Ekonomer är idag inte särskilt populära. Här följer emellertid en genomgång av ekonomisk historia och vilken roll ekonomer faktiskt har spelat för världshistoriens utveckling. Inlägget återfinns också på Caffeinated thoughts
Economists are not popular nowadays. The failure by most economists to predict the financial crisis (while there still was time to prevent it) have made a lot of people lose their respect for the science of economics.
Among the general public, nobody really respect economists anymore. Maybe this is understandable – I’m in no way uncritical of the way economists have acted in recent years. Having said that, everyone knows we economists are no saints. We’re no leprechauns, able to give everyone their own personal pot of gold.
There’s no reason for me to repeat what everyone already knows. Instead, in this post I’m going to try and answer the question: What have economists ever done for us?
1) Created world peace. Okay, this one seems crazy doesn’t it? We didn’t have world peace last time you checked, you say? True enough. Yet, economics has contributed to creating world peace by scientifically proving that wars are bad – for everyone! Are you familiar with the broken window paradox? Basically, if you smash a shop window, you’re forcing the shop owner to pay for a new window, which means the glazier will have to hire someone to make this new window. This person will now no longer be unemployed, and so he’ll be able to spend more money, for instance on clothes. The tailor will then be able to hire more staff as well, driving unemployment down even further. So isn’t the breaking of a window really a good thing? Bastiat – an economist – proved that it’s not good for the economy even though it appears to create jobs. You can always argue that breaking windows are wrong, morally speaking, but it’s the economical argument that has the ability to convince everyone: The shop owner would have spent the money anyway. Maybe, if he hadn’t had to replace the window, he would have bought himself a new suit, which would have boosted the economy just as much as the replaced window did. Now, he has a window, but no suit. If the window hadn’t been broken, he would have had a window AND a new suit. So it’s a net loss.The “broken window” in the real world refers most oftenly to a war, and so Bastiat provided a good reason not to go to war: It doesn’t, actually, help the economy (there are still economists who believe it does however).
Before economics, it was argued the only way a country could get rich was by occupying another country and taking their resources. Economics proved this to be false as the economy is not a zero-sum game (though some people on the left still believe it is). Since the real reason behind 99 % of all wars were economical (you started a war to become rich), not having this excuse has greatly improved the chance of achieving world peace. Also, economics has contributed to world peace by creating the second thing on this list:
2) Free trade. The reason why you can enjoy all kinds of goods from every corner of the earth is because the first economists proved that trade is great. Before scientific economics came around, there was a misconception that a country somehow became weaker by importing goods. Exporting was good alright, but not importing. This led to trade wars and massive tariffs and hindered growth by forcing everyone to produce everything instead of specializing. If the UK is better at producing clothes than France, and France better at producing wine than the UK, then the UK should produce clothes and France wine, and then they should trade with each other. That way, France will end up with good clothes and good wine, and so will the UK, instead of either country ending up with only good clothes or only good wine (of course, in reality, the UK would specialise in more than one good and France in more than one good – point remains though). Trade, therefore, is good and makes everyone richer. Early economists like David Ricardo showed that trade cannot occur unless this is the case – you don’t agree to a trade (for instance, trading your dollars for a gallon of milk in the supermarket) unless it makes you better off, and whoever is on the other side of the deal wouldn’t have agreed either if it hadn’t made him better off.
Free trade is also good because it promotes peace. If you’re food is produced in the neighboring country, surely you won’t attack them as then they won’t agree to sell any food to you (and you’ll likely starve to death before you manage to occupy them)? And if you produce the clothes that people in the neighboring country are wearing, surely they won’t attack you either? This isn’t only a positive if you trade with countries that maybe you might otherwise attack (think; middle eastern dictatorships which supply us with oil), but overall throughout history, it’s definitely been overwhelmingly good.
3) The industrial revolution. In the beginning of the industrial revolution, when innovations began to pop up and make life easier for everyone, there were one group that was opposed to all of this: The luddites. They were anti-technology and wanted to ban any innovation that would make production more efficient, as they were convinced that efficiency meant unemployment. If an employer introduces a machine that means that one worker can do the work that it used to take four workers to do, then surely 3/4 workers will end up unemployed? Not so fast, said the economists. What’s going to happen is not that 3/4 people will end up unemployed, rather production will increase by 300 %! Everyone keeps their job, and now that they produce so much more, prices will fall lower and everyone will be richer. This has been empirically proven, yet many leftists still to this day insist that technology is dangerous and will cost jobs.
Thought experiment: We are now more than 100 times as productive as we were in the 19th century. Does that not mean that we should have about 99 % unemployment? Given that 1 person today can do 100 (19th century) people’s jobs. Instead, unemployment today is lower than it was in the 19th century (when unemployment in the high single digits was something they could only dream of).
Without economists and the intellectual defense they provided for innovation, it is not impossible that some populistic king or politician might have just banned Spinning Jenny and all the other technicological miracles that were part of the industrial revolution. Again, economic arguments are the strongest because everyone can relate to them. For me, it would be enough to say that “the employer has a right to install machines if he wants to, it’s his property” – but that’s far from enough for everyone. The economic argument “Let’s allow him to install machines and we’ll all be richer and then one day we’ll have IPods” on the other hand is acceptable to everyone, no matter where you stand on property rights – who wouldn’t want an IPod?
4) Women empowerment. Before the industrial revolution, the situation for women was frankly horrible: No possibility of working (that’s not saying that all women should work – but the opportunity to do so is certainly good), no equality before the law, legally beaten and raped by their husbands, husbands whom they hadn’t chosen themselves – in practice, few women actually got to choose the man they married.
We can all (I hope) agree that these practices were absolutely disgraceful, but what do they have to do with economics? Well, you see, without the industrial revolution, female empowerment would never have happened. There is a reason why women didn’t work before the industrial revolution, and it’s got nothing to do with the “patriarchy” like some feminists would have you believe.
Basically, in the early 19th century, caring for the household was a full-time job in itself: Washing had to be done without a laundry machine, dishing without dishing machine and so on. Add about seven kids, and you’ll realize why women didn’t work: They couldn’t. After they were finished with all the household work, the day was over.
The inventions of the industrial revolutions, (the vaccum cleaner, the electric oven, the laundry machine etc) made life easier for women, and saved them loads of time: Suddenly, they had time to work, even after all the household work was done (yes, I know a lot of women feel they still don’t have time to to work, but the point remains).
In addition to this, another constraint to working disappeared: The physical work. Most women are physically weaker than most men, which meant that the work back before the industrial revolution (and a good bit into the industrial revolution) was impossible for them to perform: Being a lumberjack or a mine worker for example required significant amounts of physical strength, strength that most women lacked. With modern machines and equipment, women are no longer excluded from such occupations.
Also, economics, as mentioned above, explained why specialisation is good, and how output can be maximised by everyone doing what they’re best at. This applies not only to countries, but to individuals as well: If you’re good at farming, then maybe you spend all your time on farming and then trade some of the food you grow for clothes, rather than spend time sewing your own clothes (which will mean less food and less clothes all in all). If a women is good at working, but not-so-good with kids, then maybe it’s a good idea for her to work rather than to have kids? Before economics, everyone assumed all women were called to have kids. Economics gave women who wanted to pursue a career an intellectual defense for their right to do so.
5) Abolished slavery. We really should get more credit for this one, but the only guy people remember is that Lincoln dude. Do you know why people in the northern US opposed slavery? Well, it wasn’t ONLY because of humanitarian reasons. The humanitarian reasons had been there all along; there had always been those who were opposed to slavery because it was morally wrong. Rather, what ultimately did slavery in, was the fact that slavery could be scientifically proven to be inefficient, in particular as work became more advanced (advanced working tasks are harder to perform by uneducated slaves), which was a result of the industrial revolution. Oh, and the reason why white people were against it? Slavery was dumping salaries for white workers, who couldn’t compete with the cheap labor provided by slaves. Slaves were the 19th-century equivalent to illegal immigrants, who work for less than half any american citizen would.
Economics is strictly anti-racism, which is one of the reasons it got its well-known nickname “the dismal science” – no, the first time someone called economics the dismal science, it actually wasn’t because economists were so pessimistic. It was because they were so negative to slavery and because they believed that differences in wealth between nations could be explained by differences in Land, Capital and Labour. The reason why England was richer than Ethiopia therefore had nothing to do with the english somehow being genetically superior to the Ethiopians; it could all be explain by things such as the fact that England had more arable land than Ethiopia.
6) Defeated communism. Come on, didn’t Reagan do that? Well, yes, but not alone. You have to remember that Reagan was able to do what he did because of brilliant economists who designed his economic policy, which boosted government revenue without actually raising taxes (though he did raise taxes later), and which managed to finally after a decade characterized by stagflation, bring inflation under control. The economy grew, and America appeared succcessful again.
Also, economists were among the earliest critics of the Russian revolution, with von Mises one of the very first to predict the eventual downfall of the Soviet Union, because communism simply doesn’t work economically. Again, there are many philosophical arguments against communism that really should be enough to convince people that it’s a bad idea; but again, the economic argument is in the end the one that most people will listen to and accept. It is through economics we can begin to fully understand why the free market works and central planning doesn’t.
What about finance?
So what about economics’ ugly cousin, finance? Even those who grudgingly admit economics may be useful, still have a hard time admitting the same about finance. All finance has ever done is creating financial crises, or so a lot of people seem to think.
What they miss is that finance is even younger than economics; only 60 years old. You’ll notice the Great Depression, the Panic of 1873, the tulip bubble and nearly all the other spectacular crises you can read about in history books happened before then. This is very important, because a science always takes time to develop: At the time when astronomy was 60 years old, astronomers still agreed that the earth was a flat desk at the centre of the universe. Compared to that, finance scientists are doing just fine.
While stock and bond markets have been around for hundreds of years, scientific methods for putting together a portfolio have only been around since 1952. It’s kind of scary to think of that for hundreds of years, all investors had to go by essentially was their gut feeling about a company and the overall economy.
What has scientific finance done then? Well, first, it’s proven the value of diversification: Investing in many different stocks (and bonds) rather than just one. The value of this knowledge cannot be underestimated for anyone who is trying to save for retirement or just trying to make the most money with the least risk in general. Having said that, sadly enough a lot of investors – including large financial institutions – still won’t apply financial science when they make decisions (investing a too large share of your portfolio in the housing market would be an obvious example of this). The problem, therefore, is not finance as such but the way people ignore what finance teaches us.
My main conclusion is this: Economics is a useful science and, I dare to say, next to medicine and mathematics it is THE most useful science. Not saying that’s an easy thing to measure, but I’m not taking it back.
I’m not saying that economics alone was responsible for all the things listed above, but its contributions should not be downplayed the way they’ve always been.
We don’t know everything yet. The exciting thing about economics is not what we know, it’s what we don’t know. That’s what makes it such an interesting field to study.
Economics is how we learn how to allocate resources. It is how we learn why the market works. It is how we learn why innovation is important. It is how we learn how to fight unemployment and poverty. And because of that, I’m proud to be an economist.
Let me finish off by an excellent quote from Friedrich August von Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”
Thank you for reading.
/ John Gustavsson