Friday, January 9, 2009

Cargo Cult Economics

In a chapter of Nobel prize winning physicist Richard Feynman's book Surely You're Joking Mr. Feynman! he discusses junk science and relates it to a tribal phenomena known as the cargo cult.
In the South Seas there is a cargo cult of people. During the war they saw airplanes land with lots of good materials, and they want the same thing to happen now. So they've arranged to imitate things like runways, to put fires along the sides of the runways, to make a wooden hut for a man to sit in, with two wooden pieces on his head like headphones and bars of bamboo sticking out like antennas--he's the controller--and they wait for the airplanes to land. They're doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn't work. No airplanes land. So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they're missing something essential, because the planes don't land.
In other words, rather than understanding and initiating the fundamental cause of some effect the cargo cult imitates the form of the causal process in the hope that it will bring them the actual effect. In this case, the islanders created an imitation airport in the hopes that it would result in actual goods being brought by airplanes. In the same way, Keynesian economists can be thought of as cargo cult economists.

Everywhere we hear the Keynesian doctrine that in order to restore economic prosperity, we must encourage spending. If only people would spend we would be OK. The Fed is lowering interest rates to zero in order to encourage lending. Obama is proposing to spend hundreds of billions of dollars to "restore" economic growth. Naturally, the money for these programs will be created out of thin air by the Federal Reserve when it purchases Treasury securities with fake money.

In a simple barter economy, you would not think to offer nothing for a good that you desire. You would offer something that you own or have created. In reality, nothing changes when you introduce a medium of exchange (money) in order to simplify transactions. In order to actually spend money, you must produce something and offer it as a value for a value. In other words, spending or "demand" is a consequence of production. Your demand is your supply which is in essence
Say's Law.

Notice that the cargo cult economists try and imitate the form of a valid economic transaction by advocating the creation and expansion of paper money. When the government prints paper money and offers the paper dollars for goods and services, it appears that someone has produced wealth and is exchanging it for an equal value. After all, in the past, when the paper was backed by real wealth (gold), it was observed that there was a lot of paper money around. So, just as the cargo cults fabricated control towers and runways in the hope that it would bring real goods, the cargo cult economists believe that by creating paper money with fancy ink and stamping a large number on it, wealth will result. But just as the "planes don't land" for the islanders, creating paper money does not create goods.

I must go now. I created a cardboard gas pump, and I'm going to check to see if gas appeared yet.

7 comments:

Kendall J said...

Doug,

Great post! A great way to illustrate the reversal of cause and effect in this whole stimulus craze.

I don't know of any other way to reach you. Can you email me at: kendalljobj at gmail dot com? I have a couple of items I'd like to discuss with you.

Kendall J

Beth said...

Nice post.

Have you listened to Ridpath's lecture on Gold and Keynes? He has refers to the Cargo cult--pointing out a parallel to the Keynesian attempts to bring goods into existence by throwing paper.

Doug Reich said...

Hi Beth,

No I have not heard that lecture. I have a physics background so I have been a great fan of Richard Feynman's books, and I thought the example was perfect. I will have to check out that lecture. I'm a big fan of Dr. Ridpath too. Thanks for the heads up.

IceManSaul said...

I've also noticed another way in which Keynesian economics is a cargo cult. Only the cargo they are seeking is the certainty, precision, and prestige of science, and the methods they mimic are the mathematical models and scientific sounding theories.

Obat Aborsi said...

nice post mrs

Windy Wilson said...

What IceManSaul said so long ago, graphs without numbers. That was my frustration in Economics 201 or whatever the number was, in College. Graphs without numbers. Claimed relationships without any proof beyond a sort of hand-waving and a confident delivery.

And here again, in yet another election cycle, it's the Cargo-cultists who are the leading candidates for both parties.

Unknown said...

Concise and informative. Have you done a write up of Bitcoin as a future currency? Reading about the cargo cult again has filled my mind back up with criticisms. The online community seems divided, especially when it comes to the issue of "it isn't backed, how will it survive?" Not many people can argue that point cogently. I'd be interested to see it try to hold together in a model that extrapolates the history of money devaluation and frames it against the perfect modern context argued by Bitcoin proponents. Thanks again for the article :)