Friday, April 29, 2016

Reexamining our Economic Theories by Allen Laudenslager and Bryan Neva

These are very strange economic times we’re living in with one of the slowest recoveries ever seen.  We are seeing more people out of work or only able to find jobs at a fraction of their previous salaries or working below the skill level of their previous jobs or training.  The official unemployment rate of 5% doesn’t account for the millions of discouraged workers who’ve left the labor force, or the millions of people who are underemployed.

Professional economists were asleep at the switch when the economic meltdown of 2008 occurred.  Even Allen Greenspan, one of the most esteemed economists, didn’t see the economic crisis coming. Following their best training and the collective wisdom of their profession, a lot of well-trained, very smart people made decisions that seemed quite rational at the time.  Since those decisions led directly to the current economic crisis, we really need to understand what happened and why so we can try to prevent this kind of economic crisis in the future.

Each of these experts, having tens of thousands of hours of academic and on-the-job training in economics, all made the same fundamental mistake: they all believed that unregulated, free market capitalism would behave rationally.  It was a fundamental misunderstanding of how things work in the real world and too much reliance on theoretical models that didn’t account for all the factors; the biggest factor being that humans don’t always behave rationally, wisely, or altruistically.  In fact, the history of the world teaches otherwise: humans in general are irrational, greedy, self-centered, and foolish.  It's the exception to the rule they'll behave otherwise, which is why we need to regulate capitalism.

It would make more sense if only a few of these experts had made this mistake.  But that’s not what happened as far too many of these experts, suffering from groupthink, came to the same erroneous conclusions.  So which seems more likely that economists all over the world made the same mistake, or their academic training was flawed?  We believe the latter to be the case.  The 2008 economic meltdown was an example of a flawed plan that was brilliantly executed and the result was a total disaster.  

The famous American psychologist, Dr. Abraham Maslow, Ph.D., once said, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”  This concept is known as the Golden Hammer Rule, and it’s simply an over-reliance on a familiar tool.  Medical doctors, for example, epitomize the Golden Hammer Rule with all the various medical specialties.  In the case of economists, they only have one Golden Hammer in their tool bag to make sense of the economic challenges we face.    

For anyone to buy anything they must have money.  To have money, they must have jobs that pay enough to buy stuff.  So any economic theory that does not hold as its keystone the availability of jobs and the income level of those jobs is fundamentally flawed. Yes, the economic measures and theories do include jobs, but only peripherally and not as the central measure of economic health.  This may seem simplistic to someone trained in “classic” economic theory, but a layperson in their simplicity and innocence recognizes the principle of good paying jobs as the key to a healthy economy.

The definition of insanity is doing the same thing the same way and expecting different results!  We've gotten where we are by following our current economic theories.  The only way to reverse our current economic morass is by reexamining our economic theories and chart a course to a more prosperous future. 

Featured Post

The Power of Positive Thinking

...