It's economy, not a machine! - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 21 May 2013
It's economy, not a machine! A  A  A

Canton, Mississippi

We are visiting our children in the US, before heading back to Europe. The weekend was spent in La Jolla with Henry, who is working with Rick Rule's investment firm in Carlsbad.

Now, we are in Mississippi visiting Maria, who is shooting a movie here. Mississippi seems to be courting the film industry with low costs and tax breaks. This is the second film Maria has done in this area.

Yesterday, the markets reversed direction, albeit timidly. The Dow went down 19 points. Gold went up $19.

And if there is anyone who knows what these markets will do tomorrow, he doesn't work here at our Diary of a Rogue Economist.

Before coming to California and Mississippi, we gave a speech in London. In it we quoted Paul Krugman. Here's the quote, from an article in the New York Times magazine:

    Keynesian economics rests fundamentally on the proposition that macroeconomics isn't a morality play-that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that "we have magneto trouble"-i.e., the economy's troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem.
What kind of brain could think such a thing? How could one confuse an economy with a machine? We promise not to become earnest about it, but it is probably worth spending a few minutes exploring this claptrap. It is the error at the heart of modern economics and it is the foundation of the Fed's attempt to revive the economy. Krugman, Bernanke, Summers et al think they are technicians..

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They've got the wrong metaphor. You may be able to describe the human body as a machine too. But don't try to fix it with an adjustable wrench. It's a good thing Paul Krugman isn't a medical doctor!

Unlike a machine, an economy was never designed by anyone nor built in a factory. There are no owners guide to troubleshooting problems...and no website where owners go to talk about the problems they've had and the tricks they've used to fix them.

Not made by cannot be repaired by man. But let's look at why this is so.

First, it is too complex...with millions of moving parts. And each of these parts has information and desires of its own. The farmer in Mississippi may know that his bottom 40 acres is too wet to plow. The Department of Agriculture has no idea. The plumber in Milwaukee may know that his business is slowing down, but how would Krugman know? What machine has intelligent parts...each responding to its own information base, more or less independently?

Second, the parts have desires of their own. You build a machine to accomplish the desires of the designer, builder and owner. An economy, on the other hand, is merely a way for the constituent parts to achieve their own ends. Imagine an automobile that goes where the steering wheel wants to go! Imagine a motor that runs faster when the carburetor feels frisky...and slows down when the valves get tired.

You can see that this is like no machine ever created. The parts want to go in different different speeds...for different reasons.

In today's America, real wages are lower today than they were 10 years ago. Depending on how you adjust for inflation they may be as low as they were at the end of the second Eisenhower administration. With so little in earning, people are naturally careful with their money. They go to giant discount order to get as much for their money as possible. They want low prices.

What is an economy for, if not to satisfy the hopes and desires of the people who live in it? And what is the goal of activist economics if not to help people get what they want?

So what does Paul Krugman do?

He urges the government to raise consciously and intentionally sabotage the wishes of the people by raising the cost of living. That's the point of Quantitative Easing put more money in circulation so that prices rise. Then, people will get less for the money...and be more eager to spend their money (fearing that it will lose its value).

And that's why Krugman prefers to think of an economy as a machine. Machines can be manipulated and controlled. Real economies can't.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "It's economy, not a machine!"

surajit som

May 21, 2013

wonderful article. isms dont work. communism,capitalism,keyneyism . the article says brilliantly why it cant.

free market is not at fault. that's our best hope. but when central banks intervene massively and frequently,it is no longer a free market. it is a massively rigged. and in whose favour ? for the banks , the bankers, politicians,moneybags. in short anybody who has interest in bank. elementary ,Watson !!!! and the common people ? well ,he is just a guinea pig, a milking cow !!

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