The problem with economics is that it sometimes gives the impression of being practically useful. As an academic subject its great virtue is in training the mind, a component of what Newman referred to as a liberal education, in the same way as latin used to be. For some time the mind training role of latin appeared to be being taken over by computer programming. That had the same hard, rule-based logic, and for most people who, three decades ago or more, learned Fortran or C and their various derivatives, there was the same lack of practical utility. Now, that role has been usurped by the study of economics.
Economics’ appearance of utility, beyond training of the mind, and beyond what common sense already provides, can have most unfortunate results. For example, the problems of recession and how to deal with them. The then government, being committed Friedmanite free market idealists and N word phobic, pumped trillions of taxpayers’ money into the economy to keep it buoyant. But it did so by funding banks which would otherwise have collapsed, and then tried lamely to persuade them to pass it on to real economy businesses so as to maintain employment. But the banks were reluctant to pass the money on because they needed to rebuild their own balance sheets, having themselves made such a mess of them. The phrase ‘quantitative easing’ was really bank balance sheet easing, and had limited impact on real business and real jobs beyond the financial sector.
Fisher’s famous equation, MV=PT, contained a grain of common sense that could have been helpful. In that expression M is the total amount of money, V the velocity of its circulation, P the price level and T the amount of monetary transactions. If money doesn’t circulate then V is zero and the whole thing collapses, which is what happened when banks just hung onto the quantitative easing. That’s the common sense in the Fisher equation. However, it gives the impression of being more profound and useful than that simple lesson about the circulation of money. But the fact is none of the components in the equation are actually measurable. So its relevance is wholly theoretical, and any attempt to apply it is only of practical use as training of the mind.
Much of economic theory is like that. In terms of real world utility, it adds little beyond common sense. Economic models of markets, or ‘the firm’, or indeed economic man himself, are unworldly abstractions dependant on all manner of unlikely assumptions to be internally consistent. And their application to real situations remains totally theoretical and useful only as components of liberal education. But, as Keynes noted, we are ruled by madmen in authority applying such theories to real world situations. The results are all around us.