Basic Economics & Bad Economics

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."
—Murray Rothbard

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Economics is a complex subject, and it is further complicated by various mistaken ideas believed to be truth by various schools of thought. Unfortunately, experts in things that are wrong often guide governmental and corporate policies, resulting in very real destructive consequences for the world at large. Education on the subject tends to be very dogmatic, and consequently deficient in teaching core principles that allow people to weigh matters appropriately or form valid conclusions. It is my hope to address the basics here in such a way that people can seek further knowledge that has real, practical applications.

At its core, economics is the study of human action. Humans apply reason to choose actions that they believe will achieve desired ends. People can reason poorly, fail to act appropriately, or not in fact enjoy the ends once they are achieved. This does not preclude rational economic calculation, but it does place a limit on economic study. It isn't physics or chemistry with iron laws of action-reaction.

Value is not an intrinsic property of any good. It is not like mass, electrical conductivity, or other empirical properties. Some of these properties may be highly valued by many people, but this still does not impart the property of "value" in the good in question. Value is always a subjective determination applied by the individual making the valuation. It is ordinal rather than cardinal, and can vary based on the circumstances. Although this example will swiftly become obsolete, think of a Justin Bieber CD. I do not value the music at all. I would not pay anything whatsoever to buy it. However, if I found myself wanting a gift for someone else who was a Bieber fan, I would change by exchange preferences and consider it alongside other potential gifts based on my knowledge of the intended recipient. That is because the person in question does value Bieber's music and might enjoy having it in physical form.

Prices do not define some sort of intrinsic value. A price is merely an offer to make an exchange. If a loaf of bread is priced at $5.00, it does not mean the universal absolute value of the loaf is $5.00. Rather, it says, "I value $5.00 more than I value this loaf. If you value this loaf more than you value $5.00, I would like to make an exchange." Prices and wealth are also often confused with moral value, and this confusion also applies to wages. Prices and wages say nothing whatsoever about the moral worth of a good or service, including labor. It only indicates the monetary value others are willing to offer in exchange. A large number of people value professional sports, so skilled athletes can command a high wage because their skills are scarce and the demand is high. The same applies to financial managers, lawyers, engineers, and many other professions.

Even interest rates are in effect just a price applied to the use of someone else's money. People have different scales of time preference. Some prefer goods now over future debt, while others are willing to save in order to avoid debt and cover potential emergencies while planning to pay up front for what they wish to have. Thus, you can see how those who prefer to save and those who prefer to borrow both benefit if the savers lend their funds to the spenders. Interest rates cover the risk of non-payment and the cost to the lender of losing access to those funds for the period of the loan.

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The economy is not a thing in and of itself, but rather the result of human action and interaction. Each market actor in the economy uses his choices to guide his production and consumption. The impossibly massive conglomeration of offers and exchanges using the price system is an information network signalling supply and demand to everyone in the economy everywhere on the planet. As such, monetary prices are an incredible tool that serves as a decentralized incentive structure to guide human behavior to provide the most benefit to others.

Good economics is the study of the incentives and responses of humans using this system, and the incentives and responses that result from the addition of coercion to it. It is descriptive rather than prescriptive. Bad economics takes many forms, and can be recognized by a few characteristics.

Note that in the examples I offered above, I left out discussion of subsidies, taxes, bailouts, licenses, etc. These are all examples of anti-market interventions from the government. Government is a group of people who claim a territorial monopoly in violence, and fund their operations entirely by expropriating wealth from the productive economy of voluntary exchanges. Governments operate as monopolies in the services they provide as well, and good economic analysis can explain easily how such monopolies promote waste and abuse. One kind of bad economic analysis treats the government as a beneficial part of the economy rather than as the destructive parasite it is.

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The political plunder of the State is compounded by those who seek to blend government with the markets. The banking industry of today relies heavily on the governmental central banks and monetary controls such as interest rate manipulation and inflation as well as explicit permission from the government to lend wealth it doesn't actually have as an aspect of fractional reserve banking with the protection of tax-funded government "insurance."

Corporations in general are legal fictions established through government law, affording the organization with legal "personhood" and granting certain privileges and protections to the executives and shareholders in the corporation. This is clearly a distinct concept from that of a large business formed through the market process already, even before considering the layers of subsidies, bailouts, protectionist regulations, no-bid contracts, and other ways corporations and government collude through political plunder. When political intervention and corporate collusion are assumed to be natural aspects of the free market, confusion abounds and bad policies are proposed.

On the one hand, Keynesian economists want to guide the economy by using central planning to manipulate the market. They want to steer the economy and guide it to serve their own ends instead of considering human action and understanding the deeper effects their manipulations have on guiding the choices people make. Using interest rates to manipulate the economy sends false signals regarding the availability of saved wealth to producers of goods, for example, and can result in real problems like the recent housing bubble. Low interest rates told builders that there was saved wealth that people would likely want to spend on housing. Construction began based on that faulty information. Then, when the reality of the situation became apparent, the collapse occurred.

On the other hand, we see Marxists declaring that property is theft, prices are greed, and their brand of central planning can replace the entire network of human action where prices inform myriad consumer choices, in turn informing production, in turn informing prices. Such dictates exemplify the economic calculation problem far more than even Keynesian planning. The planners cannot know the subjective preferences of individuals on a broad scale, much less the various circumstances that can change those preferences from moment to moment, or adapt to the growth of technology and changes in consumer preferences. The lack of information is crippling.

In the market, the failure of an individual through ignorance, inability, or error is small, and recovery is relatively readily mane. In a system of central planning, the planner's ignorance is far greater, his inability is assumed to not exist, and his errors are compounded by the scale of his control. This can only result in disaster in the long term, even if the efficiency of large-scale operations were not crippled by layers of bureaucracy.

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I apologize if this essay is somewhat disjointed or otherwise lacking. This is the result of hit-and-miss blog writing over the course of a couple days, and I can't guarantee my editing of my own work was up to snuff. I also know I have taken the liberty of assuming knowledge of such matters and money and property, which likely need their own treatment. Please comment below if there are ways I can improve this post over the next week or if there are subjects I should discuss in more depth. I can also recommend other works by serious economists if you would like to examine these ideas in more depth. I would suggest beginning with Henry Hazlitt's book, Economics in One Lesson.