Money Management and the Economy

Thursday, June 26, 2008

Economics as Ideology

You aren't smarter than the market. It really is that simple.

This is a quote from a CNN Money online report on the debate over whether we are faced with inflation:

'president of the Federal Reserve Bank of Cleveland and a voting member this year of the Federal Open Market Committee, explained in a speech last month.

"As consumers spend more money for higher-priced petroleum and agricultural goods," she continued, "they eventually have less money to spend on other goods and services. Other relative prices must then fall."''

Well yes, prices are falllng "relative" to oil and food. But this is a clearly a statement of ideology rather than evidence based science. And it is clearly wrong. As people have less to spend, they buy less and producers produce less and lay off employees who now have less to spend, creating stagflation. From that same article:

"Automakers Ford (F, Fortune 500) and General Motors (GM, Fortune 500) have slashed their production schedules as well, as consumers stopped buying the fuel-guzzling sport utility vehicles that were once a huge source of profits for Detroit. The loss of high-paying pilot and autoworker jobs will only add to existing weak wage and job trends."

The only prices that seems to actually be falling as preciptiously as gas and food is the price of people's houses. But that is hardly a response to inflation. To the contrary, inflation may be what finally stops the bleeding in real estate by pushing up incomes to a level that makes the inflated price people paid for their homes a few years ago affordable.

This discussion, however, reveals the real role of economists, whether Marxist or Capitalist which is to express an ideological explanation for the privilege of their preferred group. For Marxist economists that is workers, for Capitalist economists it is managers. You can see it in the popular economic theory that inflation isn't a problem as long as employees can't demand higher wages to pay them. Essentially higher prices aren't a problem as long as the money goes into the money managers pockets. It becomes a problem when it encourages employees to demand a bigger share of the pie. But then who pays economists? Who funds economics departments? The answer is those who manage most of the resources. And they get paid to justify the privileges that group enjoys as the natural law of science, rather than a choice we make as a society.