The great investor and writer Andy Kessler frequently points out that the failure rate among Silicon Valley start-ups is 90 percent. Every member of the economics profession would be wise to memorize the previous figure, and repeat it daily. If so, economists might come closer to understanding why they’re mystified by what they deem slow economic growth. And mystified they are. So much so that they’ve apparently given up.
According to New York Times reporter Binyamin Appelbaum, the theme that emerged from the Kansas City Fed’s Jackson Hole confab is that economists have ceased offering growth proposals. Appelbaum indicates that they’re playing defense now; floating ideas to allegedly ensure things don’t get worse. Having tried everything since 2008 (more on this in a bit), they’ve given up arguing about what they plainly don’t understand, or recognize. It almost renders the credentialed sympathetic in some weird, pathetic way.
And it’s encouraging. While the role of central banks (the Federal Reserve is the world’s #1 employer of economists) in the economy is vastly overstated either way, it’s good to see a routinely incorrect profession realize that it is nearly always incorrect. The first step to healing is recognition of the problem, or something like that.
While central bankers plainly don’t understand what drives economic growth, they need to realize that what they do has little to do with growth as is. Lest they or readers forget, central banks project their always overstated and rapidly shrinking economic influence through antiquated banks; banks arguably the least dynamic sources of credit in the world, and surely the least dynamic in the U.S. Going back to the Silicon Valley stat that begins this piece, does any sane person think banks have anything to do with the finance that drives this hotbed of innovation? This is a short way of saying that even if central bank economists actually had a clue, their doings would have little relevance to the economic sectors that actually power growth.
It’s also worth pointing out that Silicon Valley dynamism is likely not being captured by GDP, and other dopey numbers that central bankers follow. To understand the previous point, readers might consider how the 19th century introduction of coal as a source of fuel multiplied the productivity of workers twenty times over. And this was coal. Imagine what technological advances like the computer, internet, smartphone, and the GPS that is standard in modern smartphones have meant for individual productivity.
Yet the economists in Jackson Hole were busy self-flagellating about sub-2% GDP. Ok, but GDP is backwards. It rises when governments take our wealth and consume it, it falls when our productivity rates voluminous imports and foreign investment, and it rises when governments bail out sub-optimal producers like General Motors. GDP isn’t just backwards and wrong, it plainly can’t factor our enormous surges in productivity that spring from technological advancement. In short, the slow-growth laments of economists are the equivalent of one judging the quality of play in the NFL by solely watching games played by the New York Jets; the Jets the non-dynamic equivalent of the banks that central bankers still think relevant to economic progress.
Taking the above further, readers should never forget that the economics profession is near monolithic in its absurd belief that World War II ended the Great Depression. Oh yes, the horrid, sick-inducing process whereby armies in developed countries killed the customers of their countries’ top businesses around the world, whereby developed countries’ best and brightest were taken out of production so that they could be murdered and maimed around the world, whereby production of goods and services was halted to varying degrees so that it could be directed toward weaponry meant to destroy people and wealth around the world, whereby the division of labor that is the source of abundant production around the world was shredded in favor of murder and wealth destruction around the world, had an economic upside. The extermination of people and wealth constitutes growth to economists. In that case, how can they possibly lament a lack of what they once again don’t understand, or recognize?
Back to reality, economists would be wise to memorize the stat about Silicon Valley because it might turn on a light where there’s presently darkness. The most prosperous region in the world, one where economic growth is abundant, is defined by near constant failure. Here’s the reason why economists don’t get growth. They don’t see that the quickest path to it is experimentation, realization of information (good and bad) through experimentation, and the release of precious resources back into the marketplace when experiments fail. Silicon Valley succeeds a lot precisely because it fails a lot. Its “recessions” are the source of its strength, yet economists think the path to growth involves fighting recessions. It’s not just GDP that’s backwards.
Despite economy-cleansing slowdowns being the source of strength in booming parts of the world, at Jackson Hole former Obama administration Council of Economic Advisors chairman Jason Furman talked up government spending to allegedly make sure things don’t get worse. Ok, but when governments spend they’re extracting precious resources from the private sector only to centrally plan their use in politicized fashion. When governments spend there’s less experimentation, less information, and less in the way of precious resources being released to new stewards by the failures simply because government experiments generally aren’t allowed to fail.
Fed Chairman Janet Yellen talked up the dangers of bank deregulation, but as Silicon Valley reminds us yet again, it’s the total lack of regulation there that ensures intrepid experimentation, abundant information, and quick failure if the experiments come up short. Banks aren’t relevant to the U.S. economy for many reasons, but a major one has to do with the fact that they’re too regulated to die with the frequency that ensures the industry’s dynamism. Regulation is stagnation – for any industry – simply because industry sectors gain essential strength from the information-abundant failures.
Not only are economists incapable of recognizing what economic growth is (once again, they think war has a growth upside), they also propose policies that are inimical to the progress necessary for growth. The profession is near-monolithically confused.
But if it wants to matter, as in if it wants to stop retreating into defensive postures, it must realize that its problems are bigger than not being able to predict growth, or not being able to recognize policies conducive to same. Indeed, missed by economists is that the policies are the problem; meaning economists are the problem. “Economy” is just a word for people. People want things, but they can only fulfill their wants insofar as they supply first. Which means the answer to growth isn’t policy as much as it’s a reduction of the barriers to our natural desire to supply. Basically an absence of policy.
Which should cause one to wonder if economists will ever move beyond admitting they have a problem. They would have to acknowledge that growth is the natural human state, and “policy” is the only barrier to growth. If economists can realize the latter they’ll see that we don’t need them, and better yet that we’ll thrive without them. Economists need to recognize that the path to economic growth is an absence of economists.
This article was originally published on Real Clear Markets.
John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He’s the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics (Regnery, 2015).
