Theories And Reality

In schools we learn about theories. From Chemistry to Biology, Sociology to Economics, we all start from learning the theories and principles behind it. For the hard sciences, it is easier. The theories that have been proven long ago generally do not change, unless there is a groundbreaking discovery. The Earth revolves around the Sun, this is an undisputable fact. Light cannot bend is also another Physics fact. It cannot be manipulated, it cannot be challenged without solid proof. No political might can make the Sun spin around the Earth nor any amount of money bribe the light into bending corners.

However, when it comes to social sciences, it is a different thing altogether. Social sciences is the study of human behaviour. History can be re-written by the political will of the victor, economics can be manipulated with money, law can be bent for the ruling class etc. In this sense, one needs to understand that the theories and concepts we have learnt in school are not absolute, but skewed in favour towards the ruling class of that time.

When there is a clash of forces, the hard sciences will give you an absolute clear answer. If a small ice cube gets dropped into a kettle full of boiling water, it is unquestionable that the ice will melt. But in the area of social sciences, that will not be so. In one of my previous article, we went through how just because some people are experts does not mean that their views are accurate. It is the same over here too. Just as experts can be bought off with money, so are economists who speak for either the Government or private companies. Also, economists of old and modern times push out theories in accordance to their own circumstances and benefits.

I do not know which economic theory he studied, but I have never heard of anyone pumping more money into the economy to fight inflation. At least the Fed is trying to reduce the money supply and not increasing it.

An economist from the upper class of society will not have the same view as that of one from the lower class of society. Whether it is Adam Smith from the classical era or John Meyard Keynes from the more recent ones, they do not stand for the commoners. They were not the peasants, and hence they do not view the world as how the peasant would view it. They could only view it from their level, and pushed out economic theories fitting for their level. Yet 200 years on, despite how much society has changed, we are still learning their theories in our foundations.

In the study of foundational economics, we learnt about Keynesian theory of Fiscal policy. It states that when there is a recession, the Government should increase their spending and create more jobs. Take note this runs contrary to Adam Smith’s Invisible Hand where the Government do not interfere. With more employment and money flowing, people will then have money to buy goods and service, creating a multiplier effect which will bring the economy out of its recession. This was used in the Great Depression and has been widely credited as the policy which brought the US out from recession.

In truth, the fiscal policy did little to elevate the Great Depression. By injecting so much money into the system, inflation rose to a very high level and subsequently dropped back to the negatives when the fiscal policy was stopped. US did not get out of the Great Depression because of the fiscal policy, but by World War 2 in which they sold weapons and resources to the various countries and in the process earned lots of money. In fact during World War 2 when most countries were in the pits, the US was in a time of prosperity.

Note: World War 2 lasted from 1939 to 1945.

Yet till today, we have never judged whether the economic theories we have learnt are in fact legitimate or not, and whether it can stand up to scrutiny. We can see in our modern day era, where during the Covid years US printed out 75% of their current money supply in 2 years, causing inflation to soar sky high and everyone to groan in misery. If the fiscal policy is really that good, why is everyone complaining?

There is also the monetary policy by Milton Friedman, where the basic theory goes that lower interest rates will encourage more borrowing and more spending, as saving money in the bank is no longer that appealing. That in turn stimulates the economy and bring the economy out of a recession. Today we see the global situation of low Fed interest rates + indiscriminate printing of money, a double combo of monetary and fiscal policy which we learnt in school, any of which is supposed to inject life into the economy, but is not ineffective.

From Adam Smith’s Invisible Hand where the market will correct itself to Keynesian’s fiscal policy where the Government should be active in the economy, we can see that economic policies are not absolute in their theories, and every era has a suitable policy suitable for it. As also mentioned earlier, the people who came out with these policies often times do not stand on the perspective of the common man.

So why is it that we still study economic theories which are outdated and have been proven to be not entirely effective? Because that is what the school teaches us, and what we learn as a foundation unit when our brain is a clean sheet when it comes to the topic. Hence what is first written in our brains remains there, and it takes a far greater effort to re-write what we have first learnt. Why did they still teach us such outdated theory? Because this current set of outdated theories can be used to manipulate the common man.

Today we learnt that fiscal policy is useful, hence when the Government print loads of money and inject into the economy, they could give the reason that they are doing their part and stepping in to save the economy. But in the process of doing so the common man loses out. Inflation is at an all time high, something they did not teach us in school as a by-product of fiscal policy. Companies earn record profits while the common man find everything to be more and more expensive.

This brings back to my previous article, on the real cost of inflation. Economic theories do certainly have its uses. But as time and situation changes, such theories need to be updated too. For all that we were taught about the goodness of fiscal policy, this very policy which we were taught to trust and believe in was used to reap off years of savings from the common man, feeding the big monies even more.

Theories are good in the sense that they give us an idea of what could have happened. But even hard sciences update their theories when necessary, from believing the Earth is flat to recognising the Earth is round, from believing we are at the centre of the universe to believing the Sun is the centre to what we know today. Yet such social sciences theories which are far outdated are still in our textbooks. Theories are good to explain what may happen around us, but they are ultimately different from reality. This, we must know. They can be manipulated, and more often than not, are not to our advantages. Always think critically, always think if what we see are really the truth or only the partial truth.

In our path to financial freedom, without dirtying our hands in blood, one must learn the rules of the game we play, and after that emerge as one who plays it better than the others.

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