schools of thought – Crash Course Criticism

Episode #14 – Economic Schools of Thought

If you’re a regular reader of this blog, you saw the title of the thirteenth episode and thought it was too good to be true. Economic Schools of Thought? This might be the most important episode yet!

Personally, I think it was, as it does put the entire Crash Course series into perspective. I was really impressed with this video, so I’m going to start with the good things first:

Feathers in Your Cap, Crash Course

You do care!

First, it appears that Crash Course reads the comments section of youtube, something I’ve advised against doing in general, but it’s nice to see that Crash Course cares about its fans and what they want to learn about. Can you imagine if public schools were like this?

People are Often Wrong

Crash Course mentioned how all popular theories in science could be proven wrong.:

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In 1798 British Economist Thomas Malthus argued that population growth will outpace food production, so eventually humans will run out of food […] Malthus was wrong, dismally wrong.

Economic theories are constantly being proven, disproven, and revised. The problem is , when these theories are wrong, millions of people can be adversely affected.

Here is where Crash Course could have thrown in how Malthus’s theory inspired some rather terrible political policies (eugenics). I don’t think the numbers were in the millions, though.

Again, Economics is not a Physical Science

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Economics is not an exact science. It aims to draw conclusions about human behavior without the benefits of labs or perfect control groups. Economic theories reflect different attitudes about human nature, and those are likely to change over time.

Crash Course then goes through a the history of theories, including Communism and the Austrian School.

A Couple Critiques

I couldn’t let this episode go without pointing out a few (only a few though!) problems I had with the things said in the video.

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The Great Depression crashed the market economies of the world’s richest countries. It also dealt a devastating blow to classical economics.

This is true; however, something needs to be said about Monetary Policy here. Certainly many people saw the Great Depression as evidence that the market doesn’t work, later schools of thought (The Austrian School and to a great extent, the Chicago School) explain the Great Depression was caused by increased government intervention into monetary policy.

Communists would probably say the same thing when Crash Course mentions how Communism failed. They would likely argue that it wasn’t communism that failed, it was just that these regimes didn’t implement it the right way (although I admit I’m less familiar with these arguments so I might not do them justice).

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The Austrian School today argues that the economy is just too complicated to manipulate.

That sort of summarizes it, I suppose. I would say that the Austrian School argues that any artificial manipulations to the market (including the interest rate) create a less efficient economy that does not meet consumer needs as well as an economy free from intervention. Crash Course’s definition makes it seem like Austrians are economic agnostics.

Overall, this Crash Course video was fantastic. It introduced and explained (however briefly) different schools of economic thought, and more or less admitted that Crash Course teaches a specific school of thought, which combines Keynesianism and Classical Economics into something called New Neoclassical Synthesis. It’s almost like Crash Course admits that these videos are just, like, their opinion .

Crash Course Episode #8, Fiscal Policy and Stimulus, Part 1

Crash Course’s most recent video on Fiscal Policy and Stimulus has its ups and downs. The show’s hosts acknowledge the controversy surrounding Keynesian economics, but not before treating the ideas favorably. The show equates free market economics with antiquated (and wrong) medical science, and presents only two (both government-centered) economic policies as the potential solutions to national recessions. Let’s start from the beginning:

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Recessions vs. Unemployment

Crash Course spends the first few minutes of the video talking about what it means when a country is in a recession, followed by a brief history of recessions in post-WWII United States.

The episode notes that dips in the economy correspond with rising unemployment, and unemployment is linked to a number of other negative societal factors: namely suicide, domestic violence, and social upheaval.

Fortunately, Crash Course also mentions that unemployment is not the only potential monster to the economy. The show gives equal time to discussing the problems with inflation:

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High inflation can be just as bad. Rising costs wipe out savings and have been the root of protests and riots around the world…

…Many economists argue that policymakers should intervene in the macroeconomy in order to promote full-employment or reduce inflation.

Without directly saying so (at least not yet), the show implies that large-scale unemployment and inflation happen naturally, and government policy may be necessary to fix these problems.

As I wrote about in last week’s episode on inflation, inflation doesn’t just happen naturally in the market. Widespread price increases happen from new money being created and flowing through the economy. When Crash Course says “many economists argue that policymakers should intervene in the macroeconomy,” they should also clarify that government monetary intervention has already occurred, and now people are considering if fiscal economic intervention is necessary.

To give them credit however, they are correct that unemployment would still occur in a free market. All schools of economic thought would agree that as industries are constantly growing and shrinking, and people get laid off when their industry shrinks. The real question between schools of thought is how a very high unemployment rate occurs, and whether government intervention prevents this from occurring (or causes it to occur).

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Expansionary/Contractionary Policy

Before mentioning that what they are about to explain is debated between schools of economic thought, Crash Course explains Keynesian fiscal policy as generally agreed upon by economists. They later use examples from the 2008 recession to illustrate how this method of thinking is practiced in the United States, explaining away common objections to their example:

In 2009 the US government launched a huge stimulus program in response to the financial crisis. Despite that, employment and GDP both fell. That sounds like a failure, but the majority of economists think that the situation would have been far far worse without that stimulus.

I mentioned this in a previous post, but if a scientist declares his hypothesis to be true, and then despite their own contrary experimental results, still declares his hypothesis to be true, there’s no use trying to convince him. They will declare themselves the winner regardless.

Keynesian fiscal theory is based on two main assumptions: decreasing taxes and increasing government spending help the economy (and the reverse hurts the economy). Their own admitted problem is that helping the economy in this way requires the government to increase their debt, which will be paid back in better economic times.

Taxes hurt the economy. This is agreed upon by all economic schools of thought, even the communists. When you take away wealth from a people, what is left is worse off than before.

Government spending helps the economy. Freemarketeers may disagree with me here, but hear me out: government spending, per se, generally helps the economy. The problem is that government spending necessitates taxes in one form or another. Free market theory argues that money is better spent in the market than by governments, not that government spending (again, per se), doesn’t do anything good for anyone.

The problem is, you can’t have government spending without taxes, and while Keynesian expansionary policy may seem like you can have your cake and eat it too, issuing debt in the present is the same as taxing the future. Keynesian economic policy taxes the future for government spending and lower taxes in the present.

Since the increase in present government spending has to come from somewhere, this policy shifts spending from the future market to the current government. Since freemarketeers argue that any shift from the market (present or future) to government necessarily makes the economy worse off, freemarketeers oppose Keynesian fiscal policy.

So what’s up with the video’s comments on Austerity and the Multiplier Effect? Stay tuned for Part 2.

Like what I wrote? Hate it? Drop your feedback 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.”