Why do you need to know this? Because when economic reporting, economic predictions and economic measures of well-being are skewed toward corporate business, your welfare and the society’s are discounted.
Economics has reverted to a pre-Depression confidence in markets, it operates on a herd impulse and is far behind the curve. We’ll talk about the housing bubble in a later podcast, but here let’s use it for illustration of this point on the irrelevance of current economics.
The run-up in housing was well understood or should have been well understood by economists as a classic asset bubble.
The most prominent economist, Fed Chairman Alan Greenspan, was actually principle author of the bubble. When the economy began to flag in 1999 and 2000, Greenspan attempted to prop it up by bring interest rates down to historic lows. Later he extolled the virtues of adjustable rate mortgages, which kept the bubble rising.
This demonstrates two things.
- Business and finance sector interests trumped common sense and good economics.
- Common sense and good economics is in sufficiently short supply that economists of this sort are not hooted off the stage.
It is said that if you have five economists in a room, you’ll get at least six different opinions. This joke is quite misleading. The differing opinions rise in large part from the economists need to explain why events are not doing what they ought to be doing. Virtually all economists see the world through the prism of their school’s theory.
The dominant theory in academics today is one or another version of free market knows best. When, for example, the housing debacle points to the fact that unregulated free markets produce chaos, there is among this group a frantic search for scapegoats, not a questioning of the premise.
The patent need for the government to come in and try to clean up the mess, including bailing out the financial sector and mitigating the suffering of millions of homebuyers, is ignored. These government clean-ups are not part of the market. They are “external” to the market. In fact, they are referred to as “externalities. These costs, nor the price of the bailout insurance, are not factored into the economy.
A better, if even more tragic, illustration of the market’s ineptness and the mass myopia of economists on account of pro-market bias is the complete absence of a market response to global warming. Oil, coal, and their attendant poisons are in greater demand than ever. The tidal wave of bad news looms above us, but the market ignores it, assuming perhaps the protection of an invisible force field, perhaps labeled "Free Market."