The falling stock market indices were important enough this morning to take over the above-the-fold front page of the San Francisco Chronicle, saving readers the trouble of searching for the Business section. Since this is a global phenomenon, it also took up most of the first quarter hour of Newshour on BBC World Service Radio. All this is entirely understandable, particularly among those of us who realized that, where “official” reports on the economy were concerned, “recovery” was just another one of those words that had succumbed to loss of meaning.
Even if money itself is little more than a fiction of convenience, I continue to be surprised by the capacity of leading economists to keep living in their own fictional world while the rest of us have to endure reality. A case in point is Olli Rehn, Economic and Monetary Affair Commissioner for the European Union, whose words were broadcast on this morning’s Newshour. They may now be found on the BBC News Web site report in the following paragraph:
Earlier, the EU's Economic and Monetary Affairs Commissioner, Olli Rehn, said he thought the movements were "incomprehensible" and "not justified by the economic fundamentals", particularly in Italy and Spain, the latest focus of investors' concerns.
I hope that his use of the word “justified” is only a sign of a weak command of the English language, rather than a failure to appreciate the true nature of economic fundamentals. After all, those fundamentals are no different from the laws of physics. The laws of physics are not, strictly speaking, laws, in the sense of injunctions that nature is forced to obey. They are simply our own efforts to describe, both efficiently and effectively, the generalities and patterns in how nature behaves. When we encounter a situation that puts one of those laws in question, as was the case with the results of the famous Michelson-Morley experiment, designed to measure and detect the flow of the ether, then we revise the law to accommodate new data, rather than give the data a stern talking to for disobeying the laws.
In this respect economists are no different from physicists. They observe the behavior of markets and try to find patterns in what their observations. Rehn’s use of the adjective “incomprehensible” means that he has encountered data that do not fit into any of the patterns at his disposal; but he makes it sound as if the data are beyond his capacity to revise existing fundamental principles. If he is so rigidly locked into his current set of fundamentals, then he should take down his shingle; he no longer deserves to be called an economist. Had Michelson and Morley not appreciated that the laws of physics needed revision, the Einsteinian equations of special relativity might not have been accepted as readily as they were.
There is, however, one critical difference between economics and physics. Faced with the prospect that there was no place for the ether in the laws of physics, many physicists may have been upset; but the best of them just went back to work collecting and examining data. When stock markets go into free fall, there is a general public that is not particularly interested in the time-consuming efforts of data analysis. They just want the crisis to stop. They are less interested in an economist who works like a good physicist and more in one that has the makings of a successful witch doctor. (Recall the “voodoo” metaphor during the Reagan years.)
When it comes to dealing with crisis conditions, Ludwig von Mises may be one of the few whose head was in the right place. His treatise on economics comes close to a thousand pages long; but A Treatise on Economics is only his subtitle. His title, which sets his priorities, is Human Action. Today’s economists are so obsessed with data drawn from markets that they have forgotten that the process is ultimately one of how people involved with those markets act. This “cultural amnesia” is a greater cause for fear than fear itself, because it confronts those who claim authority with the prospect that their claims have little, if any, substance.