Economics is Not a Pure Science

On another blog, I had the pleasure to exchange opinions with a bloglodyte. What earned this fellow that sobriquet was not the fact that he and I disagreed, but that he pursued his argument without the use of reason or a single cogent fact. Vituperance and envy pretty much shut down all of the higher-cranial functions for this bitter young man. Along the course of his disjointed rants, he attempted to make some of his claims more credible by insisting that he held a master’s degree in Economics, a claim his own claims immediately dispelled. As a rule of thumb, one should have at least a passing familiarity with the major concepts and prevailing theories of a subject, before claiming expertise in the field. The fellow took umbrage at my observation that Economics is not really a science in the true sense, but rather a set of sociological behavior matrices, based on mathematic theories applied to conditional scenarios. This basic fact is essential to understanding how Economics works, and why it is so relevant to Politics.

Look at the stock market, for example. Every day, more than a thousand publicly traded stocks are bought and sold at bourses around the world and through online sales. The prices of these stocks are supposedly based on the best estimates of the companies’ fundamental performance indicators in terms of revenue, costs, debt, and other salient factors, yet minute by minute the price varies. Why? Because the price of the stock is determined by buy and sell decisions made throughout the business day, based not only on hard data and analysis, but on the emotional belief that a company is worth more or less than it’s stock price indicates, driving the price up or down. In fact, it is this emotional component which creates sales of stock in the main; if everyone agreed what the price of a stock should be, the stock price would quickly assume that value and no one would buy or sell from that point onward.

For that matter, look at oil. We’re not running out, in the short term at least. Drive to any station, and they will have all you want of all grades of gas, and even on the overall scale, stocks are not in any present danger. So, what drives gasoline prices up and up? The component costs of getting that gas to the station, that’s what, such as the petroleum. Why is oil more expensive? Because of the belief that events in the Middle East, concerns about environmental costs, and so on make the oil more expensive. That, and the fact that the eco-morons want cheap gas but won’t let anyone drill for oil close to home or build any more refineries, but again, that’s an emotional decision and supports what I am saying.

Another example is this whole sub-prime mortgage mess. Granted, it’s a real problem, but the problem affected a small percentage of mortgages and a minor sector of home building, not affecting the basic value of a home or the rates on exiting fixed-rate mortgages, as is held by most folks. What changed was brought about by a change in opinion about the stability of the industry, the trustworthiness of mortgage lenders, and the need for the government to act, which is almost always cumbersome, ineffective, and pricey in the long run. It simply needs to be understood, that we the people, to a great degree choose the economic conditions through our reaction to events which are for the most part transitory and minor. That is not to say that the effects are not real, or that people do not suffer tragically in some of these cases, but the humanistic component of all economic conditions must not be ignored.

Which brings us to politics. Obama’s faithful believe he will change things for the better, to my mind in spite of all the evidence. Hillary’s supporters believe that her time as First Lady and her short service as a Senator give her the qualifications not only to run the country, but also a far better grounding in the requisite capability than Senator Obama. And McCain’s team is confident in their belief that he is the best-qualified candidate to lead the country. Ultimately, all three of these candidates are in a race to get the most people to express belief in them, to emotionally invest in the candidate. I cannot recall a national election ever being won on the basis discourse, for good or ill. And because all of the candidates can be counted on to dwell on the U.S. economy and offer up their proposed solutions, what people believe about the economy is an important element to how the race will play out.