Monday, 6 February 2012

The Church of Economics

One of the things which differentiates Science from Religion is Belief or Faith. In a religion everyone has to simply 'believe' what they are told, questioning the doctrine is not well regarded.

Science on the other hand is built on questioning. The demands that theory can be demonstrated, and that evidence is key.

I reckon that the prevailing paradigm of "Economics" is more one of belief than one of science.

Today I read that retail sales were the worst since the eighties. Well its interesting to read the fine print on that:

Annual retail sales grew 2.4 per cent in 2011, easing from a 2.5 per cent rise in 2010. Last year’s increase was the weakest since 1984

Ok, so we actually had GROWTH and still this isn't good enough ... WTF?

Physicists are among the types of people who are trained in mathematics while (it would seem) that many Economists are not (I mean look at their graphs for a start, no scales often no axes). Reading the works on this topic by a physics person supports my fundamental view that growth can't go on forever.

He writes some interesting things, much of which is perhaps difficult to grasp if you didn't pay attention at school and can't read a graph (no, its not just a pretty picture) and you don't get what the difference is between Log scales and Linear ones.

So retail depends on "growth", but is this growth linear or log in nature? It would seem that to satisfy the economists it must be logarithmic. That's nigh on impossible. Some quotes from that above article:

Let’s say we lock in today’s 5% growth and make it linear, so that we increase by a fixed absolute amount every year—not by a fixed fraction of that year’s level. We would then double in 20 years, and in a century would be five times bigger (as opposed to 132 times bigger under exponential 5% growth). But after just 20 years, the fractional growth rate is 2.5%, and after a century, it’s 1%. So linear growth starves the economic beast, and would force us to abandon our current debt-based financial system of interest and loans.

Seems rational and easy to grasp. So how would we get a log growth? Well the same author makes good points in discussing what is wrong with the theory of sustained logarithmic growth here.

Looking at the past shows us that for some time (since the Industrial revolution perhaps) we have come to expect that we can always just get more more more. However looking into the past is not really a good way to identify our future.

Moore's law is the classic example. The under educated and mis-informed use it to 'predict' that every year we'll get more from less. Moore himself has identified that this can't go on indefinitely. We are actually starting to see the evidence to support this.

So perhaps we should start looking around for alternative economic approaches?

Look at it another way: Physicists and Engineers are the ones who imagined and designed everything we have which works that man has made. Economists are today the ones telling you that saving money is a bad thing, debt is leaverage and consume more because that's good for everyone.

I know which set of people has made things which seem to work.

I'll leave you with a quote from Moore himself. Perhaps it may give you pause for your religious belief in the "Dogma of Infinite Growth"

On a more sobering note, Moore, who has donated millions to save forests and other nature areas around the world, said that humans are definitely taking a toll on the environment.

"We are the last generation to have any wild places on earth," he said.

Fortunately there is another school of thought emerging in Economics, but that paradigm shift has yet to gain momentum.


Charles Maclauchlan said...

Economics is a favorite area of study for me and one I like to think I know a bit about. I'm not speaking the "economics" designed to fit large governments (re; liberal) here but the basic bedrock principals which have been part of human interaction since we had language.

I would be interested in understanding a bit about the emerging new school of thought.

(as an aside, the very best definition I've heard of the word "Paradigm" is ...20 cents)

obakesan said...

there were a few links in the blog to one guy. Generally it would seem to put Keynesian economics out of favour, but then I guess that's the "economics" designed to fit large governments I'm talking about too


Charles Maclauchlan said...

Ahh Keynesian. I thought so.

Keynesian Economic theory seems to me to rely on 3 things:
1) Although long term governmental interference with the free market has never produced a positive result somehow it will this time. We're just smarter or better somehow.
2) The concept of "Magic Money." Money which can be printed or borrowed and have no detrimental effects whatsoever.
3) Even though private sector spending multipliers are 1.6 to 1.8 and government spending multipliers are less than 1 it still makes sense to channel money into the government on an ultra large scale.

This type of thinking has been a prevalent cancer in this country for 3 years and is a guarantor that our economic "downturn" will be much longer than hoped.

obakesan said...

Charles, thanks for the proof read and comment. Got me to snap out of my hidden assumptions and tidy that up a little.

It was 6am when I wrote it ;-)

Charles Maclauchlan said...

thanks for letting me rant, Chris. I always enjoy tour posts

obakesan said...

Charles, I always enjoy a good rant and have no problem with anyone ranting (even at me) about anything I rant on about either ;-)

only real rule is "no advertising"

writeagain said...

Ahh, Economic theory. Where does one begin??

Economics historically involved the analysis of hopelessly complex systems to try and find patterns that could be both projected into the future, and potentially used to affect future outcomes. This has always been a noble and worthy pursuit, if somewhat hopeless.

The key problems are that 1) people don't act rationally at the individual level, and at the macroeconomic level people can act quite insanely (read The Madness of Crowds) and 2) The economy is a many headed beast: no one "authority" has the levers, see the Euro for how impossible it is to control even a part of the global economy.

But the really, unbelievably stupid development of late is the insane politicization of economics. While economic theory remains at best a retrospective analysis, we are constantly harangued by politicians claiming they and only they can control the future direction on local economies. And just when it seemed things couldn't get any stupider, we are now told that economic settings - which have repeatedly failed to manage local economies - can now be used to manipulate the global climate.

I think I'll go and check my astrology chart - apparently the alignment of the stars is going to help me win lotto next week. Makes perfect sense. Hallelujah - I believe, I believe!!