The failure of mechanistic economics

Monday, 20 February 2012

Hugo Salinas Price

The first requirement for successful action upon the physical world is correct information about the facts upon which we are to act.

The Wright brothers understood this requirement when they began their work to build a flying machine, because they began by a rudimentary but quite effective study of aerodynamics; they built models of wings and tested their behavior. They then proceeded to design a wing for their flying machine based upon the results of their tests and thus achieved a historic success in 1903.

As a result of the enormous successes which industry achieved during the 19th and 20th centuries, humanity has fallen in love with Physics, the study of the physical world. In the physical world experimentation is fundamental and provides reliable results, because in the realm of physics we can endlessly repeat any experiment and obtain exactly the same result every time.

We live in a world of truly dazzling successes: marvelous television, billions of cell phones, the Internet, fantastic air travel – the list is endless.

However, with regard to the condition of human beings, the record is not at all pleasing. Our world is in a state of bankruptcy; there is a growing popular dissatisfaction with political and economic arrangements; famine is apparent in some regions. The financial world is in total disarray. Humanity is not happy.

What has happened over the past couple of centuries is that the leading thinkers were seduced by the success of physics and fell into the mistaken idea that the principles that were so successful in the realm of physics were the same principles that could resolve human problems – a huge mistake.

If we analyze present-day economics and its sister, politics, we find that the basis of Keynesianism – which rules the world, today – is fundamentally an attempt to apply the principles of physics to a realm which is not governed by physics, but by the capacity of humans to choose: the realm of choosing, developed by the Austrian School of Economics and its up-dated version, expounded by the New Austrian School of Economics led by Professor Antal E. Fekete. See www.professorfekete.com

Physics quantifies: it measures, weighs and counts both time and quantity. It experiments and determines predictable relationships between physical causes and effects. The dismal failure of Keynesian economics which now engulfs the whole world has happened because the Keynesians have been determining economic policy on the basis of statistics, a process of measuring, weighing and counting. Then they have proceeded to experiment, as the physicists do, upon humanity; QE1 and QE2 have been, admittedly, nothing more than experiments.  The Keynesians have expected bright success from their “scientific approach” to economics, but as is clearly evident, they have failed miserably.

The fact is that there exist two different realms upon which human intelligence may operate: the realm of the material, physical world and the realm of human events: Austrian Economics and its sister, Politics.

Physics is the correct approach to dealing with the material world. But as soon as we wish to deal with the realm of human action, we are in an entirely different sphere, because humans can choose. There is no such thing as choice the physical world; it is a faculty limited to human beings.

Physics deals with the understanding of relationships between entities that have no choice. Therefore, the experimentation of physics reveals constants and predictable results, but Physics is helpless when the object of its study has a choice: if atoms had the faculty of choosing, Physics could have no atomic theory!

Since humans have the capacity to choose, economic theory based on the laws of Physics cannot deal with humans successfully. Constants are non-existent in the realm of human action because humans choose and are therefore unpredictable. Graphs are of little use, because they only show us something about what has taken place in the past, but as successful (and unsuccessful) speculators know, they don’t give us any certainty at all about what will take place in the future. Statistics are arbitrary selections out of an immense mass of historic data – all data are historic, as they register what has happened in the past - and are inevitably colored by the value judgments of the statistician as he selects what he considers the important data. Equations are useless and misleading, because choosing is about differences, and equations are about equalities.

“Sociology” – the brain child of August Comte – aims to reduce human behavior to a science, along the lines of the physical sciences, but as one wit said: “Just about the only thing Sociology has been able to discover is – that some do, and some don’t.”   Do what? Anything and everything!

And yet, this is what “Economics” today is all about: statistics, the search for constants and the elaboration of graphs. This is the approach of physics to a realm that is utterly beyond the scope of physics. Failure – the inability to achieve its objectives – is the guaranteed result of the application of Keynesian mechanistic economics to politics, because of the objects with which physics can deal successfully, none have the faculty of choosing, whereas humans can and do choose at every moment of their waking lives.

Combine mechanistic economics with the printing-press and digital money the world is forced to use, and you have the sufficient reasons for a collapse of civilization as we have known it. It is indeed very odd that a whole brilliant civilization can be taken down by the acceptance of a couple of false ideas.

email: hugosalinasprice@yahoo.com.mx