No One Has Time For A Completely Free Market

The free market often sounds quite simple and straight forward. Consumers simply decide whether product A or B benefits them more and then choose accordingly. If the same or similar product is sold by shop A or B consumers simply choose whichever is cheaper, better quality or otherwise benefits them. It is easy and doesn’t require any complicated plan or someone telling consumers what is best for them, people simply decide themselves. This is the market as described by economists, politicians and writers, especially when they are trying to make a political point. After all, if the market is so simple and straight forward, why do we need the government interfering? All these rules and regulations only get in the way, surely it is better for everyone if we just leave the consumers to decide for themselves. Continue reading “No One Has Time For A Completely Free Market”

The Power Of Employers

Many economists like to think of the markets as a place where equals negotiate and bargain to find mutually beneficial deals. Employers and workers need each other and so come to a deal that benefits them both. As these agreements are reached voluntarily, there can be no injustice in the system, as otherwise why would they have agreed to it? There is therefore no need for government intervention as people are well able to look after themselves. Unfortunately, in the real world, things are very different. In the real world, employers have market power over workers that prevent the market reaching a fair balance. It is for this reason that strong unions and government intervention is needed. Continue reading “The Power Of Employers”

Why Economics Is Not A Science

Economists like to pride themselves on their job and how scientific it is. Politics might be full of emotional rhetoric and unthought out ideas, but economists rely solely on cold hard facts. Flicking through my old textbooks, I see many references to “thinking like an economist” where we were supposed to cast aside fallacies and view the world with a rational and scientific eye. If only it were so. In reality, economics lacks the basis in real world evidence, the scientific method, and predictive power to be considered a science and is instead a highly politicised topic. Continue reading “Why Economics Is Not A Science”

How Economics Should Be Taught

On this blog I criticise mainstream economics and how it is taught in colleges a lot. In fact that’s one of my main aims with the blog. However, rather than just always criticise and say how things shouldn’t be done, today I would like to put forward a few proposals. Now to list everything that should be taken out of economics would take many, many posts, so this will be a short general overview. It should also be said that the economics curriculum is in dire need of reform (and there are encouraging signs that a growing number of people realise this). For example, my lecturers would tell me that we could buy editions of textbooks either from before or after the 2008 recession; there was no real difference between them. When the greatest crisis in decades doesn’t cause any serious review, then you know we have a problem. Continue reading “How Economics Should Be Taught”

What Is Capitalism And Socialism?

Even though we all live in a capitalist economy, few people seem to understand what this means. The word is thrown around in economic and political debates without much consistency. The situation is even worse for socialism which seems to be a label thrown onto random policies without any understanding. So to help clear up the confusion, I thought I would give a clear and simple explanation to what these words mean. Continue reading “What Is Capitalism And Socialism?”

Economists And Their Assumptions

The standard (or neo-classical) view of economics makes a lot of assumptions. The main ones are that people have rational preferences, they are self-interested, they are utility maximisers and they have access to all relevant information (including information about the future). The economy is assumed to be in equilibrium, markets are efficient and perfect competition reigns (of course this is a simplification). These assumptions come in for a lot of criticism but they are defended as necessary simplifications. However, the assumptions economists make have a huge effect on the world of economics and therefore world economies. Continue reading “Economists And Their Assumptions”

The Case For Capital Controls

The standard economic view used to be that capital controls were a damaging relic from the past. Almost all economists opposed them as they believed they discouraged foreign investment, created barriers to trade and lead to an inefficient allocation of resources. The notion that the government could restrict how people used their money was found abhorrent by many. However, since the Financial Crisis, there has been a shift in opinions. Many economists support some capital controls to reduce instability in the economy, particularly in the financial sector. 250 economists from around the world signed a petition calling on the US government to reconsider its opposition to capital controls. Even major institutions like the IMF, the World Bank, the Federal Reserve and the European Union have admitted that there may be some cases in which capital controls are beneficial. Continue reading “The Case For Capital Controls”

Endogenous Money Or How Loans Create Deposits

If you open any economic textbook you will find a standard explanation of how banks operate. The basic story is that a person deposits some money (say €100) into a bank which then saves a percent of this (say 10%) as a reserve and then lends out the rest. This €90 is then deposited by whoever receives the loan, 10% of which is saved and the rest is lent out. This goes on and on until the original €100 has become €1,000. It is easy to see why students are told this story; it is simple, intuitive and gives them a basic idea of banking. Unfortunately, it is wrong.

There is strong evidence that contrary to the above story (known as the loanable funds theory) the banking system works the other way around. Deposits don’t create loans; loans create deposits (this is known as endogenous money). This is a more complicated story but a more realistic one that can better guide our view of the economy. Continue reading “Endogenous Money Or How Loans Create Deposits”

Ireland Is Not An Example Of Expansionary Austerity

Europe is in the grip of austerity fever where all governments are convinced that reducing the budget deficit must be their main priority. However, despite the strong consensus, little thought has been given to whether or not it will work. Some economists have proposed that austerity could improve the economy if businesses and consumers believe are impressed by the government’s action and begin spending of their own. This is called “expansionary austerity” or “expansionary fiscal contraction”. Subsequent research has discredited all examples of expansionary austerity, with Ireland in 1987 being the only exception. But Ireland is no poster child for austerity, but just another example of the harm it does. Continue reading “Ireland Is Not An Example Of Expansionary Austerity”

Do People Really Have Inflation Expectations?

A common feature of macroeconomics is to run models assuming that individuals in the economy have inflation expectations. This flows naturally from assuming that they have rational expectations (can accurately predict the future and fully understand how the economy works). The standard reason for why we need inflation expectations is that during the 70s the government tried to trade off low unemployment in exchange for higher inflation. However, (so the story goes) people got wise to this trick and began to expect higher inflation and demand higher wages to compensate. As a result, government policy lost its effect and unemployment rose. Since then, economic modelling and discussions of unemployment and inflation must contain some provision for what consumers expect inflation to be. Continue reading “Do People Really Have Inflation Expectations?”