Time Figures Out Economics – Not!
By Staff News & Analysis - August 13, 2010

Is economics ideological by nature? … It's easy to rag on economics as not being a "real" science, and I try not to do things that are too easy. But in recent weeks I've really started to wonder. It is fascinating, and frightening, to me that smart economists can disagree about whether what the economy needs right now is more government spending or less. The debate isn't about how much stimulus, or how much austerity, or the way such stimulus/austerity should be applied, but rather about which one is called for in the first place. How is this possible? It's like a group of doctors not being able to agree whether a patient's blood should be thinned or coagulated. What am I supposed to make of that? Roger Backhouse, a historian and philosopher of economics at the U.K.'s University of Birmingham, helps me out in his new book, The Puzzle of Modern Economics: Science or Ideology? – Time

Dominant Social Theme: A situation that needs to be addressed.

Free-Market Analysis: We are relieved that Ms. Barbara Kiviat, who looks too young to be writing about economics for Time Magazine, has had her confusion lessened by Roger Backhouse in his new book. However, by giving voice to her puzzlement, Kiviat is enunciating a dominant social theme of sorts: "Economics is confusing and each type of economic discipline deserves its own consideration."

In fact this is how economics is taught, certainly in the US. An economic textbook may provide a full panoply of economic thought, but every school is given equal weight. Like chocolates in a box, each school is to be unwrapped and savored for its particular flavor. One comes away not much enlightened, which is why, perhaps, Kiviat maintains that Backhouse's book has finally given her a much-need perspective. Here's some more from the article:

The more I read Backhouse's book, the more I understood that it's important to distinguish economics from economics as it is typically practiced. Backhouse shows how the current mathematics-heavy top-down approach to economics is not the only one. He traces the origin of the approach – which necessarily assumes that people are rational agents trying to optimize their resources – to the 1930s, but points out that it took some 30 years to really catch on. Before that, the field was rooted in empirical work. Theories tended to be tentative and not all-encompassing. Economists would gather data, and insight from other fields about how people behave (like psychology), in an attempt to come up with explanations about how the world works.

Here's our question: How the heck did Kiviat get an economics gig at Time magazine when she's explaining to us that she only now is realizing that "the current mathematics-heavy, top-down approach to economics is not the only one." It reminds us of a series of Wall Street Journal articles about economics that we covered a while back – each one focusing on an aspect of non-Keynesian economics and writing about the concepts (all of them well known to Austrians) as if they were just-discovered. Kiviat has the same sort of wide-eyed wonder. Here's her bio, courtesy of Time:

Barbara Kiviat recently celebrated her 6-year anniversary covering business and economics for TIME magazine. Over the years, she's written stories about Ben Bernanke, Starbucks, Atlantic City, the zany worlds of real estate, private equity and hedge funds, ING Direct, J. Crew, the people who are buying up our public roads, how Verizon really got her angry by asking for her Social Security number, and why you shouldn't go shopping when you're sad. It's a pretty good gig. Before this, she worked at Mutual Funds magazine, where she got to know everything she possibly could about 529 college savings plans. She also used to work at The Arizona Republic newspaper in Phoenix. Her most indelible memory from that experience is standing in an asphalt parking lot on a 113-degree day accosting Honeywell employees about losing their jobs.

As regards Kiviat's perspective, well … there really is no excuse. Maybe 20 years ago, or even 10, Ms. Kiviat could be forgiven for not knowing much about various schools of economics. But today, if she wants to find out, all she has do is go online and she can read about different economic schools to her heart's content. She'll even find out that econometrics is generally in a bad odor among a certain set of economists, and frankly her enlightment via Backhouse is kind of puzzling.

This is how the mainstream media used to do it. Hire youngsters, put them on big beats and justify it with the idea that reporting was not an academic exercise but a nitty-gritty investigative one. Frame of reference was actively discouraged – that being the editor's bailiwick. Of course, the editor had just been promoted from the ranks and knew little more than the reporter. And this has been especially true when it comes to economics.

Not anymore. As we have pointed out innumerable times, Austrian, free-market thinking economics is increasingly the economics of choice for the educated layperson. It is even hard to remember when such economics were rigorously repressed and Ludwig von Mises himself was the subject of vituperous analyses, which attempted to make him a virtual economic footnote. Today, on Google, Austrian economic cites are more numerous than Keynesian ones.

Austrian economics is attractive because it has a fairly simple and comprehensive approach. The discipline encourages people to think for themselves and to trust the market rather than government economic schemes and interference. It states plainly that econometrics, the utilization of heavy mathematics to project economic trends is virtually useless. This is because of the concept of "Human Action."

Human Action shows us that trends are unpredictable because people, when faced with difficulties, will change their behaviors to overcome the problems that beset them. This is very inconvenient for government economists who need to make problem-solving projections based on troublesome trends. It is the reason, in fact, that five-year plans never work. It is the reason Thomas Malthus was wrong when he predicted mass starvation in Britain in the 1700s. Here's how Kiviat describes the process, however:

The current fashion, of course, is to come up with theories about how the world is supposed to work. The obvious problem: people aren't always rational. They are, in fact, influenced by things like advertising and a sense of fairness. As a result, math-heavy top-down models can prove disastrously wrong. Backhouse notes that crises of economics are common. Before the recent financial crisis, it was the crisis of the 1970s and a struggle to account for oil price shocks, waning productivity and stagflation.

For Kiviat and apparently for Backhouse, econometric projections are wrong because "people aren't always rational." Austrian economics tells us that people take human action to avoid problems and these actions make human behavior unpredictable. Not for Kiviat and Backhouse. For these two, trend projections tend to be inaccurate because people are influenced by "things like advertising and a sense of fairness." But Kiviat does not want to leave the reader with the sense that economic analysis is any sense useless or impractical. For this reason, she relates an anecdote about acid rain, as follows:

None of that means economics is fundamentally flawed. Just that we expect too much of it. Backhouse also runs through a few examples of economics working just beautifully. One example: the program in the U.S. in the 1990s to control acid-rain-causing emissions. Setting up a marketplace and letting companies trade permits was a smash success. Companies innovated and emissions came down. Backhouse explains that part of the reason this worked so well was that the economics profession created the environment its equations were meant to describe.

The only trouble we have with this description was that the "acid rain" scare was evidently and obviously a fraud, a fear-based, power-elite promotion. It's not hard to determine this as a matter of fact. There's plenty of information about acid rain on the Internet. All you have to do is type in "acid-rain fraud" and you'll be provided with a whole list. Kiviat may not believe that acid rain was a fraudulent promotion, but at the very least she should have mentioned the caveats in our opinion.

The funny thing about Kiviat's article is that there is a long string of feedback replies beneath it and many are far more literate about economics than she is, apparently. Some of the feedbacks mention the Austrian school in particular and provide her links so that she can read up on these issues for herself. (It is, in fact, a reason why so many mainstream media properties have de-emphasized feedbacks or don't even allow them after certain articles.)

After Thoughts

In the other article in today's Bell, we analyze a story in the New York Times that we think sums up the insular, New York-media approach to news and events and why it isn't working anymore. This article by Kiviat is a similar eye-opener. Here is a woman who writes about economics for millions and whose platform is arguably the most prestigious magazine of its type during the 20th century. Yet both she and her editors allow her to publish an article that betrays such ignorance that the feedbacks beneath the article are of far more value than her own erroneous musings. When that happens, you've got a problem.

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