The Emperor In Economic Clothing
7th February 2017
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I write this essay on economics with considerable ‘household’ foreboding, for my wife majored in economics at the University of Sydney, and still has a soft spot for her tertiary education. However, it is time to follow Hans Christian Andersen’s child, and declare my distinct impression of the emperor: “he isn’t wearing anything at all!”
The strength of economics as a discipline lies in helping us to ‘understand’ what has happened in the past and what is happening in the present. Its weakness lies in the arrogance of prediction about what will happen in the future. Yet who needs ‘understanding’? What we want is the power to control or at least to anticipate the future. So, as education moves from learning to skilling, from understanding to implementing, from scholarship to technology, from wisdom to employability – the value of simply understanding is diminished and the need to be practically useful in the market place becomes everything.
Unlike my wife, I only studied economics at high school, but at that time it was invested with the great mythology of ‘science’. Everything in the mid-twentieth century had to be scientific to be of any value. Disciplines like Economics had to prove themselves as science – not even soft science but hard science. Statistical analysis and mathematical modelling would give the impression of objective scientific authority. If you can attach a number to a proposition, it is no longer a theory, idea or concept but a reality, a fact: an indisputable. Later in the twentieth century computers magnified the power of modelling exponentially.
Sydneysiders love to talk of house prices. Since the great push for home ownership in the immediate post World War II years, our principal wealth lies in our homes. Woe betide any political party who would want to diminish the value of our houses. While we may decry the inability of the next generation to afford home ownership, we delight in the idea that our own houses are now so valuable (i.e. expensive – the value of a house has remained constant in that it equals shelter). So, the ‘haves’ secretly rejoice and the ‘have-nots’ bemoan the ever-spiralling increase in home ownership in our city.
Economics as a discipline has the tools whereby it can investigate and explain to us why and how the price of home ownership has risen so far. Fundamentally, in a fast-growing population, the supply of housing cannot keep up with the demand. Added to that fundamental is the increasing wealth of the population, the development of the two-income-family, the increasing number of investors in real estate, etc.
However, what the media, investors, the banks, the business people push the economists to do is predict what will happen. And here the arrogance of the economists blinds them into answering. For example, on January 29, 2016, the Sydney Morning Herald published the predictions of the “Business Day Economic Survey: What will happen to house prices in 2016?” Some 26 economists from the “financial markets, academia, consultancy and industry” were surveyed. Their predictions for 2016 were a stabilizing of house prices. Some suggested the possibility of “a small price increase”, “less than 3%”, but the majority view was no increase and 4 even predicted a fall of even as high as 5-7%. These predictions proved comprehensively wrong. Sydney prices rose by 15.5% during 2016!
Well, everyone can make mistakes, but repeating our mistakes seems particularly foolish. Yet, on February 3, 2017, the Sydney Morning Herald has published again the Business Day survey - this time with 27 ‘leading economists’. No acknowledgement is made of last year’s comprehensive failure to predict house price increase. Many are the same economists as last year. They are still predicting the end of the boom time and assuring us that we will not have a big bust similar to that of Global Financial Crisis, but on average they predict a 4.9% increase this year. Why would we believe them?
Understanding how and why prices change is not the same as being able to take into account all the varied factors of the future, which would enable us to speak of what will happen. There are too many unknowns for anybody to speak with such confidence (down to a decimal point) about the future of any part of our economy – let alone its totality. A change in government policy, a war, a ‘natural disaster’, a revolution, a newly elected president – all manner of things cannot be factored completely into any prediction. One of those things that cannot be factored into the analysis is the effect of the predictions of the economists. If governments, investors and banks believe their economists, they will make alterations to their behaviour, which would undermine the economists’ predictions.
Harry Truman wanted a one-handed economist – for all his economists would say “on the one hand…on the other hand”. But journalists have no time or space to recount the reservations and qualifications of the economists. All we are left with are the bold predictions, which, if printed far enough apart, nobody checks for fulfillment. So, nobody notices that for all their finery of academic degrees, titles and positions – the economists are not wearing any clothes.
Yet we are not left simply with the failed predictions of experts on which to base our plans and actions. The Bible tells us many things about economics. We make plans and build, but unless the Lord blesses our work we labour in vain (Psalm 127). Indeed, it warns of the arrogance and evil that flows from thinking we can trade and make money at will (James 4:13-16). Materialism is soundly critiqued as the source of evil that it is (Matthew 6:19-34 and 1 Timothy 6:9-19). Honesty, diligence, hard work, loving our neighbour, serving others, generosity; there are many ways that the Bible will instruct us to work – not for utility in wealth creation but for righteousness in behaviour. The outcome we look for is predictable: God’s blessing; not unpredictable: profitable markets.