I was at a social function last weekend and the conversation turned to economics – surprise surprise. I was the only professional economist in the group. I try very hard to avoid discussing economics in these circumstances because experience tells me that misunderstandings quickly occur as the “intuitive” or “common-sense” economists seek the floor. I would much rather talk about weeds growing than the sustainability of budget deficits in times like that. But, alas, someone said “but we’ve got a 50 million-dollar deficit who is going to pay for that?” Another member of the group, who is very articulate and fairly well-read in Modern Monetary Theory (MMT) but not a professional economist stepped in to save the day. She proceeded to explain how common sense is a dangerous guide to reality and that not all opinions should be given equal privilege in public discourse. The conversation deteriorated because the “deficit worrier” and others immediately personalised this observation and considered it to be a attack on their life’s experience. Notwithstanding the tenseness of the situation, it was an interesting demonstration of the flaws in logic that govern the way people think about economics and the way politicians exploit our (flawed) reliance on common sense. Our propensity to generalise from personal experience, as if the experience constitutes general knowledge, dominates the public debate.

Amidst all the political turmoil in the Australian government this week, there was a highly significant report issued by the government (finalised December 2011 but released by the Government on February 20, 2012) – Review of Funding for Schooling – which showed not only how unequal our education system is but also how far behind we have fallen relative to other nations (particularly those that are more important trading partners). For a government which pretends to be concerned with equity and efficiency the Report posed huge challenges. Not only did it suggest current policy was failing, the Report estimated that over AU$5 billion should be invested in education reform to not only improve standards but also ensure that the massive inequalities between rich and poor with respect to educational access and outcomes are reduced. The response by the Australian government was that its priority remained the achievement of a budget surplus in 2012. Here is a classic demonstration of how a failure by the Government to understand the characteristics of the monetary system that it runs leads to poor outcomes in the short-run, but also undermines the future prosperity of the nation.

I wrote recently about Eugene Fama, a Chicago economist who basically denied that a breakdown in the financial markets had caused the current crisis. Please see – Yesterday austerity, today growth – but leopards don’t change their spots – for further discussion. Last week (February 17, 2012), one of Fama’s colleagues wrote a Bloomberg Op Ed – How 3 Myths Drive Europe’s Response to Debt Crisis. The article by one Harald Uhlig, from the Department of Economics at the University of Chicago demonstrates the way that the Chicago School likes to obfuscate issues. He develops a model, which purports to show that the imposition of fiscal austerity and zero impact on the standard of living of the population. The only problem is that the model not only makes some false conclusion, within its own logic, but is also inapplicable as a vehicle for explicating problems that might arise in a modern monetary economy. This is typical Chicago economics – a stylised but irrelevant analytical framework.