Pete’s blog

Going to be another rant this week. Will try and come up with something positive next week (maybe get an alternating rant/positive thing going…)

I have been reading an old economics textbook from ‘varsity – before you think I have lost my mind reading textbooks, I am applying for a job in Standard Bank’s economics department and thought a bit of a refresher was in order. But reading this textbook I am getting frustrated and confused – is this the foundation that modern economics is built on? It is so simplistic and … wrong! This is just my opinion and impression and I know that making such statements can get your house firebombed by libertarians (people who love the free market). I am not going to bore you with technical details, but there are two things that I am going to gripe about.

First thing is the most important phrase when discussing any economic theory – parabus equibus… Ever heard that before (all you BCom people)? It means ‘all things being equal’, ie ignore any other possible effects and just concentrate on a single situation or relationship. For example, if you decrease the supply of shoes, the price will increase using standard supply and demand theory, parabus equibus. All makes sense, all logical and reasonable … until you start applying this to every situation – jobs, happiness, people, pollution, taxes, money supply, poverty. Human issues, people issues – and since when were people sensible, logical and reasonable. A scientific example of parabus equibus would go something like this:
An electric heater is able to convert electricity into heat energy through resistance. Therefore if you leave a heater plugged into a constant electric supply, the heater will constantly convert electricity into heat until the heater gets so hot it spontaneously combusts … parabus equibus. Why complicate this scientific situation with other problems like convection currents, heat transfer, etc? Surely it is much simpler just to concentrate on the electricity to heat theory?
This is what economists seem to love doing, ignoring all the other forces and impacts and interactions, and just concentrating on a small part. Maybe it is too complicated to analyse and theorise about all the possible interactions, but economics is really about people and not about numbers, and people are complicated.

Second thing is the prisoner’s dilemma or game theory (anyone seen ‘A Beautiful Mind’?), which seems to underpin the logic of free markets. The prisoner’s dilemma goes something like this:

Two bank robbers are captured by the police, and are held for questioning. The police don’t have enough evidence to convict them for the robbery, only for possession of firearms, and as such need a confession. If both robbers keep quiet, they get the minor sentence of a year for the firearm possession. If one robber confesses and the other keeps quiet, he will get immunity and go free, while the other will serve 10 years for robbery. If both confess, they will both serve 8 years. So what do the prisoners do? Game theory basically says that both prisoners confess, because that is the equilibrium situation. If both confess, then a change in either prisoner’s choice will yield no benefit for that prisoner. Not going to go into all the details, but think about it for yourself. What would you do? The problem is that if both prisoners confess, it is actually the worst outcome for them – they would be better off if both of them did not confess.

Free markets seem to work the same way, they will find equilibrium, but the low equilibrium, the one that has the lowest overall benefit to society. It is the selfish answer, the answer of least trust. Screw your neighbour, because if you don’t, he is going to screw you. So how do you achieve the high equilibrium? Through discussions, negotiations, trust, threats, who knows?