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Economics Ab Initio

In this article I will be offering a critique of current economic discourse. Essentially my claim is that the majority of discourse is based on fundamentally true statements regarding the effect of some policy in terms of some numerical value but, crucially, that such statements fail to provide any information regarding the actual value under discussion.

For instance consider the following statement:

Some degree of inequality is required in order to create incentives that lead to increased wealth for all.

No-one could disagree with this statement but equally the statement provides no help in finding the optimal inequality to achieve some aim. Beyond possibly stating that inequality in an ideal economy must be non-zero. Even if we could decide on an aim (maximise median income, minimise unemployment etc etc) we have no help in finding the optimum.

Consider now the following opposite statement:

Any economy has some degree of zero-sum game character and is fundamentally a question of how resources are distributed.

Equally no-one could deny the truth of that statement, and yet all it really tells us is that inequality should be less than 1.

And yet these two simplistic arguments are the predominant ones used when debating the importance of a rise or fall in inequality. This is like arguing over the ideal amount of food one should eat in a day using the two facts that if you eat nothing you will starve and if you eat infinity you will explode.

The crudest possible description of the left right divide is that the left argues for a bigger economic role for the state as a percentage of GDP and the right argues for a smaller role. But how does either side decide on an ideal? Keynesians can speak of the beneficial effect of increased aggregate demand and Hayekians (?) can speak of inevitable reductions of individual liberty. Neither of these absolutist ab initio arguments tells us anything of the ideal value that it should take. Does Krugman believe in infinite deficits? And if not how did he arrive at his optimum? Do British fiscal conservatives believe in permanent maximum surpluses? And if not how did they decide on their optimum? Only a fool would decide to be always beyond the current position regardless of what that position is.

Imagine we had no state then surely Osborne would be arguing for an increase in the size of the state. Equally if we had a total state, surely Corbyn would argue for a reduction in the size of the state. Nevertheless both use absolutist arguments to justify movement from the current position.

The only possible way out of this malaise is to take an empiricist approach. But that way lies the problem of the counterfactual. Perhaps democracy necessitates a binary system whereby one side will reduce the state and the other will increase it and the population will stick with one until it gets some superstitious sense that it has gone too far. The trouble I have with this is that we then of course arrive at an interaction between political and business cycles which is inherently cyclical (anti-Keynesian) in nature. Have you ever seen a Laffer curve based on actual data?

Fundamentally true statements are appealing and make for engaging rhetoric but they frequently provide no useful advice. Like Wittgenstein’s world of ice put forth in the Tractatus, if we limit ourselves to saying only what we know is true we are reduced to uttering meaningless tautologies.

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