Why OH WHY is economics so bleedin' awful, then?

Swimming the wine lakes and climbing butter mountains

Let's give two examples of what this means for the real world. There is one area where economics has made huge strides in recent years and that's in the design of auctions. We also have the more general, and long standing, idea that resource rents should flow to government, not to private economic interests.

Thus, when we look at a scarce resource like radio spectrum, government should be charging users for its use. We say they should maximise the revenue they get from this through a cleverly designed auction.

Yes, I'm aware that this meets a certain resistance around here but economists think it's absolutely great. Further, government organisations that use spectrum (like the Ministry of Defence) should be charged shadow prices for their use of this scarce resource. Sure, it's only book-keeping but it does concentrate minds wonderfully on whether they need to have quite so much of the damn stuff.

We can also apply such lessons more generally, say, to the economy of Venezuela. We can even work out why it's crumbling in such an alarming manner. No, it's not purely because the oil price has fallen. Nor is it because Chavez and/or Maduro are thieving incompetents, although that could possibly be true. It's because they followed entirely the wrong policies to achieve their declared goal.

Which was, remember, that Venezuela is too unequal and that the poor should be getting a larger share of the pie. Whether you agree with that idea or not is up to you but it's not an obviously terrible idea. It does rather depend upon how you do it, though. The way not to do it is to violate the principles of microeconomics; that is, the bits of economics that we think we've got right. That being precisely what they did do of course.

So, in order for the poor to have more of the pie we could do a number of things. Perhaps take some of that oil money and just give it to the poor.

Maybe tax the rich some more and then give the poor that money. Either would work, making the poor less poor and the society less unequal. Instead they decided to go mess with markets and the price system. Yup, they decided that there was a “fair” price for certain goods. So, given that there's a fair price, that's what people should charge and what people should pay.

Except this runs into a terrible problem. If that fair price is lower than the market clearing price then there will be shortages. For, by definition, the market clearing price is that one where people want to produce as much as people want to consume at that price. Similarly, setting that price above the market one leads to vast waves of surpluses, as the EU found out with the wine lakes and butter mountains. The only price fixing that works is when the fixed price is the market clearing price: the one that you would have had anyway. So what's the point in that? Oh, and you can only work out what that market clearing price is by using the market to calculate it.

Note that this is derived from the same source as our first agreed position among economists, the one that 93 per cent of them sign on to. That says price ceilings on rents cause shortages of housing. The same holds true for toilet paper, as the Venezuelans have found out.

I'll let you into a secret: It's (mostly) hokum

My own opinion would be that macroeconomics is in such a bad state that we should pretty much ignore it. Sure, we do actually need to have an interest rate so we've got to have a monetary policy and so on, but at anything more detailed we just don't know enough about the chaotic system that is the macroeconomy to have more than the slightest clue what to do.

Get things right in the microeconomic senses – ensure that markets are working well, regulate the natural monopolies, crush the created ones – and she'll be right. Do note that this is not a right or left position. It makes no references at all to what tax rates should be, what the level of inequality should be, or how much redistribution should be going on. Only that whatever levels of these we want to be doing should be done in accordance with the bits of economics that we know we've got right; that microeconomic stuff.

This leaves us with our answer to Brenda. Why did no one predict the crash? Well, because economics is a bit crap really, Ma'am. ®