Episode #3: Economic Systems and Macroeconomics, Part 1

For episode 3, Crash Course is going big. This episode talks about different macroeconomic systems and the proper role of government, all in 10 minutes. There are a lot of things to unpack in this episode, so this review will consist of multiple parts.

The Factors of Production

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There is no better introduction to macroeconomic theory than by talking about control over the factors of production. Although the term was originated and defined by Adam Smith, Crash Course decided to quote Karl Marx for the same definition: Land, Labor, and Capital.

Free Marketeers might be upset that they attributed it to Marx, but it makes sense. Communists (and socialists for the most part) are often the ones who use the phrase “Factors/Means of Production,” and if you hear someone mention it in conversation, it’s more likely that they are a Marxist than a devotee of Adam Smith.

A Planned Economy

I got confused with Crash Course’s definition of a fully planned economy and its relation to Communism:

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In a planned economy, the government controls the factors of production, and it’s easy to assume that that’s the same thing as communism or socialism, but that’s not quite right. According to Karl Marx, “The theory of Communism may be summed up in the single sentence: abolition of private property.”

If the State owns all factors of production, and therefore owns all property produced from those factors of production, doesn’t that automatically eliminate private property? In other words, how does the public control over the means of production not create communism? What else could it be?

In fact, according to the Wikipedia entry on Communism, Communism is defined by the common ownership of the means of production. There is not a mention of private property in this definition because the absence of private property is the logical conclusion from the definition.

(However, I would accept that Marx’s Communist society is stateless, so Mr. Clifford’s mention of a government controlling the means of production would not be Communism)

A Free Market Economy

Crash Course gave an excellent definition of a free market economy:

In Free Market or Capitalist Economies, individuals own the factors of production, and the government keeps its nose out of this stuff and adopts a Laissez Faire or hands-off approach to production, commerce and trade.

This is, in my opinion, Crash Course’s best work yet. They continue:

In Free Market Economies, businesses make things like cars, not to do good for mankind, but because they want to make a profit. Since consumers, that’s me and you, get to choose which car we want, car producers need to make a car with the right features at the right price. Economists call this the invisible hand.

This is a great definition of capitalism, and one that emphasizes the consumers’ essential role in the process. Instead of focusing on a business’s desire for profit (a necessary element, but not what drives market successes and failures), consumers determine the market winners through their own preferences:

Scarce resources will go to the most desired use and they’ll be used efficiently, more or less. After all if a business is wasteful or inefficient, or makes something that no one wants to buy, then some other business will make a similar product that is either better or cheaper or both. If there’s no consumer demand for a product, resources wont be wasted producing it.

Businesses could not survive in a free market if they did not provide customers with what they wanted better than the competition. Crash Course also provides a look at the alternative: a centrally planned economy for consumer goods:

Assume instead that a government agency was in charge of deciding exactly which types of cars and cell phones and shoes to make. Do you think they could quickly respond to changes in tastes and preferences? If there was only one government monopoly producing cars, do you think they would be produced efficiently?

We don’t even need to speculate what this would be like because it has already happened. For example, during the Soviet Occupation in East Germany, automotive manufacturer VEB Sachsenring had a government-created monopoly on automobile production. Their product was the Trabant, the only car available to East Germans, and often considered one of the worst cars ever built. On top of this, due to the mismanagement of the factors of production, the waiting list for one of these cars was ten years.

Is there anything that the government must do because free markets won’t? Come back later for Part 2.

Episode #3 is Finally Here

Fasten your seat belts, this one has a lot to unpack:

A day late (a week and a day, really), but this one has enough content to keep CCC busy for weeks. I’ll have a response post up ASAP.

Upon first watch, what surprised you? What did you like? What disappointed you? Drop your impressions in the comments.

Is Macroeconomics Like Physics?

If you recall from the second episode, Mr. Clifford fires a shot at other academic subjects, saying Economics is the greatest of all time. Adriene chimes in with “Take that, Physics!”

As I was perusing the comment section, I expected to see some rebuttal from a physics student, and I was not let down:

Mr. Ehle here takes some swings back at the field of economics here, and there’s a lot of truth to what he’s saying. However, I think his major frustration comes from when he hears people treat economics as a natural science, instead of a social science.

A natural science (like Physics) uses empirical evidence and the scientific method to prove things. The repeatability of empirical tests is necessary for a conclusion to be deemed valid (for example, water will always freeze at 0ºC, no matter how many times you repeat it).

Unfortunately, the economy deals with so many actors making billions of independent decisions every day, so it would be impossible to create even two identical economic situations to confirm a theory. Economics does not have the advantages of physics where you can create a sterile laboratory environment to prove a hypothesis. Trust me, all economists wish this were the case.

Instead, economics is a social science, the study of humans interacting. Like sociology or political science, there is not a provable “right answer” that scientists can find from researching in a lab; there are only arguments based on theories that will predict what will happen.

However, some social scientists use positivist methods (using data and attempting the scientific method) to try to prove the correct theory. When you hear people say “The Great Depression proved…” or “The 2008 Financial Crisis proved…”, they are using real examples to suggest that scientifically, a particular economic theory is true.

The problem is that almost every economic school of thought can look at a global event and use it to suggest that their theory is true. Let’s take the 2008 financial crisis for example:

Keynesians: The financial crisis proves that the Federal Reserve was setting interest rates too high, since this caused the crash.

Austrians: The financial crisis proves that the Federal Reserve setting rates at all hurts the economy, since this caused the crash.

Marxists: The financial crisis proves that private ownership of the means of production hurts the economy, since this caused the crash.

Everyone can declare themselves the winner, but in the end it doesn’t prove anything.

Mr. Ehle is a hard scientist. He wants data and falsifiable hypotheses and the scientific method to back up claims. He wants to learn the facts about Macroeconomics. Unfortunately, Economics does not work like Physics because it is an entirely different field.

Besides, there is not an actual “greatest subject of all time.” That’s like asking for “the greatest ice cream flavor of all time.”

Karl Marx Bust on the Crash Course Desk

Things have been slow here at CCC since last week’s video was pushed back until this coming Wednesday, so I thought I’d take a second to point out something that someone in the YouTube comments noticed about the on-camera desk space at Crash Course:

Behind Adriene you can see a slot machine (I suppose signifying the seemingly random and potentially profitable possibilities in predicting the economy), an abacus (can’t really explain that; that’s more mathematics than anything), a safe or something with a red button (that can’t possibly be referring to Rothbard’s button), and a bust of Karl Marx.

Will we have a full episode dedicated to Communism and Karl Marx? Will there be other episodes dedicated to other economics schools of thought? CCC certainly hopes so.

*Also notice the standard black faux-wooden desk, which I’m pretty sure is from IKEA.

VidCon Delays Episode 3

Episode 3 was supposed to be released Wednesday evening, but as of today (Friday), we’ve still got nothing.

I tweeted at the co-hosts and show to see what the deal was:

@adrienehill @acdcleadership @TheCrashCourse any reason why CC economics #3 wasn’t released on Wednesday?

— CC Criticism (@CCCriticism) July 23, 2015

I received this response from Mr. Clifford:

VidCon is a convention for online video content creators and fans. YouTube’s top stars will be there, including Crash Course’s main producer and editor, Stan Muller.

The convention is from Thursday to Saturday, and I imagine Stan was preparing for it all week, so he didn’t get a chance to post the video, even though we are all desperately waiting.

Stan, did you know that you can set your YouTube channel to release videos at a specified time, so you don’t have to do it manually?

Don’t make me drop so low that I have to critique popular videos on behavioral economics, like this one. Behavioral Economics has about as much to do with real economics as does Home Economics (that joke is Bob Wenzel’s).

Crash Course Criticism has a wife and kids to feed here Stan. Don’t make them starve.

We’re counting on you.

Love,

CCC

UPDATE: Stan has tweeted that the next video will be up on Wednesday:

@cccriticism Next Wednesday. Tech trouble and VidCon conspired to create a delay.

— Stan Muller (@crashcoursestan) July 24, 2015

Robert Wenzel’s Critique of Episode 2

Surprisingly, Crash Course has not released their video for episode 3 yet. I’m pretty sure they record all of the episodes in advance, so I can’t explain why they didn’t release episode 3 Wednesday evening as per usual. Perhaps the topic of episode 3, which was mentioned in the last video to be “how economic systems contribute to differences between countries,” contained some errors, and they are fixing it last minute. I’ll try to get to the bottom of this by tweeting at the co-hosts and official Crash Course Twitter handle.

I’d like to take this time to talk about Robert Wenzel’s observations of the second video.

First, Bob also recognized the mediocre example of a pizzeria, where it isn’t so obvious that people have different skill sets, to describe specialization in trade. He recommends a clearer example:

[People] might become doctors, they might become lawyers, they might become creative movie producers. If they spend five years studying it and then ten years in the field, they’ve got a lot of knowledge. That’s a lot of intellectual capital invested in that sector, so it doesn’t really make sense for them to go to another field. In general, once someone starts down a road of specialization like that, it makes a lot of sense to generally stay in that direction.

Bob also mentions a school of economic thought that rejects specialization:

Karl Marx really didn’t understand specialization. He thought that there would be a society where in the mornings, someone would be making pizza, in the afternoon working on a farm, and later in the day, working at a construction site.

The Marxian idea, in fact, would work best in a pizzeria. One employee could very easily go from preparing the vegetables to making the dough to sweeping the floor without much difficulty. It would be much more difficult to switch from farming to telecommunications consulting.

It’s not that you can quickly put people from this place to that place to the next. It is knowledge of specific localities, it’s the knowledge that someone is familiar with doing something, it’s knowledge because someone has greater intellect or skills or whatever it might be.

I’m not a Marxist, but I would have liked for Crash Course to talk about different economic schools of thought on the subject of specialization. Am I right, comrades?

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