Sunday, November 18, 2012

The Meta of Economics

Economics has become too complicated for its own good.  It logically evolved this way because it wants to be taken seriously as a science and not hang out in the back of the school bus with philosophy and sociology.  To do this, it looked around and saw what was being taken seriously: chemistry, biology, and physics.  These rigid sciences are not only precise and accurate, but best of all, predictive.  Economics saw its way in: if it can convince the public and politicians that the economy can be explained in an accurate, precise, and predictable way, it will be the most valuable commodity on Earth.  Imagine predicting a recession and then getting a nation out of one.  Perhaps in another universe this has come about, but in this one, it has done a half-ass job in all fronts.

The problem became obvious: economics was dead-on at predictions until the winds changed.  In an effort to become more "scientific," it did what all real sciences did: it took all the available data, graphed it and looked for important trends.  It then plotted a regression curve to predict the next fifteen years.  So by trying to be accurate, precise, and predictable, it went 0 for 3.  All it could do was explain what was happening, what would happen if current situations prevailed, and why things changed after the change occurred.

The most frustrating thing is how checkered the subject is.  Out of the numerous schools of economic thought, some will always get the next big prediction right.  Those schools will rise to the mainstream, spend its 15 minutes in the sun then get blindsided by the next big change.  How to keep on top of it all?  Do I got to read every day to be on the cutting edge of economic thought?

The truth is: don't bother, unless things like nominal GDP targeting and coin seigniorage really interest you.  All you need to know is this: at all times, there is the status quo aka the mainstream thought aka the establishment.  It is the yolk in the egg of economics.  Surrounding it is the egg whites, all of the fringe economic thought.  If the economy does well, the mainstream gets stronger, its correctness is manifested in the strong economy.  If the economy starts to suck, it loses legitimacy and the marginal schools gain strength.  If the situation gets bad enough, one of the plethora of heterodox schools who predicted the crisis use this opportunity to stage a coup.  It is important to note that by definition, the mainstream school will always be caught off guard when the economy structurally changes.  Status quo likes stability.  If it detects change, it will do all it can to stop it from happening.  If things do change, that means the establishment did not see it coming and is thus unprepared.

Back in the Great Depression, classical economists were the big cheese.  Then as the economy continued to suck, the people turned to Keynesians, who promised a way out.  They ruled the roost until stagflation (aka economy sucking) in the 70s, which allowed the new classical economists to take over again.  Their brand of economics was all the rage until it culminated in the debt/housing bubble in 08, which pushed us to the brink of Great Depression II.  Guess who shows up to save the day?  I shit you not, the New Keynesians.  Meanwhile throughout all this, you got your severely heterodox schools routinely making appearances as the economy ebbs and flows.  You got the MMT guys who say we can never default since we print our own money.  You got the monetarists who say all we got to do is target nominal GDP and everything will work itself out.  You got Austrians who promise gold is our salvation.  And of course you got your socialists, communists, and fascists who are just waiting for the day that everything falls apart.

TL; DR: The actual content for all economics don't really matter.  If the economy does well, the mainstream thought is strong and unassailable.  If the economy begins to tank, the mainstream thought becomes vulnerable.  If the economy tanks enough, the school which makes the best case for recovery will become the new mainstream.  This cycle will continue because everything falls apart.