Economists and economics

I read two articles recently that lead me to writing this post. One by Paul Krugman who analyzes how most of the economists didn't anticipate the crisis that hit the world last year and another one (in Romanian) who criticize exactly Paul Krugman and Joseph Stiglitz for their omnipresence in mass-media where they impose their "leftist" ideas.

First I should mention that I read both books of the Vienna school economists (like Mises and Hayek) and Stiglitz. The science of economics mainly tries to create models that explain the interactions of people in the context of goods and their value. Apart for the various competing models one big disputed point among economists is how much the state should be involved in economy. The adepts of a liberal ideology claim that we should always let the market free to reach its equilibrium, as the free market is the most efficient way of allocating resources. But the ideal market model has one important assumption: that the agents act rational. And this assumption is not true many times, for example in the recent asset bubble people were driven by an "irrational exuberance" and they kept buying properties at ridiculous prices. One may say that a model is limited by its nature and cannot account for all the complexities of reality, but if a model cannot predict bubbles in various markets that keep appearing and have devastating effects on the economy when they burst then that model is not very useful. On the other hand, if we understand that such bubbles can occur than maybe public policies that act to prevent such evolutions are desirable: for example, counter cyclical monetary policies like raising interest rates when the economy grows strongly.

Moreover, economic theory doesn't question the morality or rationality of our goals. For example, in U.S. under free market conditions it is clear that not all people will have health insurance. The fact that a society may choose to offer health insurance to all its citizens it's not an economic issue, but a moral one. Thus, the fact that the state collects taxes and redistributes money to achieve such a goal should not be seen as an interference with the free market, but as an voluntary action of that society. This particular example of health care was acknowledged even by Hayek in his Constitution of Liberty as a legitimate case where the state might play a role in the economy.

The free market theory says that given certain assumptions an equilibrium state is reached, having the expression of the equilibrium price of a good. However, it is important to notice there can be many possible equilibrium states. Some of them might be more desirable than others (for example having fewer unemployed people, or having universal health insurance, avoiding financial meltdown), so in this case the intervention of the state in the economy is acceptable. The same argument applies when talk about ecology and global warming. Although some say that no intervention is necessary cause the free market will lead us to an equilibrium state, what if this state is one where life is no longer sustainable on Earth? We'd better make sure that the equilibrium state where our environment is heading is one where we can also live around.

Space garbage

In the last 50 years the space exploration changed our lives: think only about GPS and satellite communications. But what happens with the satellites that are no longer in use? Some of them (the bigger ones) are driven back towards Earth and they burn in the atmosphere. But most of them are just left orbiting around the Earth. Thus the new place where garbage accumulates is in the space around our planet. This is more and more a concern because this kind of garbage can hit at any time a functional satellite or the ISS producing significant damage as satellites are designed to be as lite as possible, not resistant at impact with other objects. So now DARPA started to investigate ways to remove this garbage. Some more details here.

GDP to be replaced as a measure of well being

For a long time most of the people looked at GDP as the measure of well being of a country. This is misleading from at least 2 reasons in my opinion.
First, as the GDP measures what is produced inside a country it measures as positive output the work done by the firefighters after a fire, or the medication bought to cure an illness also contributes to the GDP. But the negative consequences of these events are not taken into account.
Secondly, we arrive at a state where the consumption is encouraged in order to increase the GDP. As we consume more, the GDP increases, people have jobs and everybody is happy. But the environment degradation (pollution and resource depletion) is not taken into account anywhere in this equation.

A number of organizations proposed alternative ways to measure "user satisfaction" and also the state of the environment so we can have a better picture of the real state of a particular region. See an example of such measures here.
The European Commission is heading in this direction too and it will investigate alternative ways to GDP of measuring the development of a country. I hope this trend will catch with other countries too, so the governments get rid of this obsession of increasing the GDP at any cost.