10/23/2009 05:12 am ET | Updated Nov 17, 2011

Practical Economics 101

I am not an economist. Thank goodness. This is not a good time to be one. There is a wonderful overview of the field, "How Did Economists Get it So Wrong?," by Paul Krugman in the New York Times. The bottom line is that the current situation "which nobody could have predicted" was predicted and it doesn't take an economist to know that:

* Nothing goes up forever,
* People aren't always rational,
* We should learn from the past, and
* The "house" always wins.

With all the theoretical back and forth between the various "schools" of economic theory, one word jumps out at me: "technocrat". A technocrat is someone who is more committed to his or her formulas, theories and procedures than to people. These usually faceless bureaucratic bio-machines pride themselves on their ability to "stay the course" even when we're in the toilet. Technocrats will always argue why their policies and leadership should have worked and (at least to my knowledge) they have never been known to admit they were simply wrong or, more often than not, didn't know what they were talking about.

Krugman divides the world of economists into two camps: the "freshwater" folks, from the Midwest, and the "saltwater" folks, who are mostly from the Ivy League. The "freshwater" economists are pure market fundamentalists, think recessions -- like forest fires -- are good things, and believe (above all) that human beings are rational when they buy and sell assets. In the other camp, we have the "saltwater" folks, who are mostly neo-Keynesian and believe that some "management" of the markets is appropriate because recessions are bad things sometimes caused by factors outside the "rational" market and that people aren't always that rational anyway. President Obama is listening mostly to the '"saltwater" people.

The main point of Krugman's article is that everyone (including almost all of the economists) were blindsided because they fell in love with their models (the mathematical ones) and were more interested in the academic pecking order and being right about their points of view than they were in exercising leadership on the financial playing field. The result of their blindness: millions of families living in fear and facing very hard times, widespread erosion of confidence in our institutions, and, perhaps most alarmingly, an expanding fragmentation of our society between conservative and liberal views in which reconciliation becomes more and more difficult with each passing day.

Why This Blindness?

I think it has more to do with philosophy and the nature of our worldview than anything else. Very smart people do very stupid things when they are trapped in a point of view that is inconsistent with what is occurring in the larger world. Consider some of these famous quotations:

1. "Sensible and responsible women do not want to vote." -- Grover Cleveland (1905)
2. "Who the hell wants to hear actors talk?" -- Harry M Warner (1924)
3. "I think there is a world market for about five computers." -- Thomas J. Watson (1943)
4. "This 'telephone' has too many shortcomings to be seriously considered as a means of communication and is no value to us." -- Western Union Memo (1876)
5. "We don't like their sound and guitar music is on the way out". -- Decca Recording Company rejecting the Beatles (1962)
6. "640K ought to be enough for anybody." -- Bill Gates (1981)
7. "There is no reason for any individual to have a computer in their home." -- Ken Olson, CEO of Digital Equipment Corporation (1977)

These examples are statements made by smart people. There are, of course, thousands more examples. I am sure "experts" would have proclaimed that Arthur Anderson or Enron going out of business overnight was "impossible". I am certain others would have said the same about Bernie Madoff getting away with a $50-billion swindle. The corridors of history are lined with miscalculations and mistakes made by those we pay to know better and who, through greed, hubris or just plain ignorance, lead us down a path toward destruction and tragedy.

The blindness of these people, like everyone's blindness, is a product of being trapped in a self-referential worldview in which they cannot distinguish between what they believe and the possibility that they could be totally blind. They are trapped in a form of denial of any other perspective than what they already think is the case. They end up making disastrous decisions that could have been avoided if they'd had the vision or the humility to at least consider another possibility.

This is not just a lesson for our leaders. In a world that is changing faster than we can follow, in which solutions are obsolete before they are implemented, and in which knowledge is becoming obsolete before we learn it, can any of us afford the arrogance to operate as if our point of view is the truth? As with any form of denial, the only sure way to find out if we are in denial (or not) is to take the point of view that we are -- to accept the premise that we are blind and then, from that perspective, test our assumptions about the world and ourselves and see if we still hold onto our most cherished beliefs and to the past.

In this rapidly changing reality, anything is possible -- the demise of great corporations, nations, and even entire fields of endeavor. We cannot tell if we are witnessing the end of this branch of social science, the field of economics, right now. Whether it recovers as a discipline that has value and power and that can be trusted remains to be seen. The question we should be asking ourselves at this time is, "Where do we stand as individual human beings when we can no longer trust our predictions of the future, when we have lost trust in our institutions, when we have no one left to blame but ourselves?"

A good place to start to answer this question is with another, more fundamental, choice: "Do we stand alone or do we stand together?"

© 2009 Jim Selman. All rights reserved.