Economics is Backwards

Our economic thought is backwards. For hundreds of years we’ve developed and advanced a method of thought that, in the aggregate, results in overshoot, overpopulation, overthrow.

How could such fundamental errors have occurred? Easy, when formulating a hypothesis as to how the world works, the context of the history is extremely important. The environment on which the modelling is performed is not static, thus the model should not be static either.

The context is the cultural/social milieu, and the period, a time when the riches of the new world have been virtually untouched. You can make egregious errors in concepts and logic without suffering from the impact of that error as it is not apparent and will not be apparent for hundreds of years. It seems like the system works until it doesn’t. What is then is prescribed is more of the same, because that is, after all, what has worked in the past.

So what was the error? The classical economic system has as its foundation, labour, land, and capital. With me so far? The neoclassical economic system is structured thus; labour and capital with land as a subset of capital.

See the problem? No? The economy is presented as a closed system that encompasses land. Mill, Smith, and Malthus thought of land as a pile of free resources. Henry Hazlitt confirms the same thinking in his book Economics in One Lesson. Yet for a closed, encompassing system, economics requires a concept of “externalities”, actions and events that happen outside the system.

Where does these externalities and resource come from if not from the environment? If the economy collapsed as a system, what would be left? Not labour, not capital, nothing but land. If the environment collapses what would be left? Nothing. Without the environment (land) you cannot have an economy, thus it is the economy that is a subsystem of the environment, not the other way around. The environment doesn’t need labour, capital or the economy.

We had it backwards.