In response to Felix Salmon on Portfolio.Com’s Market Movers:

Economic reasoning (actually all philosophical reasoning) is the study of processes from first causes to last causes. Any cause that is not first-cause is simply making assumptions. A practical person makes assumptions. We all must develop rules, or principles, because we cannot uncover first causes in all circumstances and in real time. It’s just impossible to understand everything in real time. And many problems are simply repetitions of other problems (which is how our minds evolved to solve problems, by imitation). But when we are talking about policy, and in particular economic policy, we are talking instead about how an individual should act within a complex system, and how we can cause multiple people in that complex system to act, thus changing the assumptions that individuals make. (A hard bit of reasoning there, sorry.) So, as such, we need to consider first causes, because by changing the system of causes we invalidate our assumptions.

Or I could just say that in economics and philosophy we should start with first causes. :)

Can We Really Guide the Economy?

Ryan Avent says that he thinks the “plausible range of economic outcomes is, at the moment, quite wide indeed,” and wonders whether “the size of this conceivable range is actually reflective of potential outcomes, rather than simple ignorance”:

If it seems like things could go really well or really poorly, is it because outcomes are very dependent on our actions or because we have no idea what's going on? And I suppose that if you want to understand the different approaches to policy advocated by liberals relative to libertarians, that question, and its answer, is key.

The easy answer is that this is not “simple ignorance.” Studies have shown repeatedly and convincingly that the range of possible outcomes is nearly always greater than you think, not smaller. Economically speaking, actual results regularly come out quite far away from even pretty near-term forecasts, which is one reason why asking economists (or journalists, for that matter) to predict when we’re going to come out of recession is an exercise in futility.

On the other hand, that doesn’t necessarily mean that outcomes are very dependent on our actions. What action, for instance, did we take to send the price of oil plunging by $100 a barrel in the space of a few short months? That’s the kind of thing which can only happen in a highly complex and therefore wholly unpredictable system.

So I don’t think of liberals’ policy approach as being deterministic — if we do this, then the economy will do that. Instead, I think of it as working the other way around: if the economy does this, then we should do that. Right now, the economy is tanking, and so we should apply a large dose of stimulus. We can’t predict with any accuracy what the results will be, but there’s a very high chance that they will be better than if we did nothing, which is the default libertarian position.

My response:

“but there’s a very high chance that they will be better than if we did nothing, which is the default libertarian position.”

No, the default libertarian position is that the economy is in bad shape because of policy activity, that doing more of a bad thing will only make it worse and prolong the problem, and (liberal or conservative economists will agree on this) that there will always be some form of correction in any economy because of the “stickiness” of what some call prices and salaries, but which really is the “stickiness” of agreements such as salaries that cannot change WITHOUT people being fired, or jobs, where people will not change until there is catastrophic failure allowing it legally. All simply because we can neither predict the future nor make contracts between people who can predict the future EQUALLY, or between people who want to socialize losses and privatize gains (such as through union contracts or banker commissions or laws). While many economists and certainly most if not all journalists do not understand this, the entire difference between libertarian and liberal economists has to do with whether policy “day-trading” (as conducted by liberals) is more effective at managing the population than is simply letting humans be human (as libertarians prefer). And while it is a very complex topic that few truly understand, and one which you can see hinted at in your statement about “possibilities,” the end result will be far closer to the libertarian position. The process that is driving the problem you allude to, and that such diverse people as Nassim Taleb are trying to popularize (forgetting even Keynes, Hayek, Popper, and Shackle) is that the mathematics and logic of equilibrium theory are legitimate as we approach equilibrium, and illegitimate as we divert from it.

Or put more simply, as prosperity increases (meaning the rate of production increases), our ability to predict the future decreases and probably does so not linearly, not geometrically, but logarithmically. That inability to predict the future applies to individuals, business people, bureaucrats, and economists. If so, our math fails.

The conversation continued in the comments:

What is wrong with thinking of stimulus spending as a way to mitigate the effects of the economy? It doesn’t have to be about stopping the recession. Lots of us agree that the imbalances need to adjust themselves, but that doesn’t mean we should put up with homelessness and bread lines.

Then do exactly that, rather than increase “liquidity.” Go ahead and try to figure out how. Money and prices are our information system. They are the only way we know anything about the world. It’s sort of like Neo in “The Matrix,” who sees green lettering on the walls: where he sees the Matrix, other humans see a world of prices. We don’t like it because we can’t alter them with emotional pleas when under duress, and we didn’t evolve to live in a world of prices, but we have evolved a world of prices in which we live regardless.

Downturns are a measurement of our failure to predict, and of differences in predictive ability and our desire to socialize losses. That’s what this is really all about: socializing losses. We are always going to have downturns. If you try to change that fact, you will get NOTHING BUT DOWNTURNS. All life is speculation, not production. All thought is theory, not memory. We have problems, we make theories to solve them, and we are wrong a lot of the time. We are wrong even more frequently when we try to make into a managed equilibrium a thing that is an inter-temporal pseudo-equilibrium, the nature of which is determined by what we cannot predict rather than by what we can.

Liberals have economics backwards. Almost all advances in economic theory have been in confirmation of the libertarian position. Almost all advances in political theory have been in confirmation of the liberal position. These two facts illustrate the basic problem in a somewhat humorous manner. You have bread lines because you were too optimistic about socializing risks, even if that risk was simply having children.

And finally:

What you or legislators could do would be to educate people to do what they should, so they don’t get into agreements that they should not, because we cannot predict the future.

a) Do not have children unless you can afford them even after the loss of half of your income.
b) Save money so you aren’t dependent on others. When you save your money you lend it to the next generation, which supports you.
c) Don’t borrow money for any length of time longer than you can understand (probably fifteen years).
d) Don’t vote for political candidates who promise you otherwise. They are trading on promises that can’t be kept. They’re no different from drug dealers or religious prophets.
e) Don’t make or get into any contract that socializes losses. You won’t be able to unless you’re simply lucky (such as 1950′s-era GM employees who have already died).
e) Everyone wants to privatize wins and socialize losses. It is human nature. And everyone from an hourly laborer to an investment banker does exactly the same thing: in politics, in business, in private.

In doing these things you will not predict a future, you will make one, a future that has less harm in it than the one being manufactured by liberals.

We cannot socialize losses infinitely. It’s like guaranteeing everyone a ten million dollar life insurance policy. Insurance doesn’t work when all the people die.

Liberals are betting on eternal increases in productivity and inflation of the currency. Left liberals are betting on getting away with increasing amounts of redistribution (which actually can be accomplished to some degree if done by market processes rather than political processes). Libertarians are betting on the fact that people are people, that minds are minds, and that in the end we will pay for this foolishness catastrophically just like every other civilization that has destroyed its cultural discipline, its money, and its legal system by socializing losses against a future that cannot be predicted.

Cheers

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