Tuesday, March 12, 2013

Why Economics Should Matter To You

This may be a difficult article for many to read.  We like our news spoon-fed and interpreted for us, broken down to the “nitty gritty” of what we think really matters. Rather than take the time to understand the causes of our present state, most simply want to know where we are heading and how to fix this mess we’re in. Those skilled in the art of statistical, economic, and political distillery are well aware of this general malaise and use it frequently to promote a particular agenda. In the spirit of full disclosure, I am trying to do the same. My motive, however, is to increase understanding and to encourage individuals to more stridently defend those rights that are naturally theirs.

When I was first introduced to what some call the “dismal science” in a university economics course, I was a bit confused by the jargon, equations, and the mental gymnastics necessary to arrive at (what can only ever be) an approximation of outcomes, based completely on the quality of the inputs. I say approximation because modern economics is concerned with mathematical models that attempt to quantify the aggregate effect of billions of interactions; any one of these interactions not performing as predicted could conceivably throw a wrench in the whole model. In other words, economic modeling has not arrived at a point where the random preferences of billions of people interacting can be mathematically predicted, so we’re stuck with a choice to:
  • force the imperfect conclusions of a model on people who do not always act according to the desires of central planners; or
  • allow individuals to make decisions freely in a marketplace of competing ideas, products, and services.

Most politicians and bureaucrats prefer the first choice, simply by virtue of their position as some of the chosen few who get to act upon others. These social engineers supposedly care for us and make decisions which are in our collective best interest. This is the world in which we live.

Somehow, we all know deep down that this is not right. We want to captain our own ships, be the masters of our own fate. However, when faced with real world manifestations of control, we make excuses for our passive obedience. We casually accept the various edicts of government regulators, yet bristle at the meddling of the neighborhood busybody telling us to park somewhere else, pull our weeds, or cut down a tree obstructing their view. So, does one meddler have any more right to know and direct your business than another?

Those who subscribe to the classical or Austrian view of economics see no difference between these two forms of intervention. Classical economics concerns itself with rational decision making, market preference, and cause/effect. In the classical view, intervention distorts how or whether we satisfy our natural hierarchy of needs. These distortions have a multiplier effect as bad decisions lead to equal or opposite bad reactions by other market participants, necessitating more intervention, and causing further harm. This cycle continues to spiral until we experience an artificial boom or bust as a result. Without this multiplier effect the business cycle still has hills and valleys, but nothing like the peaks and gorges we’ve seen over the last 80 years. Economic manipulation has given us the Great Depression, the Oil Shocks of the 70s, Black Monday, the Dot-Com Bubble, the Real Estate Bubble, and the Great Recession.

Economics should therefore matter to you and I because we are all affected by this turmoil. Those placed in positions of power who then attempt to centrally plan a diverse and uncontrollable economy wreak havoc on our personal finances, creating unemployment, higher insurance premiums, more expensive bills, and a variety of other outcomes that cause significant and intimate economic hardship.

One of the most powerful interventions promoted and implemented by central planners is interest rate manipulation. In a future installment we’ll discuss the purpose and importance of interest rates in a free market and the way rates are manipulated to force certain economic outcomes (in violation of the free market).

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