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Welcome to the Twilight Zone

By Chris Clancy
web posted March 11, 2013

The following story is told for purely selfish reasons. The purpose is to illustrate and share the misery which so many students of economics have to endure.

A group of these unfortunate souls approached me last week. They wanted to discuss one of my articles published some time ago. Of course I was delighted to oblige – at least I knew some people out there were actually reading what I wrote.

The key words in the article were "productivity" and "economic growth". In order to prepare the ground, I asked them to get together beforehand and discuss their understanding of what these things meant. The idea was for them to actually get it down in writing - in their own words.

What I wanted were two straight-forward, common sense explanations – just to get us started. As an example, for productivity, something like this:

Productivity refers to how efficiently we use our resources – meaning our people, along with our machines, equipment, raw materials and so on. The more efficiently we produce new or existing products, the lower the cost - which means consumers pay less – and usually get a better product into the bargain.

Needless to say, instead of doing what I asked, they simply downloaded something from the internet. It was the transcript of a lecture delivered by Nouriel Roubini back in 1998.

I had a quick scan and asked if they understood it. Not surprisingly, they didn't have a clue what Roubini was going on about. And you couldn't blame it on the fact their first language was Thai. Even students who were native English speakers would have balked at it.

In this lecture, which was actually about productivity and growth, Roubini defined productivity as:

"Y = A F(K,N), where Y is output (real GNP), K is the stock of physical capital (plant and equipment), and N is labor (the number and hours of people working). The letter A measures what we will call productivity."

And then added:

"A higher value of A means that the same inputs lead to more output, as clear a definition of productivity as I can think of."

Which is true as he has it - but its got to be said - if only the real world were as simple as this.

But anyway … let me see now … if I re-arrange his formula I get:

A = Y/ F(K,N)

Anyone any the wiser? Is there any attempt at any real teaching going on here?

What on earth is it supposed to convey? Well, believe it or not, it's supposed to refer the same thing as the explanation I gave above.

I'd love to be able to say he stopped at this point. But unfortunately not:

"In practice we know all the terms but A, which we compute as a residual. We generally do not measure A directly, which adds to its enigmatic character." [Emphasis added].

No, you're not dreaming … you have now entered the twilight world of economics in academia.

And it actually got worse. I lost interest when he unloaded the following humdinger for economic growth:

Wait for it … drum roll … here it comes …

"[G]rowth decomposes into d(Y/N)/(Y/N)= dA/A + 0.33 d(K/N)/(K/N)."

Ta-dah …

[Cue sound of crickets in the background].

Yes.

Well … thank you so much Nouriel… for what I'm not too sure … but thank you anyway.

Poor students. The above is typical of much of the ego-tripping intellectual malarkey they have to plow through. And, unfortunately, this is what they come to expect. When I gave them my explanations for productivity and economic growth, using plenty of real world examples, I could see there was a problem.

They actually understood what I was talking about. No formulae, no tables, no figures and no infernal diagrams! They were perplexed. This was economics after all?

If it's easy then there must be something wrong? Surely?

Well … no ...actually.

So why then, do so many people drop economics after taking an introductory course in the subject?

I could give many good examples of why this is so. But one which comes to mind straight away is the mainstream exposition of what is called "Perfect Competition" – something which students come across early in their studies.

Dr Eamonn Butler, in his superbly readable "Austrian Economics – A Primer" – puts it thus:

"[T]he textbook ‘perfect competition' is just that – a simplification of the real world. But a model in which buyers and sellers are supposed to be identical is not a simplification of the real world, but a complete renunciation of it." (Chapter 5)

It doesn't make any sense – not to people who happen to inhabit the real world. Newcomers think it's their fault – that they must me missing the point - that they're not clever enough to understand it.

So they abandon the subject and take their talents elsewhere.

Had they taken an introductory course based on Austrian economics, I daresay the outcome for most would have been different. What the Austrians say, in a nutshell is, cut intervention to a minimum and then just leave the thing alone.

If you want a way into this subject – there's only one book to start with – Henry Hazlitt's "Economics in One Lesson".

This book hammers the lesson home – chapter after chapter after chapter – and you don't need to be some kind of high-flying ivory tower academic to understand it. Government intervention in free markets leads to unseen problems down the line which leads to more intervention, more unseen problems, more intervention and on it goes.

Most of the difficulties and complications in economics arise from trying to explain just why, almost invariably, intervention only makes things worse.

All I can say is thank God so many people, especially young people, have discovered Austrian economics. And as every day passes, and nothing gets any better, the numbers can only continue to grow.

This has to be the one and only positive thing to emerge from the Obama experience.

As for the group of students, the best I could do was point them in the direction of Hazlitt and hope for the best. ESR

Chris Clancy lived in China for seven years. Most of this time was spent as associate professor of financial accounting at Zhongnan University of Economics and Law in Wuhan City, Hubei Province. He now lives in Thailand where he spends his time reading, writing, lecturing and, whenever he gets the chance, doing his level best to spread Austrian economics.

 

 

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