4.2 Is economics fun?

There is a big difference between the way the public looks at economic issues and the way economists look at economics. For the great public, a phenomenon that is reflected as well in the public education, economic issues play no role. History, as it is taught in school or political science, abstract completely from economic issues. History or politics at school focuses more on individual persons as the driving forces of history than on the underlying economic development. That's obviously wrong. The French revolution occurred because the king and the aristocracy didn't have the economic resources to keep themselves in power.

At the other side, we have the economists, which abstract completely from any social and political influences and technical progress is only taken into account, if ever, as a parameter.

In public debate, too much attention is paid to persons; politicians in general. People expect from politicians the solution to all their problems and are disappointed if they can't resolve them. (And in general, politicians can't resolve the problems. Jobs for instance are created in the economy. Politics can make it easier to find interesting investments, see the little book about Keynes downloadable from the startsite of this website, but can't create stable jobs and sustainable jobs.

For political parties, on the other hand, it is important that people believe them being important, although nobody really knows. It is not more relevant what Google does than what Obama does. For the same reason, it is imperative for political parties to have an influence on the mass media, while the economy, the millions of entrepreneur, don't really care about mass media.

A possible explanation for this phenomenon, the ignorance of economic issues at one hand and the reduction of economic thinking to standardized concepts is the fact that in the public debate economic issues are often discussed as a moral problem. Every kind of economic problems, unemployment, unequal distribution of income and fortune, high-interest rates and inflation are considered as moral failures of certain individuals and not as failure in economic theory.

For economists, on the other hand, moral failures don't exist. There are only misdirected incentives, in other words, systemic errors. This is an entirely different approach. Economists expects that individuals react rationally, in other words that they do would best fits them in the circumstances given. This is the approach of Adam Smith, see homo oeconomicus. The economic order has to guarantee that the personal incentives leads to a conduct that contributes to the public wealth. This is the case in a market economy. A baker doesn't bake bread to improve the life of the people. He bakes bread to earn money. But the only way to earn money is to make the best breads at the cheapest price possible.

If the system leads to disincentives, that is the case in the public administration, the individual interest doesn't correspond to the public interest. An academic teacher of economics, for instance, has an interest that academic curricula are never changed. This way he can earn a living teaching the things he knows and is not obliged to make any effort.

There are two completely opposed perception of economic issues. Moral failure at one side and systemic failure on the other side. We see that very easyly if we read an article about the homo oeconomicas, a very basic concept in economic thinking. Most of these articles focus on rationality and moral. Both things are irrelevant for this concept. The central point is that under the condition of a well devised economic order the individual interest corresponds to the public interest. If the homo oeconomicus is able to take a rational decision, if he is well informed or not, if his behaviour is questionable from a moral point of view is irrelevant.

We don't expect from a company that it is completely informed. We only expect that it is more efficient than others and we eliminate it in the case that it is less efficient than others. Moral failure is relative in this way of thinking, because in any case the homo oeconomicus serves the customer. Therefore, the question whether the homo oeconomicus behaves rationally or if his behaviour is questionable or not from a moral point of view is irrelevant. A market economy works as well under incomplete information. It is enough that the best informed company wins. Complete information is not needed for a market economy to work. We are not looking for a system that produces the theoretical optimum; we are looking for a system that finds the best possible solution.

We have two very different positions, therefore, at one hand, the systemic thinking of economists, which tends to reduce complexity by abstracting from everything that is not related to economics in a narrow sense of the term. (In other words, everything beyond the canonised concepts.) At the other side, we have the broader public, with a more "intuitive" approach that tends to personalise economic problems and to consider economic problems as a moral problem.

We see that nowadays in relation to the financial crises that we are still in 2014. The south of Europe accuses the northern countries, especially Germany, that they want to dominate Europe and impose a politics convenient for them. Northern Europe accuses the southern countries to have abused of the easy access to loans after the introduction of the euro. Public discussion is in any country, easy to see by reading the newspapers of the different countries, Spain, France, Germany, not about economic relationships, but about persons.

From an economic point of view, both sides are right or wrong. The northern countries, especially Germany, had a huge plus on their current account balance, exports exceed by far import, what have an adverse impact on the labour market of foreign countries and leads to an exportation of capital. The southern countries on the other side were not able to detect profitable investments and their consumption was in part financed by loans as imports exceeded exports. That is a combination of import of capital and negative current account balance that never works.

Systemic thinking leads to a notable reduction of complexity. We can see that already if we compare the classic authors. Jean-Baptiste Say and Adam Smith with David Ricardo. Jean-Baptiste Say and Adam Smith follow are more "intuitive" approach and deal with a lot of topics. This way of thinking can lead to a lot of contradictions, as we are going to see later, see labour and exchange value. Systemic thinking, David Ricardo is the first example in economic thinking for this kind of approach, is logically more coherent, at least if we abstract from reality.

It is a stunning phenomenon that economics only very late, actually with the appearance of Wealth of Nations of Adam Smith in 1776, became a science. Before it was considered a branch of philosophy, actually of moral philosophy and most of the first economists were actually, like Adam Smith, philosophers. This is strange, because it is obvious that economics has a greater impact on peoples life than for instance astronomy, which already is an independent science since almost 2000 years.

It is to assume that the same reasons responsible for the late constitution of economics as a science are responsible for little attention paid to economics in the public schooling system and in the public debate in general. People tend to interprete economic problems the failure of persons and not as systemic failures. It is obvious that this changes the perspective. If the problems are interpreted as the failures of individuals, in most cases of politicians, the problems are psychological problems but not economic problems.

In the previous chapters, see for instance mathematical modeling, we focused on the problems related to systemic thinking. Nevertheless, it is to admit that at a certain moment in history, systemic thinking presented a progress. It helped to understand that economic problems very often had little to do with moral failure, but a lot with systemic errors.

To get an insight over economic thinking, it is much easier and more entertaining to read the original works. Modern textbook of economics are only a somehow arbitrary canonization of the concepts described in these works, but less clear. The fundamental problem with modern textbooks is that all the differentiation made by the original authors got lost. modeling means simplyfying.

Modeling can be useful, without any doubt. A road map if a simplified version of a landscape, where only the relevant objects, the roads, are taken into account. Modeling is only possible if the scope of modeling is very clear. A driver is only interested in the roads, and a road map shows only the roads.

If simplification and modeling lead to a model that excludes the relevant relations, the model is not useful. Most of the economic models are of this kind.

There are some classical and neoclassical authors who use too simplified models, David Ricardo and Vilfredo Pareto for instance, and especially Léon Walras, a very illustrative example of the problems which can arise by modeling, but Adam Smith, Jean Bapiste Say, John Stuart Mill, Alfred Marshall, John Maynard Keynes don't extend modeling to an extension where it becomes useless.

Modern textbooks reach almost the level of abstraction of Léon Walras; that's why they are very boring to read and irrelevant for explaining economic issues.

Through that manual we want to proof three things. First, that economic theory is simple. Everybody can understand it. Secont the problems are in the data, not in the theory. If we don't have for instance a detailed information about the public budget, we can't make a rational choice in the elections. Insteas of voting we can equally play dice. And last not least that economics is entertaining.

We expect that reading this manual, something that could be done in three months, one reaches the same level as someone who studied economics for four years and that it is entertaining.

return to the top of the page ...