economy actually functions, we can understand that the “socialism” described by Marx was nothing more than the shareholder capitalism that exists in the western world today, or that the idea of laissez faire as discussed by the Austrian economists was not the rigid anti-government approach suggested by certain members of Congress or presidential candidates.
Economics is not physics, nor is it astrology, but rather it is a system of relationships and general axioms or truths that underpin the way that markets – all markets – work. Those of us who purport to be a part of the discipline have a duty to our clients to ensure that we understand these relationships and truths and use them to back up our research and recommendations rather than relying on complex mathematical models of crystalline spheres to describe the world.