Economics Lecture 2121

(*Author's note: Recently a group of students at Harvard University walked out of an economics class being taught by renowned economist Greg Mankiw. Mankiw was an economics advisor to Pres. George W. Bush and is known for being the author of the famous mainstream economics textbook Principles of Economics. Students claimed that the economics class advocates an ideology that favors the wealthy at the expense of the poor. In light of this Harvard economics class walkout, I thought it would be interesting to present a hypothetical take on an economics lecture at a university in the not-so-distant future. Contemplation on what the future may hold can often help us put our present situation into proper perspective.)

In a classroom at New Shanghai University, somewhere in the North American Syndicate (former USA) of the World Union, year 2121...

PROFESSOR: Okay, class, let's get started. Everyone, please scroll to page 144 on your e-readers. Today we're going to discuss the financial crisis of 2008 and the resulting Global Depression. Now, you've all read the material assigned for class today. What would you all say was the ultimate cause of the Global Depression in the early 21st century? Does anyone have any thoughts? Yes, Terran.
TERRAN: The subprime mortgage crisis in the US. Banks were extending loans to people who could not pay them back...people who in some cases never expected to be able to pay back the home loans.
PROFESSOR: What else? Yes, Sebastian.
SEBASTIAN: Easy credit. Rampant consumerism, I'd say. Too much consumerism and not enough production. You had the world trying to get accustomed to new technology and the markets had to find some way to keep up with the changes.
PROFESSOR: Okay, so maybe the emergence of new technology came into play. But wait, we know from reading Hazlitt's "Economics In One Lesson" that the idea that new technology wipes out jobs is an economic fallacy...because technology helps us to work more efficiently and gives us more time and resources to undertake other things. So yeah, maybe the markets and societies were trying to come to grips with all this brand-new technology, but what else were they trying to deal with? C'mon, let's think of what happened around 2012 to 2020. Maria, do you have any thoughts?
MARIA: I think it goes back to the population boom. The world was trying to deal with overpopulation in conjunction with the energy crisis.
PROFESSOR: Interesting. Now, let's think about Maria's point for a second. During the Great Depression in 1930, the world population was around two billion. 80 years later during the Global Depression, and the world population was around seven billion. That's quite a jump. But again, as we read in Hazlitt's book, more people arriving on the scene need not be feared in terms of economic harm, right? As a higher population creates more demand, those same individuals contribute to trade, commerce, and production, so there's equilibrium, right?
DERRIQ: But Professor Karo, that significant jump in the population shocked the equilibrium between population, production, and consumption. That's what led up to the water crisis in the 20's.
PROFESSOR: Ah! Now, Derriq just made an insightful point. Let's think back to the Water Crisis. What would you say drove the world to the brink in demand for drinking water?
DERRIQ: Um, more people?
PROFESSOR: And how did more people create more demand for drinking water?
DERRIQ: Because...human beings need water?
PROFESSOR: Precisely. Human beings need water. Now if we look at page 145 in the assignment, what do you see in the second paragraph? Derriq, if you could please read what Kahan and Wise write -- just the first sentence.
DERRIQ: "As we shall see in the next chapter, the foremost catalyst of the economic affairs of humans is derived from the conatus of humans' physiological and biological needs, i.e. air, food, water, shelter, health care, and sexual intercourse."
PROFESSOR: Right, the conatus of humanity's physiological and biological needs -- food, water, shelter, medicine, and sex -- that is what drives the economy. You can paint over these needs with currency signs, clever advertising, and fancy logos, but the economy goes back to humanity's basic needs to survive.
Back in the early days of economics, economists debated on the nature of wealth: They asked the question, "What is wealth?" You had the mercantilists who said that having an accumulation of gold and silver is wealth. Physiocrats said that agriculture was the sole source of a nation's wealth. Meanwhile, you had Adam Smith, the father of modern economics, saying that land, labor, and capital are the three factors of production and the major sources of a nation's wealth... But what about biology? What about chemistry? What about food? What about water? So we have all these banks and paper money and gold and stocks & bonds...so what? People have to eat. To eat, people need food. To drink, people need water. And how do you get food and water? Labor...and production.
It was not until Severus Barron's magnus opus in economics entitled "Man, Economy, and Need" in 2025 that modern economists really began viewing economics as being this interplay between biology, psychology, neurology, and resources. You may have all the wealth and gold and silver trinkets in the world, but if you don't have any food or water, those gold and silver coins aren't going to do you much good.
Back in the days of the Global Depression in the early 2000's, you had these backward economists saying, "Economics is about how society uses its scarce resources" as if we were all just playing a game of Monopoly or something. Now looking back on it, the period of the late 20th century and the early 2000's was sort of a dark age for economists. And then later, by the 20's and 30's, you have economists that could actually think intelligently like Barron and Malka saying, "Hey, wait a minute, I see this apple tree and this rice paddy...and damn, if they don't make a lot of apples and rice. Maybe even enough apples and rice to feed an entire village. But with entrepreneurs, businesspeople, and governments, even with a surplus to satisfy needs, we see this drive towards scarcity in society.
Even if there is enough, businesses and governments take all the apples and rice for profit." It's a scarcity trap devised by humans themselves. Manufactured scarcity...artificial scarcity. And then the light bulb dawns on economists, "Hey, this economy-thing...it isn't about money, it isn't about stocks, it isn't about material things like cars or computers. This is about survival." That is to say, the struggle for survival, to perpetuate the species...the same as birds, beasts, and bugs. Economists found that the wiring of the human brain is worth more than gold or silver; enter neuroeconomics. Yes, Pierce?
PIERCE: So, Professor Karo, you're saying that the Global Depression was about the struggle for survival?
PROFESSOR: Yes, in a way. But let's get back to the point a student previously made about the subprime mortgages. So we have the US government saying, "You have a right to own a house. We'll help you buy a house". But as we now know today, a government could say in its constitution that every citizen has a right to blueberry pie, but if there are no blueberry pies and no way of getting them, no one's gonna be getting any blueberry pie, right? So the US government in the early 2000's was saying, "You have the right to a house" and "you have the right to health care" and "you have the right to an education" and "you have a right to retirement funds"...and how did that turn out?
MARIA: Not very well. The scheme ended up driving budgets into the red. Countries went bankrupt. Governments couldn't live up to the promises they made to citizens...the market had other plans.
PROFESSOR: Indeed, and what can we take away from that period in time with respect to how we analyze economics?
MARIA: Don't make promises that you can't keep?
PROFESSOR: Exactly. And that's an important lesson for professional economists in particular: Don't make promises that you can't keep. Now, going back to the assignment for today, what do Kahan and Wise suggest about how governments should intervene in markets and the economy? Yes, Stephan.
STEPHAN: That government intervention is bad...that they shouldn't do it.
PROFESSOR: And why?
STEPHAN: Um...because it doesn't work very well.
PROFESSOR: Anyone have any additional thoughts?
MARIA: That government intervention in the market distorts the true values of things in the market. If the government says that a car is worth $500 but the market says otherwise, then the government mandate isn't worth anything. The market has the last say, so the government should stay out of business only insofar as to protect society and ensure that contracts will be enforced.
PROFESSOR: But what if no businesses are doing the things that the government wants them to do? What if we really need more buses or trains or rocket ships for public transportation, but the free market isn't making them?
MARIA: Well, then, the market probably isn't making more trains and buses because such endeavors are not profitable and worthwhile to businesses.
PROFESSOR: So then, what's wrong with the government saying, "Hey, we want more widgets, businesses aren't creating widgets, so we're going to start making widgets"?
MARIA: Well, businesses have a better idea of what ventures will be profitable and which ones won't be worthwhile. Eventually, when the government starts creating widgets on its own, the endeavor will not work out...if it were meant to work out, then it would have already been worked out in the market. Businesses would already have been making widgets at an affordable and efficient rate. Like the "right to blueberry pie".
PROFESSOR: Exactly. But, Andre, what does this idea of the government deferring to the free market have to do with the Global Depression in the 2000's?
ANDRE:  Uh...I would say because governments during the Global Depression started to bite off more than they could chew.
PROFESSOR: With what?
ANDRE: Well, from the readings, in the 2000's I'd say at least with education, health care, and militarism.
PROFESSOR: But didn't governments have to undertake those ventures in education, health care, and the military in light of growing technology and an exploding population? I mean, doesn't a national government need an army to protect its borders?
ANDRE: Yeah.
PROFESSOR: And governments had to undertake these ventures because education, health care, and the military ultimately relate to what? I will tell you: preservation. The perpetuation of the species...the struggle to survive. And as people struggle to survive, so do governments. As we will learn later, as markets function, businesses and governments are driven to become leaner and leaner -- because if they don't, then the competition will destroy them. When it comes to government, sometimes less is more. There is this subtle line of boundary where too much government intervention chokes the market, but not enough government intervention compromises the ability of government to do its job thereby stunting the market. It is in the interest of government for companies, firms, and individuals to succeed. If firms and individuals do not succeed, then there will be no taxes and with no tax revenue, there will be no government to sustain the commerce. Thus, government and the free market must exist in a sort of equilibrium in order to be successful. And what is the job of government? As the authors write, protecting borders, protecting the rights of individuals from physical harm, ensuring rights of citizens, and ensuring that contracts will be enforced.
So where looking back we might want to say that the Global Depression in the early 21st century was due to a housing crisis, easy credit, or other risk-taking behavior on the part of the financial industry, today economists can see these other factors coming into play...such as energy usage, overpopulation, booming technology, overconsumption, and the world trying to balance production with needs. In the end, as more recent economists have noted, economics is more about the struggle to survive than sheer money. Thus, the Global Depression was not so much a crisis of housing prices or exotic financial instruments, but rather a crisis of value. And it was one that affected the entire planet at the time. This crisis of value...related to need versus value versus production versus consumption. And in the center of it all was what?
ANDRE: As you said before, the struggle to survive.
PROFESSOR: And what would you say is the operative thing that directs this struggle to survive?
ANDRE: The threat or use of force, perhaps?
PROFESSOR: Precisely, thus, as we continue on in the readings, I want you all to keep this in mind. In economics, it is easy to get bogged down in fanciful theories or prices or taxes or money, but if we lose sight of the backdrop of the underlying struggle to perpetuate the human species, then we are as lost as those economists living in the early 2000's during the Global Depression. And that is probably a good reason why Global Depression hurt as much as it did; people had difficulty determining a sense of value in relation to their quality of life in the prism of the struggle to survive. At that time, economists and consumers had trouble seeing outside the jar of money in which they were trapped. Though money is important in economics, the foundation of economic behavior goes back to this human conatus to survive and persist in being; money is thus merely a tool. As we will learn later, even money exists on a market of sorts...and even where money may appear to be constant, given human economic activity, exchange and tradeoff values are always changing. Thus, the market appears to be a living thing, and we have to respect it as such.
Keynesian economists of the past thought that governments could lead the market around like a dog on a leash. As they later discovered, the market is more like a wild beast...a lion that will go whichever way it pleases. The lion ended up being stronger than the individuals who thought they were in control while holding the leash. As we will learn in another chapter, as much as the market may fool humans into believing that humans can somehow control and direct it, the free market eventually emerges triumphant and shows that it alone has the upper hand. Humans may think that they control the market or that they can direct the market to go whichever way humans want, but the market often has a mind of its own.