Posted 8/6/2010

THE DISMAL SCIENTIST

One day in the first grade, our teacher asked us to stand and tell what our fathers did for a living. I think she said "occupation," but most of the kids didn't know what the word meant, so she had to simplify.

Being shy, I became progressively more nervous as the reciting kids got closer and closer to me. As my turn came, I stood up, trembling – and my mind went blank. The word "economist" flew out of my mind and up into the cuckoo clock. After some highly irritated prodding on the part of Miss Bloomquist, I stammered, "I don't know the name, but my mother said something like his doing 'dismal science'."

Miss Bloomquist got really mad, her sister being a science teacher at Patrick Henry Junior High. As I stood there forever, she ranted about smart-alecky kids and how science was something rational and pure. I don't even think she ever forgave me.

Not even when I said "fatigoo" instead of "fatigue" in trying to impress her with big words. Because I learned vocabulary as a reader and not a talker, I was always making the class laugh with pronunciation mistakes. In many ways, in my early days I came to think of English as a rather stupid, inconsistent language.

The kids in the class never got over my embarrassment. The called me "Fatty Goo" all through elementary school, even though I was a 49-pound weakling. Others called me "the dismal scientist," even though that was my father's occupation.

As I got older, I began to wonder why economics was called the "dismal science" and why it was ridiculed with expressions like, "Economists have predicted nine of the last five recessions."

I think all this is why I decided to major in economics in college. And now, years later, I have come to reject the term "dismal science."

What I have learned is that economics is not a science at all. Unlike mathematics and physics, which are full of laws and theorems, economics can only boast one law – the law of supply and demand. But even that one law doesn't work very well or very consistently.

In the 1940s and 1950s, Charlie Revson was credited with reversing the law of supply and demand by making and selling high-priced cosmetics under the Revlon label. He proclaimed that he wasn't selling cosmetics. He insisted he was selling "hope in a jar."

His products might not make you beautiful but they would get you noticed, which was the first essential step in finding romance. (Unfortunately, Charlie died, the accountants took over and started cutting costs. Before long "hope in a jar" got lost, and with it went price. Today Revlon is just an ordinary brand.)

Camel cigarettes, Coca-Cola, and Lux soap were just a few of the brands that reversed the law of supply and demand during the Great Depression. All easily outsold the cheaper competition.

The advent of national advertising created the phenomenon of "the premium brand" – one which leads its category in sales despite much lower priced competition. Think of Tide, Kleenex, Marlboro and Coca-Cola. Think of all the luxury brands which commanded unusually large sales and extraordinarily high profits – Mercedes, Lexus, BMW, Tiffany, Ritz-Carlton and Estee Lauder, to name a few.

All have obliterated the law of supply and demand. Apart from packaging and imagery, is there any real difference between Hershey's and Godiva? (Back in the 1980s, both received their raw chocolate from Baker's Chocolate, a unit of General Foods.)

Many other human factors make the venerable law of supply and demand unreliable at best. Consumer fears and anxiety about job security, income, debt and savings can substantially reduce consumer spending regardless of supply and demand conditions. Overconfidence can lead to debt-based purchasing and over exuberant spending. Witness the current housing market.

The largest single factor in economics is the human factor. The attitudes of consumers determine economic growth or decline.

Because economists are not trained in human understanding on either a macro or micro level, they are unable to accurately predict economic conditions. Limited to charts and theories, the economist resembles justice – blindfolded and getting the scales out of balance.

Ben Bernanke, Chairman of the Federal Reserve, is just one such economist. Having studied the mistakes of the Great Depression with great care, he was determined not to make the same mistakes during the Great Recession. Instead of reducing the money supply, a la President Hoover, he decided to greatly expand the nation's money supply by piling over $2.3 trillion on his books.

Theoretically, this would have allowed banks to expand the money supply by a factor of ten – or up to $23 trillion. Banks would borrow and lend, small businesses would create jobs by expanding, more start-ups would sop up the unemployed, big business would invest in capital equipment and start hiring, and the Great Recession would be over. Everyone would have a job again. For insurance, he backed the over $800 billion stimulus plan.

Then he sat back to watch the results of his handiwork.

But nothing happened.

The banks did not lend. The banks did not borrow. Small businesses could not get credit to expand and create jobs. Start-ups became dry-ups. Big business piled on the cash, then decided to sit on it. Stock buybacks and increased dividends sopped up the money which should have gone to new jobs. And real unemployment (unemployed, under-employed and the unemployed no longer looking for work) remains about 20 percent.

What went wrong?

A lot of things.

Consumers lost confidence with the housing collapse, the withdrawal of many 401(k)s, job loss, and job uncertainty among the employed. Bankers afraid of the creditworthiness of other bankers refused to lend. And the whole financial system seized up.

Consumers became even more terrified by the Government's piling up debt, which they believed to be unsustainable. Frightened families began to pay off their own debts and rein in spending.

Consumer fears were further stoked by all the economists who started screaming their version of "Chicken Little" – "Inflation!" "Inflation!" "Runaway inflation!" "Government debt will destroy the dollar and cause galloping inflation!"

But the economists worldwide simply did not understand the human factor in economics.

If bankers, businessmen and consumers would not spend, the money would not be used. And if the money would not be used, all those trillions would be dead letter – and entirely unable to create inflation of any kind.

Now those same economists, 12 months later, are running about screaming a new version of "Chicken Little" – "Deflation!" "Deflation!" "Falling prices!" "A sinking economy!" "We will be like Japan!"

Ben Bernanke still has his $2.3 trillion.

Last year economists were yammering about inflation.

This year the same economists are yammering about deflation.

Is it any wonder the world looks at economics as "the dismal science"?

Except that economics is not a science.

Economics is an art.

The art of understanding the human being in his monetary environment.

Unfortunately, they don't award Ph.D.s in that.

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