Are Economists Missing Fundamental Social and Economic Change Again?

by trenzpruca


Economics (Photo credit: markwainwright)

I previously have written here on my observation that we may be witnessing a basic change in economic activity. A shifting of fundamentals if you will.

In the 1700s economics, as we tend to think of it,  primarily concentrated on the fundamentals of trade and the incipient industrial and technological advances contributing to its growth. This was the time Adam Smith and his followers attempted to describe what they saw happening around them.

By the Nineteenth Century, industrialization spawned socialism and its neo-classical reaction in an attempt by the emerging self identified élite, now calling themselves economists, to illustrate the situation as they experienced it. Being addled by their own theories, they still relied on the analysis of Smith et. al. but added “updates” to attempt to preserve the theory and hopefully more accurately describe the situation as they found it at that time. Few if any (Marx excepted) recognized the circumstances were totally new and may require a completely new theory, analysis and description. After all, trade was no longer the driving force in society and in the economy, production and consumption was.

In the Twentieth Century things changed again. The central focus of the “economy” morphed from production and consumption to getting people from here to there in order to produce or consume. It could be argued that the major portion of economic activity was dependent upon transportation, not as merely the means of moving goods to market but the major driver of economic activity; in effect its purpose. The economists adjusted their old theories steadfastly refusing to recognize the fundamental change of everything.*

We are now facing perhaps another basic change in economic activity, social media and mobile communications have made transportation less central to ones life. as the following chart demonstrates, vehicle miles per person is steadily decreasing.
As a result, economic activity based upon getting people from here to there is also contracting. To a great extent, I suspect that is what is exacerbating the current economic turmoil (if not its cause). We may be entering a new economic age. Once again most economists fail to recognize it.

Should this most recent pattern change fail to mitigate the effects of climate change, expect the next so-called paradigm shift to focus on remedial actions to limit the effects on the environment from the carbon byproducts and waste produced by the industrial and transportation economies bringing with it a new economic template.

Economists at that time will still try to preserve their theories and will tell you that essentially nothing has changed in their analysis. Not only will they be wrong, but they still will not be able to predict anything of any importance to anyone with any greater accuracy than the flipping of a coin.

The reason for the economists almost always “getting it wrong.” appear to me to be twofold. The fist is that economists attempted to model itself on Newtonian physics in an attempt to make itself appear more “scientific” and separate itself from the other social sciences. However lacking some independent criterion, such as in science’s case natural phenomena, its theories cannot be effectively judged. A social science like economics deals with people who not only act on their own and influence the system in which they operate, but have their own views of the realities of the system in which they act.

The second, as described by George Soros recently, is somewhat more  complex and subtle.

What a person thinks is the reality he or she perceives is never the actual reality itself. The person’s perception is always incomplete. The person, in other words is fallible to use Soros word. He could be wrong to a greater or lesser degree.

When the person intends to impact the reality then his incomplete or fallible view that represents his understanding is supposed to determine the outcome. All well and good if for example you want to throw a stone. But as things get more complex more problems arise. As the reality becomes more complex what the person thinks is the reality becomes more problematical. Where a person intends to act on or impact something within that more problematical understanding of reality the nature of the effect becomes more problematical as well. In other words as a persons view of reality diverges from the reality itself, the outcome of his actions increasingly diverge from his expectations.

This syndrome affects all social spheres such as finance and politics inevitably producing actions or insights that have no greater accuracy or effectiveness than what would result from pure chance.

* Note: Between the 1960s and about 2010 some commentators have suggested that there may have been another fundamental shift; from a transportation economy to one based upon the exchange of financial instruments. It arose because there appeared not to be enough industrial and transportation projects to sop up all the money created. So, gambling on itself seemed to be a reasonable way to continue choosing winners and losers. This era appears to have been born and now be dying right before our eyes. It may have been either an exceptionally short-lived shift in the world’s economic foundation or merely a transition between two generations. In my opinion it is probably the latter.


On the Role of Civil Society:

“Why would anyone be morally bound or wish to be morally bound to a civil society that does not share the goal that it’s citizens deserve a fair distribution of wealth, income and power? If the civil society is not dedicated to that end what else could it possibly be dedicated to? What is freedom, to those without wealth, income or power?”

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On Economics as a Science:

“In Science. a physical theory that is logically consistent may be considered truth only until falsified. In Economics, a sociological theory that is logically inconsistent is often considered true even when falsified.”

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On Governmental Priorities:

“As with most fundamental freedoms, preventing those who wish to abridge the fundamental rights of others is a more important role of government than encouraging the exercise of those rights. Exercising our rights are our individual jobs, protecting us from those who would abridge are rights is the duty we collectively give to government. If government is not the guarantor of Freedom then it is a tyranny.”

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