In the spirit of non-violent economist “bashing”

The other day the press had fun bashing economists in general. So, let’s talk for moment about some economic beliefs.

One thing I learnt during the years studying economics at University was that everything depends on something (inter-dependancy being a key word) and that the universe will always naturally seek to find a sustainable equilibrium; the less we try and control and influence this “invisible hand” the quicker and less painful the equilibrium will be able to find itself.

Thus, many well-meant interventions often prolong or even cause more (future) pain than gain.

Anyway, most everything in economics is about resource allocation, optimization and equilibrium. All great economists of the past were first of all great thinkers, i.e. philosophers if not even here and there actual mystics in disguise (Adam Smith’s infamous “invisible hand” gains a totally different meaning looked at under this aspect).

Amongst other, these thinkers were concerned with finding sustainable equilibrium in society with as little income difference between the richest and the poorest as possible.  Why? – Well, apart from a possible altruistic motive, the logical aspect dictated that there is less social and political unrest to be expected if people are treated fairly and more to be gained for everybody. Fancy that!

Thus, the big question that economists concern themselves with is: How can the world’s resources be allocated in such a way that inequality is minimized, equal distribution maximized and allocation optimized? (Profit maximization belongs in the realms of business goals and has not much to do with the actual questions that micro- or macro economists would normally concern themselves with. An economist may of course think about the economic consequences of profit maximizing behaviour in society.)

Most economists like to think of themselves as being highly rational and logical thinking beings. An economist ‘believes’, in fact, that most people behave and think in a rational – i.e. predictable – way (Homo Oeconomicus). May this be true or not, most models are based upon such premise.

Why is logical thinking so important to an economist? – A possible answer may lie in its own history. At the end of the dark ages and consequently with the dawn of the age of enlightenment logic was ‘in’ and (religious) belief more and more questioned. In other words: the days of the church and its political monopoly were numbered. Blind belief was out. Logical thinking was very much forcing its way into the realms of society and power. The pendulum was swinging from an unstable equilibrium towards a new era.

And economists? – Certainly, they don’t want to be looked at as a bunch of people just looking into a crystal ball coming up with the according predictions for the following quarters (Also, if sometimes it does appear that way)! Thus, the discovery that the human being behaves in accordance of rational – i.e. economical – behaviour came in handy.

This “Homo Oeconomicus-presumption” though is also quite tricky. – Why? Economic (or any other behaviour for that matter) is not something static but changes and shifts along with the ethical and other societal understanding of any given time. What seems rational today may have been totally irrational 100 years ago. Also, what is rational or not may be quite subjective.

In economics, logical thinking by itself was soon not enough anymore and underlying mathematical confirmation was gaining fast in importance. And that, of course, is where it becomes really tricky. Any mathematical computation is dependent on a certain amount of predetermined conditions, information, factors and variables. Everybody would agree that a model invariably can at best be an approximation to the real world. Hence, if the model is no good, the calculation thereof will amount to nothing. And when the world changes faster than some of the models… Hm.

Perhaps it is simply a logical consequence that logical and rational thinking had to take on more extreme forms over the centuries. In fact, this may actually be the real weak point in economics.

Rational thinking has more and more crowded out any other form of thinking that is based on – say – belief, emotion, higher forms of intuition or personal experience rather than on rationality. Thus, the pendulum seems to have swung from one extreme dogmatic form based on belief (dark ages) to another extreme dogmatic form based on rational thinking with its models and mathematical calculations (today).

Both systems – be it blind belief in some unknown entity or be it a blind and dogmatic form of faithfully crunching numbers of preconceived ‘rational’ models – in their extreme form are bad for society – leading indirectly to wars, social unrest, poverty, inequality, etc.

However, as economics also teaches (thank god for Adam Smith et al!) no extreme form is sustainable – and nature will always search for a sustainable equilibrium! Thus, after we have swung from total blind belief to total blind rational thinking it is only natural and in the way of mother nature to swing back and forth until she finds a sustainable equilibrium somewhere in-between so that the Human Being may one day actually realize its true illumined intellect that is wholesome, integrative and harmonious in nature within itself.

OM.