Monthly Archives: September 2015

Cloudy Economics

I have been doing a lot of reading and thinking about economics lately, trying to understand not just the various theories but why there are so many of them that reach totally different conclusions. And then out of the blue (skies), the answer came to me – economic theories are like watching clouds.

Photo by Jessie Eastland

Photo by Jessie Eastland

I was laying on my weight bench outside, staring up at the blue sky and the swirling clouds, getting ready for the next set when it hit me. Each part of the cloud was behaving differently; the white wispy part was spiraling clockwise, the dark gray part was gathering moisture to start a rain shower, the puffy white part was rising in the hot air thermals, starting to form a thunderhead. This is why economists can interpret the economy so differently; they are each focused on a different part of the cloud and therefore can come to totally different conclusions for valid reasons.

And this is typical of the scientific method. We pick the point (or concept or situation) that we believe is the most important and then build our theory to support that point. We identify the single most significant property and then determine how that property shapes and affects the whole item.  We make the assumption that the property (and therefore our theory) applies consistently throughout the whole thing.

And why wouldn’t we? If we have a stick of wood, we expect it to have the same properties from end to end, for each part of the stick to burn equally well. We wouldn’t expect part of it to be stiff and part of it limp. Same with concrete and carpets. We expect them to be pretty much the same, from end to end, top to bottom, and any property variations to be small and explainable (this end of the stick is wet, so that’s why it won’t burn).

However, because our economy is a dynamic, interrelated system (instead of a static unchanging thing), then all of our analyses of single regions in the system are inaccurate because they fail to capture the essence of the whole system. The single-point analysis is wrong not only because it describes only a portion of the cloud, but also because it fails to describe the interactions of the various portions of the cloud, interactions that could produce (or prevent) different rain or hail or snow.

We are like kids lying in the grass, arguing about the shape of that part of the cloud on the right, not realizing that we are about to get rained on by other parts of the cloud.

This inability to describe the whole messy totality of economics is unsurprising. Our brains are single-threaded and can only focus on a single thought or idea or part of the cloud at a time. And until we recognize the limitations of our thinking and the limitations of the economics models we propose, we will fail to produce really useful economic predictions. Instead, we will be doomed to endless bickering about the meaning of this parrot-shaped part on the left or that swirly part on the right.