by Larry Hatheway | December 14th, 2022
A few years ago, I left the corporate world for a set of new endeavors. I co-founded this non-profit (Jackson Hole Economics), started my own business, and resumed teaching economics at university. This transition was not always easy, but with change comes the opportunity to look at things differently. After a quarter century on Wall Street, it was time for a fresh start.
Above all, teaching economics has enabled me to revisit what I learned decades ago when I was a student, albeit with the advantage of greater experience and, I hope, a bit more humility. Accordingly, I also look differently at my chosen profession.
In what follows, I share some thoughts about economics. My observations are neither novel nor earth-shattering. Nor are they confessions. Instead, they reflect a greater appreciation for the inherent contradictions in economics. This is not meant as another indictment of an already beaten-up profession. Rather, within those contradictions reside subtle insights that, once appreciated, allow us to think more critically and objectively about the world around us. For any discipline, that strikes me as a worthy objective.
To begin, it is helpful to admit that economics is a much-derided profession.
That is partly a self-inflicted injury. Too many economists, particularly those in my former profession of finance, are professional forecasters. Forecasting, of course, is necessary in most aspects of life. Before we leave the house, we scan the weather predictions to decide what to wear, how much time to allow for the drive, or even whether it is prudent to venture forth. Similarly, when we ponder how much to save or where to invest, we make judgements about our future earnings, spending habits, and potential risks.
The problem is that too many economists, particularly those working for financial firms, make outlandish forecasts with unfounded certainty. Economic systems and financial market are highly complex forms of human engagement. Data sets are poor. Even the present is an approximation. The current size of the economy, rate of inflation, the number of jobless and virtually every other measure of where things stand are, at best, informed guesses.
You would think that armed with such little information about the starting point and given the tendency for human behaviors to change unpredictably, economic forecasters would be a cautious breed. But substantial financial incentives and bragging rights are powerful motivations. Simply put, financial economists and strategists are incentivized to say things with unwarranted degrees of certainty — when the necessity is to rise above the din to be heard, complexity be damned. Wishy-washy and even probability-based forecasting become certain routes to professional obscurity and before long turn into occupational hazards.
Yet overzealous forecasting is not all that haunts my profession. As paid advisors in public policy, economists are often forced to become partisan advocates. In doing so, they overstate benefits and understate costs, including the opportunity costs of alternative courses of action. Political partisanship does not lend itself to intellectual honesty.
Such is the luck of a profession with greater commercial application than, say, history, philosophy, or the classics. But as an economist might observe, there are no free lunches. Money and power are nice, but they also debase critical thinking.
That is lamentable, because as a discipline economics can open our eyes to aspects of human behavior that should fascinate us, educate us, and make it possible to better understand how society works — and why sometimes it does not.
But that requires hard work, intellectual curiosity and, above all, an appreciation for messiness. Indeed, contradiction and paradox are among the most fascinating and useful contributions of economics.
Consider first that no system devised by man better allocates resources than capitalism, underpinned by free markets. Free markets offer incentives to specialize, which exponentially increases productive potential and thus makes the abundance that surrounds us possible. Yet, free markets also grossly misallocate resources, for example the tons of carbon dioxide spewed into the atmosphere daily. Capitalism simultaneously works and fails.
Economics also explains why both outcomes occur. The exchange of goods and services is the exchange of property rights. Yet where property rights do not — and often cannot — exist, markets fail and third parties are harmed, in this case, by pollution and devastating climate change.
Another messy insight, lost on libertarians, is that free markets require government. That’s because without property rights, which cannot be assured privately, there can be no exchange of goods and services. Markets outside the rule of law do not exist, as anyone who has visited a ‘failed state’ readily understands.
Here’s another paradox. Specialization, which as Adam Smith noted underpins wealth creation, simultaneously destroys it. Schumpeter’s wonderfully oxymoronic ‘creative destruction’ of capitalism conveys both the potential and the pity of a system that can only raise living standards for the many by repeatedly crushing the livelihoods of those with the misfortune to be on the wrong side of innovation and trade.
Intellectual pursuit is about the search for truth. Failing that, it is about the acquisition of wisdom. And among the many facets of wisdom, two stand out. The first is that wisdom requires an appreciation for complexity, including contradiction. The second is that the wise person can simultaneously hold two contradictory thoughts in their mind without suffering analytical paralysis.
In our daily lives, where we may be preoccupied with getting ahead financially, socially, and politically, we often use the tools of education to further our advance. That is sufficient reason for most to seek a good education as they equip themselves for the pursuit of success.
But when we abuse a worthy discipline to the point where its insights are obscured by motivations of money, power, and ambition, it is helpful to return to its primary teachings to restore humility to its rightful place. Economics occasionally needs that kind of re-boot.