Why Economics is efficient

I often heard Economics is a royal subject during my college days. But, all my friends were afraid to accept Economics as part of their course curriculum because Economics is very hard and full of mathematics. I might be persuaded  by a live stock inspector to purse economics during my teaching to his son.  And It was probably a coincidence that his friend is an economics lecture on same college where he taught me somehow ‘What Economics is all about’.

I’m a curious economist but I would like to rant today on an article Economics Does Not Lie by GUY SORMAN. He has beautiful defined how Economics is right or getting right to predict the future.

Guy Sorman has lightly focused on bad economic policies as dangerous as incurable epidemic  that deprived the millions of peasants getting their land right in Russia, China and Tanzania during twentieth century. He also focused on currency inflation and new policies that played an obstacle to the society at the beginning as people were unfamiliar.

No longer does economics lie; no longer would Baudelaire be able to write that “economics is a horror.” For the mass of mankind, on the contrary, it has become a source of hope.

If economics is finally a science, what, exactly, does it teach? With the help of Columbia University economist Pierre-André Chiappori, I have synthesized its findings into ten propositions. Almost all top economists—those who are recognized as such by their peers and who publish in the leading scientific journals—would endorse them (the exceptions are those like Joseph Stiglitz and Jeffrey Sachs, whose public pronouncements are more political than scientific). The more the public understands and embraces these propositions, the more prosperous the world will become.

1. The market economy is the most efficient of all economic systems.

Adam Smith’s eighteenth-century take on market efficiency was metaphorical, nearly metaphysical: he said that it seemed to be guided by an “invisible hand” that produced outcomes beneficial to society. In the mid-twentieth century, Friedrich Hayek observed that no central-planning institution could possibly manage the huge quantity of information that the market organized automatically and spontaneously by pricing resources.

Market mechanisms are so efficient that they can manage threats to long-term development, such as the exhaustion of natural resources, far better than states can. If global warming does become a real problem, for example, price mechanisms or a carbon tax would easily encourage a more efficient use of energy.

Some economists favor free markets not only for their efficiency in allocating resources but for political reasons as well, fearing that central planning or excessive bureaucratic controls could, in the guise of rationality, stifle individual freedom. Markets leave us “free to choose,” wrote Rose and Milton Friedman, and society is the better off for it—though not all economists embrace their libertarian political vision.

2. Free trade helps economic development.

As Smith observed when his native Scotland began to benefit from free trade, it is through access to the world market that poor nations become rich. …….Free trade not only generates the greatest possible growth; it tends to distribute it widely, both within nations and among them. For evidence, consider the emergence of vast middle classes in all free-market societies, as well as the economic convergence among nations that have embraced capitalist economics. After less than 20 years of market-driven growth, Brazil, China, and India—whatever their injustices—are closer to the Western level of development than they were before that growth got under way.

Today, most economists believe Adam Smith’s century old idea of free trade. Economic Think Tank like Adam Smith Institute is an advocate of free trade. There are numerous think tanks that urge how free economies help countries in mutual growth.

3. Good institutions help development.

Economics argue the importance of institution and organizational structures. Above all, our economy, society and the world is based on institutions and without good institutions, development is like a wild castle. Without an independent legal system, we can find many clashes among economic and social entities.

Institutions that improve market transparency are particularly important, since they counter what Nobel laureate George Akerlof calls “asymmetrical information.”

4. The best measure of a good economy is its growth

Growth is undoubtedly a currency to the economy. If there is no growth, economics is like a value less currency that the society does not require.

The Anglo-Bengali economist Amartya Sen, another Nobel laureate, has distinguished—usefully, to my mind—growth that takes place under democratic conditions from that which occurs under tyranny.

5. Creative destruction is the engine of economic growth.

Austrian economist Joseph Schumpeter argued in his book Capitalism, Socialism and Democracy (New York: Harper, 1975) about creative destruction (innovation) that “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

6. Monetary stability, too, is necessary for growth; inflation is always harmful.

We are governed by fool politicians who does not understand economics wisely. But, economics understand wisely if it is applied correctly by an independent financial body, central bank. Why Economics is so important, monetary stabilization and right economic policies to stabilize money supply and inflation are  core issues of the country.

The best way to restrain inflation, economists now understand, is to transfer money management from governments to independent central banks like the Federal Reserve and the European Bank, which—monetarists all, these days—try to create only enough credit to provide liquidity and prevent the financial panic that often accompanies credit crunches, resisting vocal politicians who believe that printing more would generate new jobs. Even in a slowdown, the banks seek to keep money stable in order to stimulate investment.

7. Unemployment among unskilled workers is largely determined by how much labor costs.

This year noble prize in economics goes to theory on unemployment. Management of unemployment plays an important role. If there is unemployment, economy can reach at equilibrium which simultaneously affects production, consumption and distribution pattern.

8. While the welfare state is necessary in some form, it isn’t always effective.

Economists recognize that government assistance always produces incentives that may affect, for good or ill, recipients’ behavior and well-being.

Indian Economist argues about welfare state. His book Capitalism beyond the crisis tells a different story.

10. Competition is usually desirable

Beyond that, there is no unanimity: some economists believe that under certain circumstances, a private or public monopoly may contribute to innovation or progress.

If economics, a human science, lacks the precision of physics, a natural one, it advances the same way—evolving from one theory to the next, each approximating a reality that eludes our complete grasp.

But if we understand the end of history in economics to mean the complete realization, in practice, of the findings of economic science, then it has not arrived. The free market still has enemies and critics, ranging from those who dream of a world more just, more spiritual, or transformed in some other utopian way to those who simply seek to defend their own narrow material interests to those legitimate researchers who try to look beyond the market.

Similarly, free trade means that some people will lose their jobs, as we all know; foreign competition can wipe out entire companies or even entire industries. We all know it because, as Friedman argued, layoffs and closings get disproportionate media coverage. Meanwhile, nobody talks about the ongoing reduction in prices for consumers and investors, scattered among a huge number of beneficiaries. That helps explain why politicians are prone to deride free trade and voters are too often ready to agree.

To help the losers in the free market, government shouldn’t back away from either free trade or creative destruction and start subsidizing doomed and obsolete activities, a protectionist course that guarantees only economic decline. Instead, it should help the losers change jobs more easily by improving educational opportunities and by facilitating new investment, which creates more employment. An essential task of democratic governments and opinion makers when confronting economic cycles and political pressure is to secure and protect the system that has served humanity so well, and not to change it for the worse on the pretext of its imperfection.

Still, this lesson is doubtless one of the hardest to translate into language that public opinion will accept. The best of all possible economic systems is indeed imperfect. Whatever the truths uncovered by economic science, the free market is finally only the reflection of human nature, itself hardly perfectible.

We can see, there is still some ineffectiveness that the world suffers like global currency crunch, depression..etc. Is it because we don’t understand it correctly or economics doesn’t understand the economist and society? It’s a tough question.

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2 Comments

  1. I like what you’ve done here. Mostly i like the component where you say you might be doing this to give back and looking at all the comments it appears that this is working for you as well.

  2. thanks for your comments.


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