The Failures of Modern Economics

Of all the humanities, the most respected field today is economics. Much of this respect is well deserved - as the whole field has contributed a great deal to our understanding of the world. Unfortunately, this is a big mistake. For, as I shall argue, popular modern economics rests on many bad assumptions that lead us astray, and ignores many things which it has no business ignoring. Without acknowledging the limitations of this discipline, the public, especially in this province is ill-equipped to anticipate and evaluate change.

So, definitions. "Economics," as I shall hereafter refer to it, means the "classical" school, which I will argue should better now be known as "common" economics. As the term Classical should suggest, this discipline was the product of the European enlightenment. Accordingly, it makes some very positive, and implausible, claims about human nature.

The greatest sin of Classical economics is its law which claims that the average human - the economic actor - is a rational being, capable both of finding evidence and evaluating it, being aware of their own biases, and making their decisions based upon that evidence, regardless of those biases. I am going to assume that you, dear reader, have probably already noticed that this is simply not the case.

In Behavioural Economics, a new field pioneered in very recent history, humans are irrational. They find evidence and evaluate it based on their biases. I would say all of us are guilty of this. According to Behavioural Economics, your economic actor makes decisions based on what is most comfortable to them; basically, human beings are inclined to accept the status quo, regardless to the evidence against it, which they discount.

Alberta currently provides us a great deal of situations to evaluate these basic summations of both schools of economics.

Our current government, for example, is operating under a massive, $11B deficit. This is indeed a scary number. If you are a Keynesian, which few are today, operating such a big deficit is essential to raising your jurisdiction out of an economic recession, as the NDP are arguably trying. However, Keynesianism has not been in vogue since its spectacular failure to deal with the stagflation of the 1970s; so maybe the NDP is mistaken in its approach. As an historian, I must add that this deficit is also reflective of the "infrastructure deficit" left to the present government by its predecessor. Some of this money would have to be spent at some time; whether this much is necessary now or later is another story.

However, the zeitgeist in Alberta - that mindset which governs people's beliefs, anticipations and biases is much more flawed. There is a belief that low taxes ensure economic growth; therefore the NDP is mistaken. There is a belief that environmental regulation is harmful to the economy; therefore the NDP is mistaken. There is a belief that public investment is bad for the economy; therefore the NDP is mistaken. There is much reason to believe the average Albertan, is in fact, the one mistaken, but it isn't really their fault.

The three beliefs outlined in short above are believed because they are believed to have worked in the past. Albertans are simply more confident of the status quo that they once enjoyed. Unfortunately for the average Albertan, the status quo was simply untenable. The change of government is a sign of some acceptance of that fact, but this change can be reversed.

Why is the status quo untenable? Why doesn't the population notice?

Basically, the things that made us wealthy are expected to continue to do so. Oil and Gas was so central to the prosperity of the province that a future without it is unthinkable to people who made their living from it. People who made money off of real estate cannot imagine a future where real estate is no longer a great money maker. People who made money cannot imagine a future where construction is no longer a big player in the economy. Weigh the evidence - not just from here, but around the world, too, and Alberta has a very big problem on its hands.

Take oil and gas, for starters. Albertans are ill-equipped to think that there are parts of the world that literally hate the stuff. These places, more often than not, are locales without local sources of either. They have many reasons not to like oil and gas: it makes them dependent on foreign, and sometimes hostile governments; it causes money to leave the country; it pollutes the air and water. It is not surprising to know that the first big pushes for renewable energy were made following the "Oil Shock" of 1973; but Albertans know 1973 for the good it did the province, not the damage it did to the rest of the world (and continues to do). In sum, you have two different status quos confronting each other.

Another way of looking at things is through the prism of "recency bias," wherein a human being views the near and far futures as obeying the patterns they see today or in recent history. The housing market in Canada reflects recency bias in a massive way. The values of housing around Canada have escalated to historic highs, and mostly in the last ten years. What goes without saying is the historical reasons for the flight in housing costs: first massive inflation (1973-1993), then government policy (1990-2010), and now record low interest rates (2010-present). Without these three factors working on the population, it is doubtful housing in Calgary, where ten years ago a new house in Mackenzie was going for about $175,000, would be worth the $400,000 it is likely evaluated today.

Huge amount of biases and conceit flow forth in defence of what should be shockingly high prices. Canada is different, when remembering the disaster of the USA in 2008. Interest rates can never go up again - it would bankrupt the country (they don't have to, by the by). Worst is the belief that housing simply "always goes up." Would that you have told that to one of Calgary's many suicides of the 1980s.

At its very worst, one can consider my favourite bumper sticker: "dear God, let there be another boom. I promise not to piss it all away next time." Alberta's great prosperity from 1995 to 2014 blinded people to the possibility that our boom could indeed end, and would. Throughout the province, people still believe taxes can be cut, the deficit eliminated, oil brought back up to $150US a barrel, and for everyone to be restored to work. All of these things are possible - but probably only simultaneously. Failing that, we have a continued failure on our hands.


The last great sin of common economics is the Externality - or rather the ignorance of it. This is not a theory of behaviour, but rather a means of measuring the true cost of a product or service. Opportunity cost can be considered a part of an externality, which can lead to massive variance in the "real cost" of a good. Take for example a McDonald's Big Mac. Price: $5; with externalities, the real cost is anywhere from $15 to $200. How in God's name does that happen?

Consider the cost to society by raising cattle. Cattle consume copious amounts of water and land. Huge amounts of rainforest have been eliminated to make way for cows. The cattle industry is also one of the world's greatest polluters, both in solid waste and in greenhouse gas emissions. Cows must be moved, slaughtered, processed, moved again, refrigerated, transported, and on and on before even being consumed. Trucks, trains, ships, stores, warehouses; all these require energy, usually "dirty," require infrastructure, and require capital. All emit pollution. Through the marvel of a "globalized" economic system, these costs to society are hidden and have no effect on the price of the good. But the costs are real - they are just paid for elsewhere, or later, and more likely by different people.

Here are two great big externalities ignored in the province of Alberta: premature deaths caused by motor vehicles and coal plants. Years ago, economists judged the value of one Canadian life at $4,000,000. Coal plants in this province are responsible, it is believed, for the deaths of roughly 100 Albertans every single year. That is not a big number - but their deaths alone cost the province the equivalent in $400,000,000 in economic and community activity. Wow. What about cars? Well, Alberta has to the highest motor vehicle fatality rate in Canada: about 500 people die in Alberta due to car accidents every year. The cost? $2,000,000,000.

So just in terms of death the province's economy loses over $2.4B in economic potential every single year just to car accidents and coal plants. Conventional GDP would record this real loss as a gain - just think of the insurance, the legal work, the funeral arrangements; death is big business, but death costs a good deal more than it gives. Also, consider that in the above calculation there was nowhere considered the cost of injury or illness - things which affect thousands more people all year, every year, which are, in all honesty, preventable.

Without pricing in externalities, we ignore at our own risk behaviours that damage us more than they give. The car was a great invention, to be sure. But there has probably come a line, which we have subsequently crossed, where they do more damage to society than they contribute. They have allowed us to build cities in the most unhealthy and expensive way possible; they are probably responsible for much of the obesity phenomenon in North America, and the isolation they bring is likely a factor in mental illness rates in North America that are triple what they are in a less car-dependent Europe; and of course they pollute like a God damn. Yet, I would bet you most people consider car ownership not a privilege, but a right.

Alberta has followed in the wake of another major oil producer, Norway, by pricing externalities. This is our new Carbon Tax. It is deeply unpopular - viewed as both a tax grab and an assault on the oil industry. The carbon tax is nothing more than a small attempt to factor in real costs Albertans do and will pay because of their fossil fuel habits. Think of it as a more indirect version of the health care premiums Albertans once suffered.

In summary, the popular conception of economics has served to deceive the public as to their long term interests. People have been blinded to the nature of their present economic predicament. Much worse, the common man has little idea of the future costs of our present actions. Some years ago, the federal government spent more than half a billion dollars cleaning up the abandoned Giant Mine outside of Yellowknife. One can only imagine what the hidden costs of our oil sands really are. I'm certain its shocking.

Thanks for reading.