“We may know how the economy functioned in the past – but we no longer understand how it functions in the present, not to mention the future.”
That’s according to Yuval Noah Harari in his book Homo Deus: A Brief History of Tomorrow. His point is that economists always look backwards to try to develop their models of how the economy works, and they’re always wrong.
Harari used Marx as his dead wrong economist. Marx predicted that capitalism would collapse based on his analysis of history. It didn’t because the new knowledge we all create every day changes the trajectory of the future. No economist can predict anything.
We don’t have to use dead economists as examples, however. Consider the confusion of the supposed economic experts at the Federal Reserve at the current combination of low unemployment and low inflation, which is not supposed to happen. Their models, looking backwards, predict that low unemployment produces high inflation because employers bid up the cost of scarce labor. Maybe in the past, but not today.
Why is inflation low today? Is it because technology makes everything cheaper, better and faster? Is it because global exchange platforms enable shoppers in Seattle to buy low cost products from China? What does it have to do with unlimited credit creation by Central Banks? There are no experts who know.
One reason they don’t know is that they live in a fantasy world rather than a knowledge world. There is no such thing as the economy. It is not a giant system measured by aggregates like GDP and CPI and the unemployment level. Those statistics are entirely fictitious.
Who does know how the economy works today? You do. The economy is about individuals. Every economic event, every exchange, every buy and every sell and every act of saving and investing is an act of one individual collaborating with another individual. You know how the economy works because you know how much work and effort you put into producing value, and how much that value gets you in exchange with a customer, whether that customer is an employer who pays you for your labor and creativity or a buyer who trades dollars for your hard work and creativity and service. You know how much work and saving it takes to buy a house in your neighborhood, and a car from your local dealer. You know whether you prefer to hang on to the dollars you’ve earned (that’s deflation) or spend them bidding on new goods and services (that’s inflation).
You talk to your neighbors and co-workers and fellow entrepreneurs. Between you, there is knowledge about how the economy works today that no-one else has. To use the language of economics, knowledge is widely distributed and highly decentralized. You own it for your individual part of the world, others for theirs. All the knowledge is discrete. Most of it is subjective. It can’t be rolled up into economic aggregates.
What’s the implication? You operate an individual economy. You make exchanges with others in a similar position. You seek new knowledge in order to be of better service to those others, to drive a better exchange, and to improve your own economy. You do more of what works (i.e. creates value recognized by and paid for by others) and less of what doesn’t (i.e. where others don’t share your valuation).
Don’t listen to the “men of system”, the economists, both dead and alive, who think the economy is a machine they can adjust and regulate. Operate your own economy in the secure confidence that you have knowledge that they don’t.