The Illusion of Intelligence

If you scan the news each day, one can’t help but get the feeling that we are being inundated with idiotic ideas from all sides. From the lunatics in ISIS who are supremely convinced that they are doing God’s work, to the ignorant politicians who think that we can just build walls everywhere to keep the bad people out, to the moronic economists who seem to believe that all of our deficit spending and quantitative easing is actually making our economy better.

Additionally, if you visit any of the thousands of chat rooms on the internet, you will undoubtedly come across a seemingly endless supply of dentists, plumbers, web designers, etc., who are more than happy to share their ignorant views on religion, economics, politics, etc. In some ways, it seems as though our world may actually be getting dumber by the minute.

The truth, however, is that life has always been this way. One simply needs to spend a little time studying history to find that our ancestors were just as confident in their own idiotic beliefs as the people of today are. After all, many of our ancestors whole-heartedly believed that the earth was flat, that slavery was perfectly acceptable, that powered flight was impossible, that you could heal a person by draining blood from them, and the list goes on and on.

In fact, if we could build a working time machine and travel throughout history asking people “On a scale of 1 to 10, how confident are you with mankind’s overall understanding of the world?”, what we would inevitably find is that the average answer would be the same no matter what time period we visited. In short, we would find that all of our ancestors were just as confident in their beliefs as people are today.

After all, our ancestors didn’t write “Well, gee, I dunno. Maybe the earth is flat??? But we’re so dumb that there’s really no way to be sure.” Instead, they were so confident in their concept of a flat earth that they would routinely punish anyone who suggested otherwise.

So why is this the case? Why do people who seemingly have almost no understanding of how the world actually works develop such a strong sense of certainty that they actually do?

In order to understand why this is the case, we need to examine some of the lessons we have learned from science about the nature of “reality”. Throughout human history, mankind has generally accepted the idea that there is a reality outside of us and that we look out onto this reality and record images of it into our brain. To the contrary, relatively recent advancements in science have shown us that this is not the case at all. Science has in fact shown us that what we call reality is actually a crude model constructed by our mind.

This may sound a little far-fetched, but it is really quite simple to recognize. After all, when you look out onto the world you should be aware that you don’t see “everything” that is out there. You don’t see the millions of bacterial cells crawling all over your body; you don’t see the dead skin cells falling off your body; you don’t see the waves of electromagnetic radiation traveling through your body; you don’t even see the air as it enters and leaves your body.

We could then take what we have learned from science to go even further. When you look out onto the world, you certainly do not see that the world is constructed of tiny electrons, protons, quarks, etc.… Or that most of the “stuff” we are made of is just empty space. You certainly cannot see that if we removed the empty space from our bodies, the entire human race would fit into an area the size of a sugar cube.

The simple fact of the matter is that we do not see the world as it really is. Instead, what we call “reality” is actually a highly simplified model constructed by our mind. The crucial point to recognize from this is that because our ideas and what we call “reality” are one and the same, no matter how ignorant, short-sighted or self-serving an individual’s ideas really are, from the individual’s perspective their ideas will always appear to do an effective job at describing reality (because their ideas are merely describing themselves). Thus the individual is easily fooled into believing that their ideas are “true”; that their ideas are describing the world as it really is.

This is the simple reason why our ancestors were overly confident in their naive view of the world and why there are so many people today who are overly confident in their own ignorant beliefs. This is why religious lunatics are supremely convinced they know God’s thoughts. This is also why there are so many people in this country who are absolutely certain that they know what is wrong with our economy. This is also why scientists are constantly being deluded into thinking that they are always on the verge on some profound breakthrough (i.e. that they have located the God particle).

By failing to understand this, mankind is constantly being fooled into believing that we can “solve” problems like ISIS without addressing the actual source of the problem. In short, the only way to solve the ISIS problem is to also solve our science problem and our “dentist who thinks he is an economist” problem or our “plumber who thinks he understands racism” problem or our “saving is good for the economy” problem.

These problems will not be solved by policy, or by psychology, or by “getting involved” or by disseminating the “proper information”. Instead, we will only overcome these problems by recognizing and understanding the illusion of intelligence created by our thought process.

#HumanBeingsAreIdiots

Myth: Low Prices are Good for the Economy

Once again, here is another ignorant idea about our economy that your average 4^th grader could recognize as being untrue. To see why I say this, let us assume that you sell pumpkins for $5.00 each and I want to buy one from you. How would you change the price of the pumpkin so that the resulting change would be “good for the economy"?

It should be painfully obvious to you that it is impossible to do so. No matter which direction we move the price, as good as the change is for one of us, that change will always be equally bad for the other. So, if the idea of low prices being “good for the economy” is so obviously not true, how is it that so many people believe so strongly in it? There are several reasons, but we will only focus on two of the main ones.

First of all, the economy is so large and so complicated that it is not clear to the average consumer what the impact is of his/her purchase decisions. So whenever a consumer “saves” some money on their purchase, they cannot see who is actually taking the “loss” on the other end.

Secondly, due to a complete lack of any meaningful economic training in our educational system, the average American is completely unaware that there is a huge difference between looking at the world from a business perspective and looking at the world from an economic perspective.

Looking at the world from a business perspective only requires you to look at the world from a singular perspective; that is, from the perspective of one business, one household, one individual, etc. In each of these cases, income and expenses are separate from each other. So if you are a baker and the price of flour goes up, then that is “bad” for your business because your expenses just went up. On the other hand, if you can raise the price of the bread that you sell, then that is “good” because your income just went up.

In contrast, when you are looking at the world from an economic perspective, you always have to look at things from multiple perspectives. From the standpoint of the economy as a whole, there are always two sides to every price. On one side of the price tag you have income to the seller and on the other side of the price tag you have an expense for the buyer.

So from an economic perspective, if the price of flour goes up, it will be bad for the baker, but good for the flour maker. If the price of bread goes up, it will be good for the baker, but bad for the consumer. So overall it is not clear if a price movement is good or bad for the economy because one side’s gain always appears to be the other side’s loss.

Unfortunately for all of us, due to our weak educational system, most Americans are only capable of looking at the world from their own singular perspective. Therefore, they tend to naively assume that price movements are either good or bad; they tend to assume that a price increase is “bad” (because it appears to be bad from their individual perspective) and that a price decrease is “good” (because it appears to be good from their individual perspective). Not surprisingly, these people have been easily fooled by big companies like Wal-Mart into believing that “low prices are good for the economy”, simply because low prices appear to be “good” for them as an individual consumer.

What everyone needs to understand is that prices are like a thermometer. A thermometer can provide us useful information about a patient, but it will not affect the health of the patient; that is, a thermometer is not going to make you sicker or healthier.

Similarly, prices can provide us useful information about what is going on in the economy, but they do not drive the economy. So lower prices are not “good” for the economy and higher prices are not “good” for the economy. The different price levels simply relay information to us about what forces are at work in the economy.

#EconomistsAreMorons

The Hidden (yet obvious) Stimulus Program

If you have been following our economy at all in recent months, you will have undoubtedly heard how many economists and other supposed economic experts have been a bit puzzled by the continuing strength of the American consumer. Despite all of the carnage in the emerging market economies and the dramatic collapse of the oil industry, consumer spending here in the states continues to be quite robust. The truth is that the only thing that is surprising about our strong spending is the fact that so many people are surprised by it.

For the past several decades, the Baby Boomers have been doing all that they can to try and set aside enough money for their retirement. In addition, the government has been setting aside trillions of dollars earmarked for their retirement within our Social Security system. All of this saving has robbed the economy of much needed demand.

To help offset this demand reduction, our financial system has been creating a tremendous amount of debt. By borrowing the savings of the Boomers and spending it in our economy, borrowers are able to restore much of the demand that was lost due to the saving (at least temporarily).

Now that the Boomers are finally retiring, “true” demand is being restored to our economy. I say “true” because it is demand that is coming from savings and not from debt; thus it does not need to be paid back.

In short, millions of Boomers are finally retiring. Therefore the government is mailing out millions of Social Security checks every month. And the number of checks keeps growing every month!

In essence, the government is running a multi-billion dollar stimulus program every month. The government is mailing out billions of dollars, almost all of which will be spent directly in our economy. And this is only the spending coming from Social Security. There will also be billions of dollars of private savings spent in our economy as well. The fact that nobody seems to be talking about this is truly bewildering.

All of that spending is restoring much needed demand and helping to create thousands (if not millions) of jobs in the areas most utilized by seniors: healthcare, personal services, travel, entertainment and leisure, etc… Of course the obvious problem with this scenario is that when the boomers die, the stimulus program comes to an end. So all of the healthcare and service jobs being created to support the retiring Boomers are essentially just long-term temp jobs that will go bye-bye right along with the Boomers. But hey, why worry about a potential crisis now when it is so much more exciting to wait for it to land on our doorstep!

#EconomistsAreMorons

The Economy is not a Business

As hard as it may be to believe, people have not always believed that the main goal of a business is to maximize its own profits. In fact, the idea wasn’t really introduced in this country until the 1970s; and wasn’t widely adopted until the early 1980s.

Since then, corporations have been extraordinarily successful. Corporate profits as a % of GDP went from around 6% in 1980 to around 11% today. The number of corporations filing for bankruptcy each year went from an all-time high in 1987 to near an all-time low today. The Dow Jones stock average went from about 2,000 in the early 1980s to around 17,000 today.

Despite all of this corporate success however, our economy in general has not fared nearly as well. Real GDP growth rates in the 1980s averaged around 3.1%, while they have only averaged around 2.0% since 2000.  And while corporate bankruptcies are way down, personal bankruptcies have skyrocketed. In addition, the share of our national income that goes to the middle and lower classes actually shrank from 72% in 1971 to around 52% today. And the percentage of adults in this country who own stocks is at an all-time low.

So why the disconnect? Why has the overall economy struggled so much while our corporations have been so successful? The problem is that our educational system does not do an adequate job of teaching people the fundamental difference between a business perspective and an economic perspective. Because of this, most Americans have been fooled into thinking that since the economy is full of businesses, if we just do what is best for each business, then it will automatically be good for the economy. This is simply not true.

From the perspective of a business or individual, income and expenses are COMPLETE OPPOSITES. Income is money coming in, while expenses are money that is going out.

From the perspective of the economy, income and expenses ARE THE SAME THING. One person’s income is ALWAYS another person’s expense (If I buy a cupcake from you, your income is my expense).

So we have trained all of our business leaders to focus on maximizing their own profits, and they have been very successful at doing so. The problem is that while the idea of maximizing profits makes sense from a business perspective, it makes ZERO ECONOMIC SENSE.

In business terms, maximizing profits is the same as maximizing your income while minimizing your expenses. However, in economic terms, maximizing income while minimizing expenses is the same thing as maximizing other people’s expenses while minimizing other people’s income! Gee, I can’t imagine why that might not be so good for the economy (or the middle class for that matter).

In order to truly turn our economy around, we need to start making decisions and implementing policies that actually make economic sense. And in order to do so, we must first educate everyone on the fundamental differences between running a business and running an economy.

A Simple Lesson in Economics

Ok, clearly we are in need of a simple lesson in economics. Even though our economy is full of businesses and individuals, running an economy is FUNDAMENTALLY DIFFERENT from running a business or running your personal finances.

From the perspective of a business or individual, income and expenses are COMPLETE OPPOSITES. Income is money coming in, while expenses are money that is going out.

From an Economic perspective, income and expenses ARE THE SAME THING. One person’s income is ALWAYS another person’s expense.

Because people mistakenly believe that the economy should be treated like a business, they are constantly being misled into pursuing economic policies that are doomed to fail.

In general, the Republicans mistakenly believe that we should try and lower expenses in order to improve our economy (i.e. cut taxes, reduce government spending, decrease corporate expenses, etc.). But you cannot decrease expenses without also decreasing somebody else’s income.

The Democrats mistakenly believe that we should simply try and raise incomes for the middle and lower class (i.e. raising the minimum wage, increasing spending on social programs, etc.). But you cannot raise incomes without raising somebody else’s expenses.

THE ONLY THING THAT CAN TRULY GROW OUR ECONOMY IS PRODUCTIVITY!! Unfortunately for all of us, most people are obsessed with things that have nothing to do with productivity (prices, taxes, profits, incomes, etc.). Thus our productivity growth has been very lackluster for several decades now. The only way to turn our economy around is to get everyone focused on the only thing that truly matters: PRODUCTIVITY!!

Please share with friends and family so we can restore some level of sanity to our discussions about the economy J