(Published 12/18 and updated 8/21)
Some people, including Paul Krugman of the New York Times, claim that economics is so complicated that the average person can’t understand it.
This may be true. But it also may not be true. One anti-thesis of the idea that economics is complicated is Caruso Economics. This is the economics of, say, two small islands with, say, 100 people on each island. What is the best economic policies to have, for all people in the long run? Your choice of economic theory for the two islands then could be applied to national and international economics. The two islands and the international situation are basically made of the same phenomenon.
Another way of understanding Caruso Economics is with the idea that national and international economics is not much different from the economics of a household or the economics of a small business.
From the viewpoint of Caruso Economics, let’s ask these questions:
“What would happen if your household continually spend 40% more than it took in?”
The answer is simple. Sooner or later your credit would max out; the interest rates would rise; eventually you wouldn’t be able to afford the interest payments; and, and finally you would default on your loans and then declare bankruptcy.
This is exactly what has happened in Greece a few years ago, and their economic policies had been similar to the U.S. policies. The only difference is that because the U.S. economy is so much bigger, it will take a little longer for our credit to max out.
Thus if we practice rational austerity now, it will be a whole lot less painful than if we wait until we are in Greece’s shoes.
We can look at the two above islands the same way. Imagine that you were a very talented politician — with a lot of political power — and you could implement any kind of political/economic system in each island. Assume that the natural resources and the populations were equal in every way. In the long term, which island do you think would do better?
Say that you tried communism in one and free-enterprise democracy in the other. Then you could have any policy regarding free trade and tariffs. What system and which policies do you think would work the best?
Whatever you choose is your understanding and philosophy of political/economics. And the probability that your ideas are correct is around the same as probability as some of the brightest philosophers in all of history, from Plato to Adam Smith, to Karl Marx, to Milton Friedman!
The science philosopher, Karl Popper, said in The Open Society, that we could try different political/economic experiments on a small scale and see how they work. Then implement the best policy on a bigger scale.
In fact, this may have been what has been done in world history! For example, monarchy, dictatorship, communism and fascism has proven not to work in the long run, while free enterprise-democracy seems to have been working well……….until global warming and the evaporation our of non-renewable natural resources.
Also free enterprise-democracy may be running into trouble with China’s sudden rise in power–with their new political/economic model, which is a synthesis of communism, free-enterprise, dictatorship, Asian philosophy, and Confucianism (See China on the Move).