Economics As If Humans Were In The Driver Seat

I was reading an article the other day and I realized something.  Here it is:
http://blogs.wsj.com/economics/2015/03/11/u-s-tax-system-encourages-foreign-takeovers-business-roundtable-study-says/

This article is based on a study done by economists for the business roundtable.  It quotes all sorts all sorts of statistics.  It doesn’t do one thing though.  It doesn’t actually seem to talk to any real people about real stuff.  These studies never do.  For some reason economists are afraid to.  It’s not just Keynesians, Austrian or Chicago school economics studies don’t have people in them either.

Which is strange because economics is all about people trading with each other. the essence of economics is that people exchange goods or services and both receive value. It’s the whole reason an economy exists.  Yet it seems the basic rule is to get the human beings out of the model as fast as possible. I’m not sure why that is.  It may be that to an academic, actually talking to people is much harder than looking at charts and numbers.  Then it’s much more expensive to travel around and actually look at things.  Worst of all the academics might find out that their ideas are wrong.  So it’s easier to think of economic as a bunch of impersonal mathematical models rather than millions of people trying to live their daily lives.

Here’s a case in point.  He starts with people, but calls it a machine. that’s great up to a point, but his explanation only really fits an economic steady state. By the time you get to his level of abstraction you’ve removed some key elements that you really need to know.  His economic machine  can’t explain things like the Industrial Revolution, or why Rome fell because by removing humans you remove the chaos that exists in the economy and by doing that you separate from key information that you really need to know.

Taking the human element out of your economic thinking can lead you badly astray no matter how smart you are.  Here’s John Gruber explaining the health care plan.  Followed by, in the same class, John Gruber explaining moral hazard and why, people, acting in their own best interests will inevitably sabotage any possibility of the healthcare plan actually working.

The interesting part is that Mr. Gruber can’t even see the disconnect.  he can’t seem to understand the problems with seemingly “free” resources ending up as a case of the tragedy of the commons. The moral hazards Gruber describes are real.  They are functioning right now.  With all the corruption that goes with the kind of rent seeking those kind of programs create. It doesn’t take much searching to see the problem  in action.

http://www.washingtontimes.com/news/2014/apr/9/sen-menendez-pal-salomon-melgen-collected-20-milli/

The problem with the academic approach is that it has a more than a little disconnect with reality. As Mr. Dangerfield makes clear.  Of course there’s more to the story than the things that were spouted off here. After all there’s the distance from suppliers and transportation costs to consider.

That professor’s ideal factory leaves a lot out.  Even if you leave out the colorful stuff in the clip, you can’t really asses the value of your asset if you don’t know what you are really producing.  Ultimately you’re producing value.  That’s something most economic professors, Mr. Gruber, for instance, don’t seem to understand.  Your product or service brings value to peoples lives.  That value exceeds the money invested or the person doesn’t enter into the transaction.  That added value is what represents wealth.

The basic question comes down to what creates wealth.  The fact that wealth is a measure of value mean that it is by and large intangible.  It represents knowledge rather than some measure rather than money.  Even though value is intangible it is the key  to understanding how economics functions.  Yet the schools of economics from Smith to Marx to Keynes have by and large written an understanding of value out of the equation. Which is where a new kind of economics is needed.  Here’s a start.

George Gilder probably has a better handle on what really going than any other economist right now.  He’s stripped away all of the mumbo jumbo and esoteric economic theories and actually talked to entrepreneurs and the people actually in the trenches.  He does get some stuff wrong, but for the most part he’s on the right track. The most thing is that he understands that entrepreneurship is a giving activity, not a taking one.  An entrepreneur gives of himself to make his dream come alive and he gives to others to make his dream possible.

I’ve seen the satisfaction that entrepreneurs get from what they do.  They don’t work those extra hours, put in all that extra effort for just the money.  They do what they do because they feel good doing it.  Realistically  nobody could pay the typical the typical entrepreneur enough to get the kind of effort the typical entrepreneur puts into his or her business.  The term “put their hearts into the business” fits perfectly.  I’ve seen in the entrepreneurs I’ve worked with over the years.  And I’ve seen what happens when they lose the business.

http://www.weeklystandard.com/articles/surprise-and-creativity_741024.html?page=1

The traditional economics loses the triumph and tragedy of the entrepreneur.  It also misses the results of the creative energy, the flow of entropy that a healthy economy creates.  Gilder’s book, “Knowledge and Power” deals with this economic energy that is the basis of an economy.  The fact is that any economy is a result of information flows, not money flows.  Money, by itself doesn’t provide any information where it came from or what it did. You can run $100 bills through the most sophisticated chemical analysis and all you will find out is that apparently every bill has been used in a drug deal.  I actually worked in a place where did run $100 bills through our instruments and sure enough found traces of cocaine on all of them.  We did it for $20 bills as well and got the same result.  Turns out that the Cocaine powder on even one bill contaminates the money counters and because our mass spec was so sensitive every bill we checked had the traces.  So much for checking money forensically for drug deals.  Or anything else, for that matter.  There really isn’t a way to examine money and have it tell you what it did.

http://www.amazon.com/Knowledge-Power-Information-Capitalism-Revolutionizing-ebook/dp/B00APDG0PG/ref=sr_1_1?s=books&ie=UTF8&qid=1427342455&sr=1-1&keywords=knowledge+and+power

Like this scene from “Executive Suite” there are things that traditional economics just can’t get a handle on. the CFO in the picture can move money around and create the appearance of prosperity, but is not actually adding anything to the real value of the company.  Yet it’s the finance office which seems to be the road to the top.  As Gilder quoted Peter Drucker Saying, “Nobody knows less about your business than your CFO.”

As Gilder points out, it’s only when knowledge is attached to money does it become powerful.  It’s the insight and creativity of entrepreneurs that provides that knowledge. It’s the entrepreneur that sees the opportunity to create value. It’s the entrepreneur who’s the sensor and amplifier picking up those small economic signals and adding the knowledge that raises the economic entropy and broadcasts it throughout the economy, creating yet other new signals to be responded to. This is the reason that big growth events tend to happen in clusters, with a whole bunch of people all doing the same sorts of things all at once.

You want to understand the industrial revolution? Look at what Henry Maudsley did in his shop. Along with the Lunar men.  You can almost trace the history of the industrial revolution through the shops in Birmingham and the shops that Maudsley worked in and employed those who came after. You can try to delve out why the industrial revolution happened all you like trying to guess money flows and population movements or you can look for the cluster of entrepreneurial types creating and building on the knowledge base that made the whole thing work.

As Gilder points out, Keynes eclipses information.  The whole point of Keynesianism is to abstract economic activity the point where you all you are dealing with is a thought exercise.  You have no of knowing what you are dealing with.  The Keynesians talk about consumption and production, credit and saving completely abstracted from the activities that are the reason for the consumption and production in the first place.

The problem is that by and large economists, especially Keynesians, are clueless about wealth creation.  Nobel prize winning NY Times columnist Paul Krugman admits it:

[L]et me tell you about a dirty little secret of economics — namely, that we don’t know very much about how to raise the long-run rate of economic growth. Economists do know how to promote recovery from temporary slumps, even if politicians usually refuse to take their advice. But once the economy is near full employment, further growth depends on raising output per worker. And while there are things that might help make that happen, the truth is that nobody knows how to conjure up rapid productivity gains.

http://www.nytimes.com/2015/06/19/opinion/voodoo-jeb-style.html?_r=0

What the Keynesians fail to understand is that for Keynes, all that mattered was what was happening in the here and now.  Keynes was a hedonist in the perfect sense.  He had no children and thus didn’t really have a stake in the future.  he could talk about larding up the debt because he wasn’t going to be held responsible for paying it and he didn’t have children who would have to be responsible for paying the debt one way or another.  A nation state can’t operate that way.  A nation sate must make some provision for the future or the future will make provisions for that state.  That has never ended well for the people living in that state.

Savings and investment are the future.  In order to exploit opportunities the prospective entrepreneur must have access to capital, either his own, from his saving or borrowed from others savings.  He then can add his knowledge of the opportunity and create new value.  Using capital the entrepreneur can create a new signal in the economy which people can respond to.

The big problem we have right now is that the leadership in government and finance have essentially followed some sort of distorted path to believing that when it comes to economic decisions people don’t matter.  They believe that you can just turn the interest rate crank one way or dump money another way and somehow, like magic the economy will fix itself.  They can’t seem to understand that running both high taxes and deficits gets you the worst of both worlds.  As does keeping interest rates at zero for favored customers and high or credit not available for everybody else.  They Powers that be can’t seem to understand that overregulation and arbitrary enforcement only send distorting signals to the very people they powers that be need to save them from themselves.

Without entrepreneurs, there is no growth.  Stifling the ability of entrepreneurs to profit from the drive to create only creates ruin and destruction.  When you replace rule of law with cronyism and arbitrary actions by a lawless executive the kinds of economic activities that create prosperity for most of the people dry up and die.  A few elites may do well, but the rest of the people scramble and scrape for everything they have, but not too hard, because the nail that sticks up is likely to get pulled.  Better to create the connections, keep your doors tight and make sure all the right people get their cut.

This is the kind of society that the current powers that be seem determined to create.  It’s a sick thing, taking the worst of old Chicago, hippy Socialism and Ivy Covered Snob Factory idiocies and creating an ugly directionless mess out of what was the strongest and greatest economy ever.  The sickness has spread and it’s eating away at what we were.  It’s not only going to take our prosperity but our liberty.  The sickness is, in the end, given historical examples going to take everything we have including out very lives.  We need to start treating economics and government as if people mattered or watch as everything falls apart.

For more on the dysfunctional economy click Here or on the tag below.

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