Unemployment, the NFL and the invisible hand

Much of the current debate about what steps need to be taken in order to improve the global economy is being complicated by the archaic, “mechanistic” ideology that currently dominates economic thought. Despite the enormous advancements made by science, most economists continue to try and understand the economy using a Newtonian view of the world. One in which the economy is like a giant game of billiards, where all of the elements of the economy are separate and move independently from one another.

Where, for every action, there are knowable and discrete reactions (i.e. if I strike the cue ball along a certain line with a certain force, then a certain outcome will always ensue). Thus, economists mistakenly tend to believe that for every economic action we take (ex: cutting interest rates, increasing savings, getting an education, etc.), there will be a specific and knowable outcome.

Of course, this mechanistic view of the world is a natural byproduct of our everyday experience with the world. Since we cannot directly see, feel or measure how our individual economic actions affect others, many people have naturally assumed that our individual actions do not, in fact, directly affect others. Because of this belief, most people naively assume that everyone in the economy has the same opportunities available to them.

This belief in turn leads to a very “self” centered view of the economy; one that is based on the short-sighted belief that each person in the economy should simply act in their own best interest. The line of thinking goes like this, if everyone in the economy simply takes the steps needed in order to achieve economic success, then everyone will succeed. Because we are all independent actors, the economic failure of any given individual must be due to either a lack of knowledge or a lack of effort on their part.

We can easily find examples of how this short-sighted line of thinking inevitably leads to the Fallacy of Composition. As just one example, let us assume we have an unemployed man named Joe who wants a job. According to the mechanistic view of our economy, if Joe gets an education (for discussion purposes let us assume he learns to write code) and works hard at his job search, he can find a job (which is more than likely true).

Because they mistakenly believe that all economic participants are unrestricted and independent of one another, people who follow a mechanistic ideology are naturally mislead into believing that an education and hard work will always lead to a job. In other words, if it is true for Joe, then it must be true for all other individuals in the economy, because they have the same opportunities available to them that Joe had.

Thus if everyone who is currently unemployed would all follow the same route as Joe, they will all find jobs and our unemployment rate will be 0%. Obviously this makes no sense whatsoever, because our unemployment rate could never get to 0% (for a variety of reasons). We might call this situation the Paradox of Employment, in that, what leads to employment for one person does not lead to employment for all.

Another, much more famous, example of how a mechanistic view of the economy naturally leads to a paradox can be found in what is commonly referred to as the Paradox of Thrift. This paradox is a natural consequence of the misguided belief that saving (i.e. the opposite of spending) is good for the economy.

Adherents to this belief tend to think along the following lines: let us assume that Joe saves 10% of his income; clearly this would be make Joe “better off” from an economic perspective. Thus, if everyone did what Joe did, they would all be “better off” from an economic standpoint. Therefore the economy as a whole would be “better off” if everyone saved more.

However, according to this logic, if everyone saved 100% of their income, they would all be even richer! But clearly this type of thinking is ridiculous because if there was no spending (i.e. there was 100% saving), then there would be no income and the economy would implode.

The reason why a mechanistic view of the economy always ends in a paradox/fallacy is that such a view fails to address the fact that the actions of each economic participant affects the opportunities available to all other economic participants. To avoid these paradoxical outcomes, we need to develop a more sophisticated view of our actions and the effect they have on the economy as a whole.

The reality is that the economy can be better understood by using an ideology that is based upon more of a Relativistic view of the world. One that utilizes the advancements made in science to help us understand how our actions directly impact everyone else in our economy, and vice versa.

By using such an ideology, one can begin to understand that the economy is somewhat like a game of billiards, but one in which there are billions of different sized balls on the table; and if we move any one of the balls in the slightest, all the other balls on the table will move at the same time. So, instead of just naively assuming each economic participant acts in isolation, we can begin to understand that every economic action changes the initial conditions for all other economic participants. Thus, the opportunities available to each of us are directly affected by the actions of all the other participants in our economy.

In order to develop a crude understanding of what this means, let us consider the National Football League (NFL) as an example of a highly simplified economic system. In the NFL, there are 32 teams that play 16 regular season games. At the end of the regular season, 12 teams qualify to play in the playoffs and the winner of the playoffs gets the Super Bowl trophy.

Let us assume that before the start of the next season every player in the league decides that they are just going to have fun the whole season. They decide that they will not go to any practices and they are going to go out drinking with their friends every night. What do you think would happen? Well, the play would be pretty sloppy, but at the end of the regular season 12 teams would still make it into the playoffs and one of those teams would still wind up winning the Super Bowl.

Now let us assume that the next year, all the players on one team (let us say that it is the Miami Dolphins) decide that they are going to try much harder. They make it to every practice and do not go out drinking every night. What do you think would happen? Since the Dolphins were so much better prepared to play football, they would naturally wind up winning the Super Bowl. From this, someone who follows a mechanistic view of the world would naturally come to the conclusion that it was their hard work that led to the Dolphin’s success.

To see why this is not the case, let us assume that the next year every player in the league decides that they are going to try much harder. They all make it to every practice and they do not go out drinking every night. Would they all win the Super Bowl? Of course not. At the end of the year, 12 teams would make it into the playoffs and only 1 team would win the Super Bowl.

The key point to recognize here is that the success of the Dolphins in year 2 was not just due to their own actions, but due to the relationship of their actions with the actions of all the other teams. By goofing around the entire year, the other teams changed the conditions of the system. Then, when they quit goofing around in year 3, they completely changed the conditions of the system again; they basically changed the “universe” of the NFL. In doing so, they changed the opportunity that had been available to the Dolphins in the previous “universe”.

The same holds for our economy. The actions of all of the other economic participants are going to have a profound effect on the opportunities available to you. In addition, their actions will go a long way in determining the success (or failure) of your efforts.

To develop a crude understanding of how this plays out in our economy, let us revisit the earlier example where Joe was unemployed. Given the current state of our economy, can Joe learn to write code and get a job? Instead of just naively saying that “Yes he can”, it is more accurate for us to assign a probability that his actions will lead to a specific outcome. So for purposes of our discussion, let us assign a probability of Joe getting a job as 99% (note: the actual percentage is not that important).

Since there is such a high probability of success, let us assume that Joe learns to code and gets a “good job” as a code writer. The key point to recognize here is that Joe’s actions lead to the development of an entirely different economic universe. Therefore, what appeared to be “true” in the “Joe is unemployed” universe, may or may not appear to be “true” in the “Joe learned to code and got a job” universe.

So, if we look at the next unemployed person (let us call her Kathy), and we ask, can Kathy learn to code and get a job? In order to answer that question, we first need to recognize that the initial conditions for Kathy are different than they were for Joe. Thus it is only reasonable to assume that the probability of Kathy finding a job has changed as well.

Since the number of available job openings dipped slightly when Joe got a job, it is only natural to assume that the probability of Kathy getting a job will also dip slightly. Let us say that it falls to 98%. Since there is still a very high probability of success, let us assume that Kathy goes ahead and follows that path as well. Once again, the economic universe has been fundamentally changed by Kathy’s actions.

So, if we look at the next unemployed person (let us call him Steve), and we ask, can Steve learn to code and get a job? In order to answer that question, we first need to recognize that the initial conditions for Steve are going to be different than they were for either Joe or Kathy. Thus, if we look at the probability of Steve learning to code and getting a job, we would find that the probability of doing so may slide down to 97% since Kathy took another one of the job openings; and on and on it goes.

Obviously this is an overly simplistic example, but it is only used to make a point. The point being that the probability of you getting a job is not only affected by your own actions, but is also directly affected by the actions of all the other economic participants. Not everyone can follow the same path to success. Each person’s actions essentially lead us to an entirely different economic universe; one in which the opportunities available for all other participants will be fundamentally different.

The simple fact of the matter is that every single action by every single economic participant fundamentally changes our economy. However, since each participant is so small and the economy is so large, the effects of each individual participant are not discernible to human beings. We simply lack the cognitive ability to be aware of the tiny (yet significant) changes that our decisions create.

Thus, from our perspective, the economy appears to be guided by something other than our individual actions; the economy appears to be guided by an “invisible hand”. But the only reason that it appears this way is because the effect of our actions is simply too small to be noticeable; there is no “invisible hand” that is actually guiding our economy.

It is also worth mentioning that as more and more people attempt to learn how to write code, the cost of obtaining that knowledge will more than likely rise (at least in the short term). More importantly, as more and more people acquire the code writing skill (i.e. the supply of code writers increases), the economic value of that skill will naturally decline. Therefore, if too many people pursue the code writing skill, the cost of acquiring the skill set will eventually outweigh the benefit derived from obtaining the skill.

In looking at today’s job environment, it is quite likely that we have already reached this crossover point for some skill sets. It is quite likely that there are some people who are already paying more for a college degree than it is actually worth.

Many people in this country either have a college educated kid living at home, or at least know of a family that has a college educated kid living at home. One of the main reasons for this is that the cost of a college degree has risen so much that many students leave college with a debt load that prohibits them from being able to afford to start a life out on their own. With more and more people attending college each year, this situation is going to worsen in the years ahead.

Of course, much of this flies counter to what many economists are preaching about our economy. Many economists ignorantly claim that education is the key to reducing poverty when we may already be at the point where the pursuit of more education may actually be leading to more poverty. By blindly listening to economists who preach about an outdated view of reality, more and more people are being misled into paying more for a college education than it is actually worth.

It may sound strange, but if everyone in this country worked really hard and was able to graduate with straight A’s from Harvard, we would still have millions of unemployed people and millions of people living in poverty. If this makes no sense to you, consider what would happen if you went for a job interview in such a world. The interviewer asks “So, why should I hire you?” You proudly stick out your chest and say “I graduated from Harvard with straight A’s!” The interviewer sighs, slowly looks up at you and says “You see all those people sitting out in the waiting room? They all got straight A’s at Harvard too. So why should I hire you instead of one of them?”

Can any one person lift themselves out of poverty? Yes. Because our economy is so large and the actions of one person are so small, there is no limit to what one person can achieve. Does this mean that every individual in our economy has unlimited economic potential? No. The more people that try to accomplish a certain goal, the more of an impact they have on the economy.

The point of all this being that, if we ever hope to truly improve our economy, the first thing that has to go is the outdated mechanistic view of the economy adhered to by many economists. As long as this outdated view of the economy continues to exist, we will be dogged by poor economic decision making.