Map of life expectancy at birth from Global Education Project.

Friday, June 29, 2007

It's Economics 101!

A colleague is returning to China to visit family for the first time in a few years, and of course I wished him a good time, and warned him not to eat, drive or brush his teeth while he is there.

If I had any loyal opposition here, or trolls, they would be falling over each other to point out that China is a communist country, but of course it isn't any more. The problems the Chinese have had lately with poison food and disintegrating tires are the result of capitalism. They decided to try to have rapid economic development by believing the economics textbooks their bright youngsters read at Harvard and Duke, which explain how "free markets" maximize efficiency and how government intervention is inevitably comes at a net cost to social welfare.

Economics professors are paid higher salaries than their colleagues in other disciplines for the express purpose of filling the minds of freshmen with lies. It's pretty clear that econ 101 is the only course the Leader of the Free World remembers, because he talks about it all the time. It has obviously made him a very wise man.

Here's the procedure. Your distinguished professor lays out a set of propositions, and then develops a theory of what would happen assuming the propositions were true. It's beautiful, elegant, astonishing! Everybody acts out pure self interest, and by a mechanism as glorious as the celestial spheres, all the sweeping, lyrical lines intersect to produce the greatest possible good for everyone. This phenomenon has multiple virtues. It means that the best possible outcome for the poor is for the rich to be rich. It means that any politician who tries to interfere with the unfettered conduct of business is stealing bread from the mouths of hungry babies. It proves that our world in which business executives live in mansions with their personal bowling allies and olympic swimming pools, while a million children die every month of starvation and disease is better than a world in which no children starve and no billionaires have bowling allies.

Now, this is indeed a valid proof, but what your professor (who is not a scientist but a theologian) fails to see is that it is a proof of the form called reductio ad absurdum. If the premises produce an absurd result, the premises must be wrong. Indeed they are wrong, and your professor will even throw in some disclaimers. Sometimes, he will aver, there are "market failures" and "externalities," which may justify some tweaking and polishing of the glorious system of the celestial spheres. But this is quickly forgotten, because what really matters is the fundamental perfection of the heavens.

Sadly, no. Market failures and externalities are not exceptions. There is no such thing as a transaction which does not incorporate so-called "market failures." Markets always fail, 100% of the time. The premises on which economic theory is constructed are always false. The falsehood of the assumptions is not a gloss on the theory, or a reservation, or a modification, it is fundamental. The theory is built on false assumptions, therefore it does not describe reality, therefore it is worthless. Economic theory as taught to our children is the equivalent of the Ptolemaic system of astronomy; market failures and externalities are the equivalent of the epicycles added by astrologers to make the Ptolemaic universe correspond to observations. But their project was doomed, because the fact is, the earth is not at the center of the universe.

It is equally true that there is no such thing as a "free market." No such entity has ever existed, or ever can exist. Markets are social constructions, made out of rules created and enforced by humans, for better or for worse. There is no such thing as a transaction in which all of the costs and benefits are felt only by the parties. There is no such thing as perfect information, no such thing as perfect competition, no such thing as rational choice, and most fundamentally damning, the theory does not even predict that outcomes will be fair and just -- a most embarrassing little secret that economics professors and libertarian ideologues pretend away.

As the Chinese are learning the hard way, we need to jettison the Ptolemaic system of economics, pulp all of the textbooks except for a historical archive, send all the professors to reeducation camp, and start basing the discipline of economics on the study of reality. Who will be our new Copernicus?

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