The way to MMT was paved with “good intentions”…
The field of economics has long and often very embarrassing history of absurd theories, blatantly wrong assumptions and hypotheses, spectacularly wrong predictions and entirely avoidable policymaking blunders; a few of them hilarious, most of them catastrophic, some of them literally murderous.
Overconfidence and a generous amount of hubris appear to be at the heart of the problem, as is so often the case nearly every time that “experts” and academics are relied upon to dictate what is best for everyone else and how a human being should behave, even if they really don’t want to. It would appear that throughout our history, the human race never suffered from a shortage of opinionated, arrogant and heavily presumptuous candidates to fill these posts. But then again, who else would apply for a job, for which humility is a disqualifying quality?
“The dismal science”
Since its earliest days, the field of economics has done a lot to earn its unfortunate but apt nickname, “the dismal science”. In fact, we can look back all the way to the Roman Empire, and find the early “economists” that tore it down through the corruption of the currency and the suppression of free trade and economic freedom. As centuries passed, other academic and scientific disciplines progressed by leaps and bounds. Medicine, engineering, mathematics, physics and chemistry, all improved human lives immeasurably, prevented needless deaths and suffering, brought about unprecedented prosperity, facilitated peace and cooperation between different cultures and built the scaffolding for the all the privileges and the quality of life we enjoy today. Economics, on the other hand, can claim no such success or similarly meaningful positive contribution to the human race. And the reason for that is really quite straightforward: From its birth until this day, the field of economics has been held hostage by the political establishment, it’s been corrupted and coopted, and the scientific method that was supposed to be at the core of it has long been replaced with skewed assumptions, biased methodologies and pseudoscientific maneuvering.
It’s been a means to a predetermined end, which is literally the exact opposite of how science is supposed to work. Theories are meant to be formed as a result of vigorous testing of hypotheses and they are expected to be invalidated once contradicting evidence emerges. The way economics works, especially over the last century, is a lot more convenient than that. One simply starts with the conclusion they wish to reach and then just select the evidence that fits, while discarding everything else. Clearly, the very nature and the practical applications of this field are extremely conducive to this kind of corruption. Most of the time, the effects are felt indirectly by the public and it often takes a while before they become apparent. If one tried to build a bridge or perform open heart surgery armed with the knowledge derived from the same principles of study and research, the problems would be rather apparent, and rather quickly too.
Of course, that doesn’t mean that the quackery of economics is harmless. To the contrary, we have countless examples in recent memory that prove how dangerous it can be. In so many cases, the original ideas and theories out of this field might have sounded plain silly, but the political actions they facilitated and justified were nothing of the kind. Communist crimes against humanity lie at the extreme end of the spectrum, and, unfortunately, most citizens today forget that it was perverse economic theories at the heart of the savagery every time. From the “Great Leap Forward”, to Pol Pot’s agenda and the Soviet system, “economic progress” and “prosperity for all” were consistently used as justifications for the murder and systematic extermination of millions of human beings.
Certainly less extreme, but no less devious, are the real-life implications and the ripple effects of the political embrace of Keynesianism. The boom and bust cycle, the crony capitalism system and the obscene concentration of power in the hands of the few, all during peacetime and in so-called “democratic” and “liberal” societies have caused immense pain in the West, particularly to the poor and marginalized segments of the population and are still at the very center of the fundamental problems of our modern economic, financial and monetary system.
The way to MMT was paved with “good intentions”
To the average citizen, saver, or even to many seasoned investors, the core tenets and principles of Modern Monetary Theory (MMT) might seem entirely absurd. The idea that deficits don’t matter or the notion that a developed nation can never go bankrupt cause it can just print more money to pay its bills are just plain ridiculous to most ordinary people. Not so to academics, however, or to their policy making colleagues who have been waiting for a “theory” like this for ages to justify and support their long-standing agenda of printing and spending to secure votes. Nonsensical ideas like MMT are also not too shocking to those who have studied, or even better observed from afar, the evolution of the field of economics. In this light, not only are such absurdities not surprising, but they were actually inevitable.
Behavioral economics (BE) has risen to prominence almost meteorically over the last dozen years or so, aided by Nobel prizes and a multitude of mainstream or “pop economics” books that spread the core ideas of this subfield far and wide. The main “claim to fame” of this branch of economics is the notion that humans are irrational beings, plagued by countless cognitive biases and controlled by their emotions. The appeal of this line of thinking, at least to fellow academics, lay in the fact that it directly and sharply contradicted the way economists used to think about human choices. Before the emergence of BE, humans were looked upon as “rational economic actors”, perfect calculating machines, that always sought to maximize some kind of “objective value” through all their activities and ventures. They were, therefore, ideal specimens for all kinds of models and predictions. They could also be relied upon to operate like preprogrammed robots and make the same choice as their neighbor, given the same deal and under the same conditions.
Of course, we know very well by now that this could not possibly be more wrong. Each person evaluates things differently and there is no such thing as “objective value”. If there were, then centralized economies would work best: a pack of bureaucrats and bean counters could surely do a poll and find the “objective” price of everything and then just make it illegal to charge a penny more or less for anything from a house to a banana. As a sidenote here, laughably naive as this scenario might sound, it is precisely what price controls are all about and they are still in place in one form or another, not just in developing or distressed economies, but in most Western nations too.
Therefore, it is obvious why BE’s challenge to this childish and simplistic worldview was seen as a breath of fresh air in academia. And to be entirely fair, most of the “founding fathers” of this new branch did make significant contributions to the way we’re thinking about economic choices. For example, the work of Nobel laureate Daniel Kahneman offered unprecedented insights into the human mind and exposed many of the inherent biases that all citizens, but especially investors, need to be aware of. Experiments around time preference, risk tolerance and the individual perception of happiness, all exposed very interesting new angles and sparked important debates about saving and spending decisions, different investment strategies and risk profiles.
————END OF PART 1
In the upcoming second part, we’ll look at the ways in which economics are commonly corrupted to serve political goals, as well as at the wider consequences of this trend.
Claudio Grass, Hünenberg See, Switzerland