Crap Economics

“The farmer and manufacturer can no more live without profit than the labourer without wages.”  David Ricardo.

Auckland Harbour

Economics is about people and how they behave when deciding how to spend their hard-earned cash. It is about individuals distinguishing between wants and needs. I need electricity for everyday living, it is a ‘must-have’. I want ice-cream so I buy it, but it is something I can go without; no electricity would be a disaster, life and death for some.

The economy is the system by which wants and needs are produced and distributed to people and societies.

Completely Rubbish Approximations

YouTube commentator, Richard J Murphy, argues that modern economics is fundamentally flawed, based on “Completely Rubbish Approximations to the Truth" (CRAP).

Richard Murphy is a political economist and former practicing-chartered accountant. He is Emeritus Professor of Accounting at Sheffield University Management and was previously Professor of Practice in International Political Economy at City, University of London. He co-founded the tax justice movement and created the concept of country-by-country reporting to tackle multinational corporation tax abuse. Wikipedia.

Richard J Murphy appears well qualified to slap modern economics with the ‘Crap’ label.

My Introduction to Economics

I was introduced to economics in a 7th form class during my last year as a secondary school student. It all went over my head, what I remember about that class is that I was feeling drowsy through most of the lecture. The next time, I had no choice but to enroll in the module, I was doing a diploma in business as a mature student. This time there was no more ‘drowsy’, I passed with flying colors. Yes I answered the questions, but deep down, did I understand what economics was all about. Not really.

Fundamental Flaw: An Assumption of Certainty

Richard J Murphy’s argument is that mainstream economics operates under the false assumption of a certain world. In a certain world individuals have perfect information, can predict the future, and always make rational choices in the marketplace. Murphy states, "this assumption which economists have to make … is total and utter rubbish."

There is uncertainty, in every aspect of human life, a life where predicting an outcome is never 100% certain. There are so many factors that are unpredictable, resulting in unpredictable outcomes being the norm. Famous economist, John Maynard Keynes, spoke of this unpredictability leading to ineffective economic models. Richard J Murphy called it a "crappy economy" from "crap politics."

Disregarding Human Unpredictability

In a certain world where perfect information is available and people make rational decisions in their choices; economists can predict perfect outcomes. They do not have to recognise the influence of the state in the economy or how large companies also have impact in the market. This leads to assumptions that are of no benefit in the real world, and of no benefit to society if politicians base their policy on incorrect assumptions.

An example of economic assumptions being made without considering the human factor is The Bank of England. The bank is criticized for disregarding the significant impact of unemployment and inequality on real people. People are more concerned with unemployment and inequality than with inflation. There is a disconnect between economic theory and the reality of life.

Values, Rules of Thumb, and Maxims

In stark contrast to the economic ideal of rational, certainty-based decisions, the reality of human decision making is guided by values (ethics), heuristics (rules of thumb), and maxims (rules of good conduct). Values are what we chose to live our lives by; they guide our behaviour. Heuristics, rules of thumb, enable us to simplify complex information and make decisions in the face of overwhelming data, even if those decisions aren't strictly "rational." Maxims, such as "do no harm" or "love your neighbor as yourself," provide an interpretation of values that also guide our behaviour.

Values, rules of thumb, and maxims, help guide us through uncertainty, they are the reality of how we make decisions. This is the reality of human behaviour, decision making that is not factored into conventional economic models. It leads to a profound disconnect between economic theory and actual human behavior.

Economics for the Greater Good

The world is full of uncertainties, despite that, studying economics gives you an informative understanding of how the world works. Economics helps you make sense of issues like prices, employment and unemployment, inflation and government policies, all of which affect daily life. It helps you analyze what is happening in your world while developing problem-solving skills to deal with issues, personal and financial. Economics helps you anticipate and understand changes in markets and society; it is however what is often considered an inexact science. Inexact, because when you are dealing with people, people make decisions not based upon economic theory but on how it affects them personally.  

Economics is the study of people and the decisions they make in an uncertain world. It is the reason Richard J Murphy calls modern economics “Crap”.