"Economics Does Not Lie"

There's an intriguing thought: Economics doesn't lie.

Such was the topic of an article written by economist Guy Sorman in the summer of 2008 in “City Journal”, a conservative quarterly magazine about urban affairs. It was written prior to the financial crisis that began to unfold later that year. Was it a coincidence that it was written just before the crisis or was it meant to be a warning about what was to come?

I’d say it was more a coincidence because it didn’t foretell anything about the looming crisis. In fact, it ignored and even praised many of the economic, laissez faire activities that were responsible for the greatest recession America has experienced since the Great Depression. So it got me thinking, how did economics not lie in this instance?

I'm not saying that the discipline of economics lies. On the contrary: basically it tells the truth. It’s built on natural law and reason. I know, for instance, that free market economics is far more truthful than the planned economics of communism and totalitarian states, which are easily manipulated. However, people can still make a liar out of the free market just by not telling the truth about what’s going on. It’s made a liar when it isn’t transparent, such as happened with the opaque transactions that led to the crash of 2008. It lies when it isn’t held accountable, when the rules and regulations are deliberately flouted and ignored. Those lies gave us the greatest economic turmoil in memory. Eventually, though, the chickens came home to roost. In the end market economics freed itself from those lies and told us the truth, that the crisis was a consequence of many questionable and unethical practices. Economics teaches us to be thrifty and good managers. Sadly, though, those prerequisites and truths were lost on many who should have known better, like the bankers and politicians.

One of Sorman’s heroes is Milton Friedman, a Nobel laureate in economics who truly believed in the free market. But Friedman believed that if a free market was going to function optimally and truthfully information about business had to be transparent and up front. If business dealings are not open to scrutiny, cheating and lying are more likely to take place. Nevertheless, that’s what happen during the years building up to the financial/economic crisis of 2008. Information was withheld from investors, information that could have prevented or at least tempered the crash. Information was withheld was about ‘toxic’ assets pertaining to questionable financing. Duplicitous assets were hidden in derivatives that were then sold to unsuspecting investors. To further compound the lies, those dubious investments were approved by the very rating agencies that were meant to keep tabs on the financial industry. If Friedman were alive today he would be appalled at the breaches of trust and lies told to unsuspecting investors.

Though it was due to a combination of events, the ‘housing bubble’ was the chief culprit of the economic crisis of 2008, the economics of which represented a catastrophic lie. The bursting of the housing bubble had a devastating ripple effect on all sectors of the economy, leaving banking, the core of an economy, especially vulnerable. And there were plenty of lies to go around, encouraged by fees, greed and poor monitary policy. People deceived themselves in thinking that the price of houses would keep going up indefinitely. Mortgage brokers lied when they made loans to people they knew couldn’t afford them. Ironically the loans were nicknamed ‘liar loans’ because they were based on, what else, lies. The mortgage brokers lied when falsifying documents about the credit worthiness of borrowers. Many borrowers lied about their incomes, as to whether they could afford the monthly payments or not. Each party suspected that the other was lying but the practice continued. And to further compound the lies, these liar loans were deliberately camouflaged and bundled up with healthier securities by Wall St. brokerage houses in the form of derivatives and then sold to unsuspecting investors. To add insult to injury, and more lies, these derivates were given AAA rates by supposedly independent credit agencies like Standard & Poor and Moody’s, companies that were literally working both sides of the street. Their behavior amounted to crony capitalism, which constituted another massive lie and a major threat to the free market.

The Attorney Generals of all fifty US states tried to put an end to the lies. They knew about the liar loans and their potentiality for economic disaster. They wanted to protect consumers from the predatory loans that were being made by mortgage companies and banks knowingly for the profits they generated. But the Bush administration blocked them from implementing such laws because it interfered with a major Bush agenda, an agenda to expand the ownership of homes. It was a veiled, clumsy attempt to enrich the middle class as it had done for the rich with a tax cuts. For all its good intentions, Bush’s dreams for an expanded ‘ownership society’ was predicated on a political ideology equivalent to a house built on sand. Oh, there were economists who warned about this policy but were roundly dismissed as killjoys.

In his article Sorman says that economics is no longer just theory but is now an actual science. (Being a science should have made it more truthful.) As he explained, we have learnt so much from past economic experience that the world can now depend on and ensure itself reasonable economic stability. Economists have developed models and equations that show precisely how the fundamentals work, that there is a certainty in economic outcomes. So what happened that we are now facing one of the greatest economic crises to hit modern civilization? What happened to the science we were supposed to have learned from, the science that was supposed to offset the lies?

What happened is that even though economics may not lie, humans still do. Humans still cheat and cut corners. Human are fallible and that fallibility can negatively impact economic outcomes if not kept in check. That’s why over the years, having gained a lot of experience about our weaknesses and less than truthful natures, we have formulated regulations and backup system to minimize and fend off economic disasters like the one we are experiencing today. Experience gave economics its status of science. But along the way, somehow, mostly due to political ideology, faith and hubris, the science and experience that we learned over the time was discarded in a matter of years, giving the world the economic crisis of 2008, the likes it hasn’t seen in some time.