Friday, December 08, 2006

The Economist's Dilemma

A helpful problem

It is the 70th anniversary of Keynes' groundbreaking General Theory. In this book Lord Keynes suggested an active role for government in the economy in order to help rid the world of Depression and create jobs.

Ok. So on this occasion Workers would like to segue into the dilemma of the economist. Economists are interesting in understanding society, in helping people better their lives. In other words, economists want to help.

Keynes' book though unfortunately was based on a false premise. The government created the Depression, and the causes of the Depression were not explained in Keynes' book. It took another economist, Milton Freidman, 30 years later to document what happened in the Depression. But Freidman's message is not what alot of economists want to hear.

Economic cycles are exasperated by government intervention in the economy. When the government prints too much money or makes interest rates too low, this means that capital is too cheap and therefore busines people have too much cheap money and make bad investment decisions. Jobs are created in sectors that shouldn't be (usually capital intensive sectors), crowding out jobs in sectors where the jobs should have been. Bad investment is unsustainable and the economy contracts in order to weed out the bad. Some business cycles are natural (as are colds in the human organism), it is only that bad economic cycles are worsened through government intervention.

Keynes said the government should step in and spend more - spend more than it takes-in - in order to increase demand through the economy to create jobs. This is just like bad monetary policy. Jobs are created where they shouldn't be (usually in government contracting) and worse, people are saddled with government debt they have to pay later. Which in turn takes money away from productive investment and productive jobs.

But most importantly, there is no way for government - or any single institution or person - to know what is the state of the whole economy, let alone what to do about it and when. The economy is everyone living creating with and cooperating with everyone else. This can't be measured and it can't be controlled.

That is The Economist's Dilemma. Economists want to help, but can't. Unless it is to prevent politicians from making bad policy, or in helping them undo bad policies that were made previously. Also, economists can help educate people about sound economics. So it is a dilemma, but it is not untractable.