Fallacies of economics

I haven’t tried it, but I reckon if I applied for permission to build a house extension made of balsa wood and sellotape it would be rejected by the planning authorities. The laws of physics and materials are understood well enough and there’s enough agreement on the fundamentals, that it would be a quick and unanimous decision. There wouldn’t be a weird cult-type body jumping in to claim that balsa is actually a hugely robust and waterproof building material maligned by decades of misinformation which has convinced us, unfairly, of its unsuitability.
And if I ignored them and tried to build this extension, I’m pretty sure it would fail.

Science is like that.

Economics on the other hand……

Any old crazy nonsense seems to be fair game, if you say it loud enough and repeat it frequently enough.

This week the UK government set out a mini-budget (they call it a fiscal event or something similarly vague) based on economics which most experts reckon would fail at ‘A’ level exam standard. At a time of high inflation (even the government is calling it a cost of living crisis) and rising interest rates, they have cut taxes, mostly for wealthy people, leading to a massive fall in the value of the currency and panic in the financial markets. The global financial bodies like the IMF have poured scorn on it, lenders have retracted many of their mortgage products due to increasing uncertainty around interest rates and the central bank has had to make one of those interventions which defy explanation, to sustain some facet of the market which none of us really understands. Maybe that’s also part of the problem.

So what should we conclude about economics and governments?

Is it that economics is so disrespected as a body of knowledge that the authorities can freely ignore it? Or is this a government that’s simply economically illiterate? Or is there a conspiracy behind the whole episode? Maybe it’s a cunning plan to undermine the Bank of England leading to a restoration of political control.

Or maybe it really is what it appears to be – blind free market ideology trumping common sense.

US President Joe Biden’s commerce chief last night told CNN “simply cutting taxes, reducing government and deregulating” was a “failed economic theory,” and argued the chaos in the U.K. right now was a “cautionary tale.” Ouch.

In the alternative reality of finance and economics, this sort of thing happens all the time.

Just one recent example. I’m fascinated by this extract from Sam Ashworth-Hayes in The Spectator:

They’re reacting to the earlier news that UK’s new PM is proposing to cap energy prices. The goal is to protect the public from price increases, which threaten to put almost half the population into fuel poverty.

SAH is explaining why she thinks a price cap is misguided.

… a price freeze removes all incentives for households and businesses to reduce their energy bills – so we’ll crank up the heating, “safe in the knowledge that the Treasury is covering the tab”. Eventually demand will outstrip supply, and that’s when we’ll get blackouts. 
It would be much better to let everyone pay the full cost of their energy use, while doling out “massive quantities of cash” to those who genuinely can’t afford to stay warm. This would incentivise everyone to use less energy – a reduction in demand that would push prices back down – while also making sure people don’t freeze to death. 

The fact this is nonsense seems clear to me. But not, it seems to others. Including people who claim to know their DPOs from their derivatives.

I’m really intrigued that someone covering current affairs really believes markets , especially those unreal artificial markets constructed for utilities, would work in this Adam-Smith-utopia-utility-maximising fashion.

Have we learned nothing from history?  We have shortages of food on supermarket shelves because there aren’t enough drivers. Why haven’t wages increased to attract new entrants and fill the shortfall? Why have there literally hundreds of thousands of unfilled vacancies in nursing and midwifery for decades?

Did the massive hike in the price of petrol lead to a reduction in miles driven (spoiler alert, no it didn’t). Did massive taxes on cigarettes and alcohol reduce consumption? (Ditto). 

Why is my High Street full of shops who close half of the week because they can’t attract staff, when seemingly we have rising unemployment?

It’s one of our most compelling fallacies – that market forces work to equalise supply and demand in these constrained markets. They just don’t. 

Our current financial bedlam has been created by the madness of free-market ideology taking priority over actual policy goals.

But that doesn’t mean economics makes a whole lot of sense either.