Don’t Quit Your Day Job – Personal Finance, Economics and Investing

Economics: The Dismal Science?

by Cameron Daniels

Economics and, more specifically, economists have taken a lot of flak lately for their inability to predict the current financial crisis as well as general distrust of Economics’ predictions. This article intends to deal with a lot of these misconceptions and to give a more clear vision of what Economics succeeds in doing and what its limitations are.

The Economics columns in this column will generally be an attempt to show how modern research and models are used to address present day problems and the applicability in everyday life. Far too often, Economics and its implications seems too theoretical, too narrow-minded, too rigid in its applications to the real world and as such the economists themselves seem obtuse and detached from reality. Hopefully, my articles will show that the only thing Economics tries to understand is how people make decisions. However imperfect the tools are, broad the implications are or difficult the procedures are the ultimate goal is to understand how decisions are made under constraints.

Boiled down to its bare bones, the study of Economics pales in comparison to the beauty of Mathematics or the elegance of Physics. Thus the true utility in Economics comes from its ability to be applied to solve real world problems. How the real world problems are solved is where the difficulty arises. It seems that most lay citizens view economists through the perception of the politician. Politicians’ jobs are to construct and create policy that represents their constituency. What modern economics has influenced is how ideological some politicians are. If there is a study that says a certain thing, or a minor economic belief is discovered, politicians will try to abuse the truth or belief to shape policy in their direction. Trickle-down economics is an example of this, as economists have never had a wide consensus on its applicability or even superiority over other economics systems. There are far-reaching examples where politicians attempt to use Economics to shape their own policy decisions, such as the heavy reliance on Keynesian economics (increasing the deficit in order to stimulate short term GDP) during poor times, or the belief that the Laffer Curve has its high point around current tax rates. This is not to say that these beliefs are incorrect, but they are merely ideas thrown out by economists who understand their limitations and these are based on very important assumptions. When there are then economists arguing over different effects and policy decisions, it gives the impression that economists know very little.

Now, all of the discussion over who abuses whom would up to this point seem innocuous. The problems Economics deals with, however, as opposed to say, Comparative Literature, are of grave importance. Economics deals with people’s lives and it is this significance and grave sincerity that economists treat their work. Perhaps, then, in this sense, it is the dismal science, but it is not based off of being boring, but of having an immense significance in the lives of others.

So, this brings me back to the original intention in writing this column. The significance of the work is obviously very relevant everyday. The column will cover the relevance of game theory in the politics of foreign policy, the relation between Social Security benefits and Milton Friedman, the ability of teachers and money to impact students, the rational choice theory of religion, all the way to the importance of how supply and demand dynamics affect modern mortgage and oil markets.

The models and results produced in these studies and fields have great importance and impact. It is with great caution and a bit of humility that knowledge on Economics is advanced. But with this caution and humility, hopefully the study of Economics is not in vain such that lives can be affected in a positive way.

Cheers,

Cameron Daniels

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