Friday, February 27, 2009

Introduction to Economics

As the banks fail and our economy suffers, there are many who think the recession we now find ourselves in will be much worse than any previously for most of our previous histories. Most of us did not live through the Great Depression and this recession has a feel that is closer to a depression than any recession that we all have lived through. What happened?

In many ways it is not hard to explain. I have wondered for years when the house of cards would collapse. But, of course, the economy is much more complex than any simple explanation, but economists thrive upon simplifications. I was trained as an economist, so I will attempt to start with simple explanations.

First, I want to say that I hope to write a series of posts on the economy as an exercise for myself. I hope these posts can be of some benefit to others, but mostly I am trying to formulate thoughts that have been swimming around my mind since I was an undergrad trying to form into a coherent economic theory that I was convinced would explain much of what I experience in the world. I abandoned this pursuit while striving to complete a PhD in economics while in graduate school, partly because I had become disillusioned by the framework within which all PhD in economics are written. When it became obvious to me that my dissertation would not explain much about the anything I was experiencing in the world, I provoked a fight with my advisor that led eventually to me spending the last year of my grad school experience taking philosophy and mathematical courses while nixing economics as a field worthy of further investigation.

The framework in economics has been called the neoclassical theory of economics and usually demands statistical analysis of some segment in the economy with a large enough data set to make some sort of judgment on a particular sector or segment in the economy based upon the neoclassical theory. Although, some will argue that there are alternative theories to neoclassical economics that can be found in graduate programs under the heading of heterodox, these schools still have a neoclassical basis and are some variation of the neoclassical model. Even the behavioralists that have been getting much recent attention merely provoke minor criticisms of the rational actor called homo-economicus by study actual human behavior that demonstrate a more complex and varied human that underlies the assumptions of the neoclassical model. However, these variations in human behaviors have not produced a coherent of workable model for understanding the economy.

I never came up with a theory or model for economics that would have been a better alternative to the neoclassical model used in all university graduate programs in economics. If I could have developed an alternative theory to present for a dissertation it would have never been approved by a committee in my graduate university economics department nor would it have been accepted in any other economic department at any other university in the world. Because any alternative I could have come up with as an alternative to the neoclassical model would have been outside the scope of economics as it is studied in economic departments around the world today, although it may have begun to answer many of the economic questions I came to my graduate studies with.

This series of posts on the economy will be an attempt to work outside the boundaries of neoclassical theory and answer economic questions that I, and I hope others, have had for many years. It will stumble from topic to topic, but I hope, in the end, to have a coherent theory or explanation of our modern economic system and prescriptions for many of the ailments in our economy that have befallen us. And, if not, well…I suppose it will be still fun to try, although it may be painful for you to read. Also, bear in mind, that most of these posts will come unedited and will be the result of the free flow of thoughts as they leave my mind and make their way to my fingers upon the keyboard. The fruitful results, if any, may someday be formed into a more coherent whole. All right, lets begin.

Our economy collapsed or is in the process of collapsing, because we have become a nation of consumers purchasing from a very few select producers often referred to as the corporations. Wait, that is only part of the story (I warned you there were going to be some if not many simplifications). Actually, those suffering from the current collapse are consumers who no longer can afford to purchase from the producers and also large producers who can’t find consumers who will purchase what they produce. How did we get to this stage?

We have to begin by asking what an economy is and what we want an economy to do. An economy is a distribution mechanism. It distributes goods throughout society by some means. One of these means is a market where people come together to buy and sell these goods. Markets are efficient ways to distribute goods. Markets are also human inventions that operate according to rules written by humans. There is no such thing as a free market that operates outside of these written or agreed upon rules. Sometimes the rules are written to be favorable to some groups or individuals. Sometimes rules are written to exclude individuals from participating as either a consumer of producer in a market. Sometimes the reasons behind these types of rules are fair and sometimes they are not. The presence or absence of these rules has no bearing on whether a market is free or not, because, of course, there is no such thing as a free market. Markets would not exist unless they were invented by humans and these inventions require rules of participation and operations.

Sometimes individuals, groups or governments extract a price for participating in the market. There are an infinite variety of rules for the operation of a market and the market for some products requires a different set of rules than the market for other products. The first understanding or notion of an economy that we should begin with is the banishment of the idea that there exists anywhere in the world an entity that could be called a free market. Markets are not free, they are invented. And the people who invent them write the rules. Often the ones who have written these rules write them to benefit themselves. This is human nature and is at the core of understanding market economics. We are all motivated by self-interest, even those who have made the rules for the operation of certain markets.

Again, let’s begin with a simple example, the household. What does the household need from an economy? Lets save that for another post.

1 comment:

Richard said...

Thanks for simplifying for me what I always thought was a very difficult topic. I am looking forward to more of your thoughts as they develope.

Why would you're theory of econmics be outside the scope of economics? Are'nt almost all human endevors involved in transactionary mediums?