Don't know much about history--Economist edition
...When those trying to solve the problems of counterinsurgency warfare against the Islamist religious bigots went looking for the answer, they found it by doing a historical survey of insurgencies. They discovered the keys to defeating insurgencies in the process and applied those keys to achieve victory in Iraq where many had given up.Overshadowing the misunderstanding of finance is a larger mistake: ignoring history. By and large, most economists don't care much about history. Introductory college textbooks spend little, if any, time exploring business cycles of the 19th century. The emphasis is on "principles of economics" (the title of many basic texts), as if most endure forever. Economists focused on constructing elegant, mathematical models. "For years theorists held the intellectual high ground," writes economic historian Barry Eichengreen of the University of California at Berkeley. They were "the high-prestige members of the profession."
History is messy and constantly changing, as Ferguson reminds us. It flows from institutions, technologies, laws, cultural and religious values, governments, popular beliefs, and much more. Model-building and theorizing can sometimes simplify the real world in ways that provide insights. But often, the models' assumptions depart so radically from reality that the conclusions become useless. Someone who studies history becomes humble in the face of the ceaseless changes and capricious mixing of motives.
Economists thought they had solved the problem of economic stability. Their tools sufficed to prevent widespread economic collapse, even if they couldn't control every twist in the business cycle. This conceit may have once been true. No more. Markets became more complex; more money crossed national borders; people became complacent. History moved on, but economists didn't.
Economist need to do the same thing, but too many of them are looking at the wrong lessons. Democrats look at World War II and thing it was the spending, rather than the concentration of effort and the driving force of the war on innovation that pulled us out of the depression. A closer look would show the importance of defense spending. Defense spending and tax cuts also brought us out the the Carter recession. Reagan's economic planned created prosperity for a generation until the Democrats pushed us into a housing bubble.
The lessons of history on economics are very clear if you don't shut your eyes to them. Unfortunately, economists are academics and theorists, so they prefer to speculate on theoretical abstractions rather than look to actual past practices. That makes them blind to history's clear message, but keeps them employed and writing and debating arcane theories about money flows, inflation, interest rates, macro-economic manipulations, etc. And they rarely agree on anything!
ReplyDeleteBecause the vast majority of the world stagnated in wide-spread poverty for thousands of years, all the types of economies they used should be avoided. Most of the great empires maintained lavish lifestyles for only the elites--Avoid whatever they did!
There were only a few places in the world that prospered and spread the wealth among a wide portion of the population. So, look to Phoenicia, classical Greece, Republican Rome, the European city states in Italy and Germany, 16th century Holland, 18th century Scotland, and the first 300 years of America from 1620-1920. There was a common denominator for each of those while they grew and prospered.
Hernando de Soto explains a lot of this and he is ignored. His answer is that governments must provide the institutions that allow a level playing field for their citizens--safety, legal rights, banking and security organizations, an honest and efficient judiciary, and a minimum of restrictions on the freedom of the people to engage in business.
The only "theory" involved is the concept that a nation must empower all its people to enter the economy and apply their genius to their work. Many totalitarian nations have copied this model with success--in Singapore, Hong Kong, Dubai--
It is economic freedom, an open and fair environment, and minimal obstacles to individual initiative that have always worked. And the reason is simple--all economic activity is simply the sum of those individuals' activities. The economists and the government never produce a dime. Unless human motivation is understood, economists will always be speculating in the dark.