Two “Laws” of Economics We Need to Break
OK … they’re not really laws, but they are justifications that the world of economists have used for decades to explain the woes of the world away.
For those of you who haven’t taken a 101 course, here they are:
- Other things being equal ("ceteris paribus")
- There are no externalities
We MUST recognize that these ‘rules’ can no longer be discarded.
The first rule is laughable, at best. ‘Other things being equal’ is a basic requirement that while I’m doing my funky little econometric equations over here, the rest of you 6 billion or so people aren’t allowed to do anything. The world stops spinning. People stop aging. Debt levels don’t change with bailouts. And so on.
It’s because of this ‘rule’ that companies like Bear Stearns wound up with some of their leveraged assets being leveraged 25 to 35 times the acceptable norm, ignoring for a brief moment the insatiable greed that Wall Streeters collectively exhibit these days (see … I’m making the exception myself and excusing one argument as I make another!).
It’s human nature to want to do things in a vacuum, but guess what: you can’t.
Now let’s look at number 2: no externalities. This is how economists defend equations that allow for manufacturing to grow unimpeded ad infinitum, commodity prices to stay stable over the decades and consumers to just keep ‘moving along with nothing to see here’, despite massive tailings dumps at the Tar Sands, millions of homes expropriated in China for the Ganges Dam project and so on.
There are externalities with everything that we do in life. If I drive to pick up my family, I create carbon emissions. If I walk, I wear down my shoes. However, in the vast great equations of economists, these issues are discarded like a Timmies cup that won’t decompose on the street.
I don’t know what the answer is yet, but I know this: using these two laws to put the universe on hold while Federal Reserve economists, IMF lawyers and Bank of Canada policy analysts simply won’t work any more.
Things have to change.