It is hard for me to listen to our president and members of his economic team talk about financial matters without laughing. I understand that they see the economy in the same way that many University students see the world — as a machine that should only be operated by those who understand it best. They believe that matters of economic consequence can only be trusted in the hands of an elite group of policymakers, and they label the rest of us with terms like “capitalists” or the “labor force.” For them, our job title is our sole contribution to the overall economy.
This view is wrong. People are not inanimate objects or cogs in some economic machine. Everyone is a capitalist, a laborer, a consumer and a producer at the same time, and their preferences simply can’t be predicted by even the most intelligent experts in President Barack Obama’s Cabinet or in University lecture halls.
Economics, as a science, deals with the fact that all people make decisions that affect the world around them in order to survive. Every person has goals and some sort of idea to achieve them. Economics does not deal with how to attain these goals or what these goals are — such topics are covered by psychology, philosophy and other disciplines.
No matter what you do, you are making an economic decision. Every decision to buy this food or that, hang out with this friend or not or watch a certain TV channel counts as an economic decision. We subconsciously order these preferences based on their subjective value to us. In other words, whatever you are doing right now, (reading this column, for example) ranked higher on your value scale than other possible options (like reading the lead story on the front page).
Obviously, your preference only becomes obvious after the fact. I can’t predict what you were going to do. I can only hope that by writing an excellent column, I can attract readers. I have no ability, no matter how keen my insights into your mind, to predict every action you make, and therefore, I can’t plan an economy around you.
Of course, it makes sense that most mainstream economists — and certainly the ones who have the president’s ear — do not stress this view. Like many people, they don’t want to confess their limitations by admitting the personal nature of economics. These economists focus on determining if this or that political policy would be better or worse. What is lost is the key nature of economics, namely that the field is largely based on individual preferences that can’t be planned.
For example, if the supply of a good falls, we don’t know precisely how much the price will fall because we can’t know consumers’ subjective values. All we know is that laws of economics exist that drive the price downward. Economic laws tell us direction and tendency of price movements, not what the final number will be.
Inevitably, because they can’t accurately predict the market changes, economists focus on long-run equilibrium. The problem is that they study a wholly unreal situation. The world as it is today is one of constant change. You don’t know if later today you will run into an old friend or if you will be hit by a car. Prices of goods, such as the stock market, are constantly moving and changing in an unpredictable manner. Because the real world is difficult to model mathematically, economists make concessions and assumptions before developing equilibriums. This is what is studied in Econ 401 and 402 at the University.
For these economic models to work in real life, we would need to live in the world of Bill Murray in the movie “Groundhog Day,” constantly repeating the same actions over and over again. Every person would need to keep buying the same goods, walking in the same shoes, spending each day doing the same homework while listening to the same music, etc. But this isn’t the world we live in — nor one we would ever want to live in.
In the real world, people can’t be treated as variables in an equation that the state can manipulate to serve some societal goal. This is the fundamental point of economics that most experts either don’t understand or won’t admit.
Vincent Patsy can be reached at vapatsy@umich.edu.