Failures of Economics

April 2, 2012

I found this Reuters op-ed piece by Chrystia Freeland interesting, not so much because of the reported championing of manufacturing by the director of the National Economic Council, but because it sheds light on some fundamental flaws in the field of economics.  The following sentence near the end of the piece sums it up well:

Unless you have a doctorate in economics, your intuition probably accords with Sperling’s point that building things is essential to a country’s economic well-being.

Economics is all about meeting wants and needs.  Vital economies are built around the processes of meeting those wants and needs.  It’s intuitively obvious that manufacturing plays a key role in that process.  But not to economists, for that doesn’t accord well with the real results of the practical application of their free trade theory.  How to explain away that failure?  They do it by mis-applying another theory – creative destruction.  It seems we are to believe that, through the process of creative destruction, new needs (apparently for services) will materialize out of thin air to fill the void created when the manufacturing sector of the economy was carved out and handed over to someone else.

That begs the question:  if such needs for services can materialize and result in an economy that was better than the one that relied on manufacturing, then why didn’t China (and Japan and Germany and others before them) build their economies around those needs for services, instead of plundering the manufacturing sector of our economy?  (See my comment on the op-ed piece – the 6th comment down – for more thoughts on the subject.)

And speaking of “creative destruction” – the process by which each product and service is eventually replaced by one that is more efficient and requires less labor to create and utilize – what will people do for a living, ultimately, when every product and service can be made available without any labor input at all?  It’s like other axioms of economics – that economic growth can go on indefinitely in a finite world, that mankind is clever enough to overcome every obstacle to further population growth, and so on.  Every one of them fails when tested at its limits.

How do economists respond to such challenges?  By changing the subject.  They’ve moved on from such matters to new distractions, like “game theory” and “behavioral economics.”   They can’t be bothered with the shortcomings and failures of classical and neo-classical economics.  Those issues are so “yesterday.” 

So our political leaders are stuck with failed economic axioms to guide economic policy.  Although it was obviously failed trade theory that decimated the manufacturing sector of our economy, we dare not admit to such and alter trade policy, for that would constitute an admission of failure and a case for rethinking trade theory altogether, something economists simply aren’t willing to do.  Better to tinker at the margins, boosting tax breaks for R&D and manufacturing, as though our entire manufacturing sector fled the U.S. because their insignificant tax breaks were infinitesimally too small. 

It never ceases to astonish me that, in the 21st century, the field of economics still gets a free pass on its obvious and numerous failures. 

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Another commenter on Freeland’s piece provided an interesting link that will be the subject of my next post.