E1L – Chapter 1
This is my interpretation and expansion of Economics in One Lesson by Henry Hazlitt. You can read the original book, for free, here:
The Problems with Economics
Economics is full of nonsense and contradiction because it is complicated, dominated by special interest groups, and defined by shallow thinking and fallacies.
Economics is Complicated
Macroeconomics is not a predictive science because economies are extremely complicated and, unlike other sciences, we cannot create a controlled laboratory environment to analyze them.
Modern economies have millions of variables. These variables are interdependent and change every second. It’s not possible to isolate and analyze them with current technology. Doing so would require an entirely digital economy, where every human interaction is recorded, and perhaps a perfected general artificial intelligence to understand that much information.
We cannot assign specific weights to variables causing macroeconomic changes for these reasons. However, this doesn’t stop the media telling us precisely why the market is moving and how it will change in the future.
Consider these voices nothing more than entertainment. If the talking heads could understand and time the market they wouldn’t sit under lamps, with make-up caked faces, talking to an ear piece. They would instead earn billions buying and selling in the market. No one sells a $100 bill for a penny.
Creating a controlled environment to study macroeconomics would be tyrannical and immoral if we had the technology. Such an experiment would disregard the sanctity of life by using human beings as pawns. Each tweak of the experiment would impact the livelihood of millions or billions of individuals, ruin marriages, cause suicides, increase crime and homelessness, start wars, etc.
If Not Macroeconomics, Then What?
Two things: the price mechanism and microeconomic principles.
The price mechanism is the system by which efficient markets function. Prices are created through the distributed calculations and decisions of 7,000,000,000+ people. Prices include information about the supply of resources, products, and services as well as the demand and time preferences of all human beings.
Microeconomic principles can be studied and are useful to guide human behavior. If we research and understand microeconomic principles it will improve our intuitive sense for macroeconomics.
Special Interest Group Interference
Special interest groups (SIG) are another reason economics is full of nonsense.
The top SIGs in United States during 2018 (stats from opensecrets.org):
1. Political Organizations $115M
2. Banking & Finance $94M
3. Retirees $88M
4. Healthcare $84M
5. Lawyers $75M
6. Real Estate $50M
7. Insurance $34M
8. Energy $34M
9. Transportation (incl. Automotive) $33M
10. Construction $33M
11. Multimedia (TV, movies, music, publishing) $30M
12. Education $25M
13. Lobbyists $25M
14. Agriculture $23M
15. Women’s Advocacy $21M
16. Public Sector Employees $19M
17. Misc. $19M
18. Defense $17M
19. Business $17M
20. Electronics $14M
21. Manufacturing $13M
22. Pro-Israel $12M
23. Retail $12M
24. Accountants $11M
25. Non-profits $10M
26. Human Rights $9M
27. Alcohol $9M
28. Food & Beverage $8M
29. Gambling $6M
A SIG is any group of people who work together to impact government policy for their own benefit. Their benefit is usually at the expense of other groups and the greater society. SIGs are organized in the form of non-profit organizations, labor unions, businesses, and industry advocacy groups.
Entrepreneurship is a positive-sum game. Entrepreneurs take risks by investing time and money into new ideas. The ideas that add more value to society than they cost will be successful. The ideas that do not add value to society will fail and the entrepreneur will lose their investment. While an individual entrepreneur may lose their time and money, they and all of society, receive a net benefit from entrepreneurs who are successful. One Microsoft makes up for a million failed start-ups.
Changing government policy for your own benefit is a zero-sum game called rent-seeking. Rent-seeking is changing the rules of the game to make it less fair and meritocratic by giving your group unjustified advantages and privileges that other groups do not receive. Rent-seeking creates barriers to competition that allow SIGs to profit. Subsidies grant your company or industry financial advantage by taking money from the rest of society in the form of taxes. Tariffs on competitors increases the prices of their goods and services and makes yours more likely to sell.
SIGs use many strategies to impact economic and government policy for their own benefit such as lobbying, campaign finance, legislative and regulatory capture, the revolving door, funding grassroots activism, advertising and propaganda, and funding academic research and experts.
SIGs pay lobbyists large salaries to live near centers of power such as Washington D.C. and interact with government officials.
Lobbyists can control the mindshare of government officials with their constant presence. This is the same way that media companies impact society, controlling the talking points and filters we use to interpret current trends and events.
Lobbyists earn their salaries by taking government officials to dinners and lunches, hosting parties and events, and meeting with them in their offices. This is where lobbyists discuss and advocate policies their employers want advanced.
SIGs impact government regulatory and economic policies through direct financial contributions.
Political Action Committees (PAC) are organizations that collect money to fund campaigns and legislation.
PACs raised $1,317,155,946 in 2018 according to opensecrets.org.
Legislative & Regulatory Capture
Elected officials make their name and careers by drafting and sponsoring new legislation.
But, SIGs have many more researchers, analysts, and academics under their payroll than government officials could ever dream of having.
Politicians also lack industry expertise and credentials. They rely on industry insiders to write the laws and regulatory policies they enact. It’s truly the fox guarding the hen house.
The Revolving Door
SIGs offer former government officials lucrative careers, book deals, and speaking engagements as a reward for serving them.
Many former government employees earn multiples more income after they leave office as a reward for their service to SIGs.
SIGs also fund grassroots activism including letter-writing campaigns and public protests by activist groups. They create the illusion of popular support for policies they benefit from by funding this activism.
Advertising & Propaganda
SIGs fund advertisements to support their interests. These include the overt forms of purchasing air time and online ads as well as less obvious forms of paying people to repeat their talking points while speaking in public.
Funding Academic Research & Experts
SIGs fund academics and economists to perform sophistry. Sophistry is accepting money to publish research, pen articles, and appear on radio and television with messages that, on the surface seem coherent and plausible, but lack scientific rigor or contain half-truths.
The public fall victim to sophistry because of information and expertise asymmetry; they simply do not have the time to vet every claim and rely on experts for complex topics.
Example: Corn lobby in the U.S.
Ethanol is made from corn and requires more energy to produce than it provides.
The subsidies to support corn farmers is spread across 330 million people. It costs every American about $15 a year in higher taxes while corn farmers received $5,000,000,000 in benefits. The entire agricultural industry only had to donate $23M this year while corn farmers alone reaped 217 times that in return. Good deal… for them.
The only reason ethanol is used for fuel is because the government mandates it.
The U.S. is the only nation where high fructose corn syrup is cheaper than table sugar from sugar cane due to subsidies on corn and tariffs on sugar imports.
First-order and short-term thinking
The two other plagues on economics is first-order and short-term thinking. Proper economics should consider and weigh the second, third, fourth-order effects of any policy as well as its impact on other groups and the greater society.