Saturday, December 18, 2010

In Defense of Economists

It’s that time of the year, Christmastime. This is the time of year when people say that the spirit of Christmas should center on giving and not on receiving. Two of the top Classic Christmas cartoons are “A Charlie Brown Christmas” and “How the Grinch Stole Christmas.” They both have the same moral. Materialism is bad. They say that we should stop focusing on the stuff and look to the deeper, true meaning of Christmas.

It is at this point that economists get scorned. Many, too many, think that economics (and by default economists) is all about (and only about) stuff, and consuming stuff in particular. Economists have pointed out that many firms don’t break even until the first day after Thanksgiving. It is the day when many firms climb out of the red and into the black, hence “Black Friday.” The implication is that if we didn’t have Christmas and all the buying of (needless?) stuff that goes along with it, then many of our businesses would never see an annual profit. Furthermore, Keynesian economists have defined the size of the economy, GDP, in a way that emphasizes consumption. The formula for GDP is consumption spending + investment spending + government spending + spending on net exports. Of these factors, consumer spending is the largest and if that dips, then so does our measurement of GDP. Therefore, too many people conclude that we should spend, spend, spend, and economists are accused of being the chief cheerleaders for this. While there are some economists that in fact cheer on consumption for consumption’s sake, Austrian economists do not.

To an Austrian economist, economics is a value-free (or value-neutral) science. The Austrian economist should not care if the economy is rapidly expanding, slowly growing or even contracting. His job is to study the economy and try to figure out how it works. If someone asks the Austrian economist, “Will this policy enhance or diminish future growth,” the answer is not the economist injecting his own values into the debate. This is what Mises and Kirzner mean by economics being a “Wertfreiheit” or value-neutral science. As an individual, the economist can step out of his role as a value-neutral scientist and suggest goals such as economic growth or unemployment reduction. However as an economist, as a scientist, it really should not matter if a person or a society consumes at a high rate or saves at a high rate. So it is rather silly to assume that all economists are cheerleaders for materialism and ever expanding rates of consumption.

To an Austrian economist, economic growth does not mean that there has to be more stuff. Austrian economics has long taught that value is subjective and cannot be compared between individuals. Thus, an economy may be better off if it takes fewer resources and less time to make the same amount of stuff. This is certainly true for individuals. We call that free time, or leisure hours. If you got the same pay for working fewer hours, would you consider yourself better off? Now imagine that for the entire economy. We are clearly better off, but not consuming more stuff.

That being said, as an Austrian economist and as a thinking individual, I prefer higher rates of future economic growth. Although to an Austrian economist, expanding future economic growth does NOT mean expanding our rates of consumption today. In fact, it means exactly the opposite. For the economy to grow in the future, it will need capital. In order for capital to be freed up for more roundabout production methods, more resources must be invested instead of consumed. In other words, that means there must be an increase in savings, not consumption.

These new methods of production are more complex and more roundabout, but are used because they either cut down on the amount of resources needed, cut down on the amount of work hours needed, or both. This process frees us up to do more or allows us enjoy leisure time. It is a major benefit of growing economy. It allows us to take time off and enjoy the Christmas holiday. Without a market economy, our holiday might not be as cheery or bright.

So have yourself a very merry Christmas, and think about the benefits that a market economy provides. I know I will.


Nathan said...

Thanks again, Dr. Cwik. About economists as scientists: is the partiality of the Keynesian (weighting consumption in GDP, as you mention) and neoclassical (analyzing fictional equilibria like they do) methods part of reason that economists are scorned as scientists? Also good to see that the Red Line for the turnpike is under heavy attack.

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