David Orrell. Economyths: 11 Ways Economics Gets It Wrong (2017) In this revised edition of his book, Orrell adds updates on each myth. Basically, the neo-classical economics establishment snarled back at him. It seems his book touched a nerve. Not surprising, since Orrell’s thesis is that neo-classical economics is so far out of touch with reality that it’s dangerously wrong.Some years ago, I read an online proof that a legislated minimum wage could not possibly work, since the law of supply and demand guaranteed that the lowest wages offered represented the actual value of the work performed by those workers. I wrote a note to the author suggesting that the analysis left out of account employers’ power to set wages at almost any level they wished, and that their greed would depress wages below what the work was worth. I got no answer. Presumably, I did not understand economics.
Fact is, I read Milton Friedman many years ago, and I thought then what I think now: the man had no understanding of how real people behave. For it’s always been clear to me that economics is a branch of social psychology. The law of supply and demand is about psychology, it’s about the perception of scarcity and desirability. “Value” is about psychology: if the seller values a ware more than a buyer, he will ask a price the buyer is unwilling to pay. Hence haggling. And so on.
And so on. Orrell has analysed the myths much better than I have, which makes his book very much worth reading. I found it at our local dollar store on the remaindered-books rack, a sad fate for such an important work.
His most interesting notion is that money behaves like quantum particles, because it has a dual nature: it is both material (coins etc) and abstract (numbers). I don’t buy this, because I see no obvious way for that notion to account for inflation. It may well be that quantum math will provide better models of how money behaves as an element of the economy, but inflation is an effect of psychology. Ordinary inflation is a natural effect of people charging more than a good is worth in order to make a profit and/or to pay the interest on their debts. Runaway inflation occurs when people no longer believe that money represents values well enough to be used as a generic IOU. But those observations are merely the beginnings of an attempt to account for inflation, which is fundamentally crazy: It’s as if we needed more and more meter sticks to measure the distance from here to London.
Still, I think this book is a necessary and useful primer in economics. By showing that the notion of “utility” is empty, or that economic decisions are irrational, or that the system is inherently unstable, etc, Orrell shows that neo-classic economic theory is empty. I’ll go further than he does: he shows that it’s a mess of superstitions, a pseudoscience like astrology. ****
Update 2020-03-28: The single biggest failure of Friedmanite economic theory is its pricing of externals. It's zero. That means that prices will understate the relative costs of goods and services. This is most obvious in the costs of raw materials. Ignoring the cost of externals underprices mineral resources, and overprices organic resources. Thus we overuse concrete, and underuse wood.
BTW, back in the 1970s I read an article by an accountant, who "proved" that the costs of replanting forests could never be recovered. That's when I began to suspect that "generally accepted accounting principles" are somewhat removed from reality. These accounting practices are of course based on Friedmanite assumptions about costs and how to account for them.
Update 2020-04-14. "Generally accepted accounting principles" are also designed to minimise tax obligations. The accountant also has some choice in which principles to apply: They can make a bad year look good, and vice versa, depending on whether their client wants to attract investors or distract the taxman. As long as the principles used are spelled out, that's ethical.
