Why are we skeptical?
Skepticism is something which is close to my heart. It taught me a way of thinking that I have tried to carry throughout my life with a few minor alterations of my own along the way. I have – of course – learned interesting facts and information during this process, but the mindset more than anything has been a positive thing for me. The mindset of demanding evidence for every claim, of being suspicious of any fact used to back up these claims. We don’t always get it right, but that is the general idea.
But why would this be important? Plenty of people go through their lives without that mindset. Well, ask any skeptic this question and what you are likely to get is a very long list of people who have been hurt, lives destroyed and ended by misinformation. Misinformation in medicine, in science, in psychology. Quite simply, we are suspicious of claims because we know that bad information causes harm!
Secondly, we want to learn from one another. No one person, professor or student can know everything and all have something to teach one another. Skeptical groups provide a forum for people to share knowledge with one another. Things that they have found interesting that others might be interested in too. We are uniquely placed to make scary, complex sounding subjects like physics and medicine accessible to one another and thereby, reduce their mystique.
Taking away the mystique of a subject is key. When authority can dictate answers and truth itself by convincing people that the subject matter is beyond them, society is in real trouble. Once, writing itself was beyond people and we can all think of examples of the serious harm that caused. Physics and medicine are still seen as being beyond the understanding of ‘ordinary people’ and that is why we skeptics turn our attention to these subjects.
So why do we not look to economics with the same suspicion? Every day we are bombarded with truisms which have been abandoned by the discipline for decades. Myths which have caused suffering and misery on a scale that makes homeopathy look harmless. Not necessarily directly, but the suffering inflicted by many things, including homeopathy, is not direct. These myths are the starting point, the weak foundations upon which harmful actions are built.
We also have a duty to remove the mystique from this subject. To learn interesting facts and teach them to one another so that we can never be told that this subject is beyond ‘ordinary people’. There should not be a way for sellers of financial snake oil to demand that we trust their tonic because we couldn’t possibly understand how it is made.
What follows is a small number of economic myths which are still pedalled and deserve scrutiny:
1. Banks lend ‘reserve capital’
The idea that a bank loans out money that it has stored has never been completely true. In a digital age, it is perhaps less so. When you take out a loan or mortgage, the bank is not dipping into money it has in its vault in the same way as you might dip into money you have in your wallet to loan it to a friend. The currency is blinked into existence at the moment the loan is made.
It does not take a lot of reasoning to understand why this may cause problems. You want your £10 back from your friend because you have been deprived of it. If you had never owned it you might feel more comfortable with lending it to a particularly untrustworthy friend, or a particularly broke one.
2. Primitive societies used ‘barter’ before currency was invented
This idea comes from the founding father of economics, Adam Smith. It was pure speculation when he wrote it and it is now thoroughly debunked. Nevertheless, it still makes appearances in textbooks (and on the BBC where I have heard Robert Peston state it a number of times). The idea that I give you ten chickens for your cow would be just as absurd to a primitive civilisation as it is to a modern one. It is in fact far more likely that something like a ‘gift economy’ or even systems of credit were the ancestors of currency.
3. Nation states function like households
This is the only myth on my short list which has an ideological component to it. I will try to keep my own opinions out of it but I will probably fail. As a quick disclaimer, I am not advocating uncontrolled public spending or any other policy decision.
How many times have you heard of the need to ‘balance the books’, to ‘live within our means’ and so on? The comparison with a household budget is absurd, but this one keeps coming back. A list of all the differences between a household and a national economy would be long and laborious but here is a short one:
- Households cannot create money from nothing
- The inhabitants of a household usually have to leave it in order to generate income
- Members of the same household rarely have to compete for scarce resources
- Households cannot defend their economic interests by force
There are more things I could mention, but I will leave you to complete the list yourself.
The function of this post was not to give a comprehensive list of the misinformation that exists in economic discourse. It was simply to demonstrate that it is out there and hopefully to encourage you to spot more of it for yourself. As I have said, these falsehoods give rise to serious harm just as scientific falsehoods do and they need to be challenged in the same way.
I would like to ask the skeptical community to view economic claims with the same suspicion as they do scientific ones. Not to share social media posts on the subject without being sure of the truth of the claim. To demand evidence when claims are made in the same way as you would for any other subject. It is important that we turn our attention to this issue.