“EVERY man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life.” Adam Smith (1776)
It would perhaps be most appropriate before I examine the uselessness and irrelevance, under certain circumstances, of the science that economics is purported to be — to put in plain words what seasoned scholars describe it as. My views on this dull subject are not necessarily born out of natural torments of study but rather from general observation of the world around us; although I must admit that I have exhausted a few years of formal academic torture during my formative years in this field; which could have perhaps unduly influenced the premise from which I proceed — although I could claim to have abruptly abandoned such to execute my own design.
If indeed as Economics is a social science and formally defined, then perhaps it is fitting that one attempt to explore what science is. According to Webster’s New Collegiate Dictionary, the definition of science is “knowledge attained through study or practice,” or “knowledge covering general truths of the operation of general laws, esp. as obtained and tested through scientific method [and] concerned with the physical world.” It is rather contradictory to reality for economists to claim any knowledge on matters relating to their field since nothing before me can attest to such knowledge. Economists are trained professionals paid to guess wrong about the economy. As harsh and unforgiving as I may be, it is apparent that no reliance can be placed on opinions or forecasts of economists; which to my limited expertise provide no basis for them to claim to be repository of knowledge in this matter. Even the respected John Maynard Keynes said, “I’d rather be vaguely right than precisely wrong,” a testament that no significant amount of reliance can place upon economics by any persons exercising their acuity of mind. Economics can be nothing but a painful elaboration of the obvious.
What arouses interest for an ordinary man on the street is the real value of his disposable income; and the goods and services his income can afford him the “amusements of human life”. South Africans in the past months have been subjected to rising interest rates as a result of the SA Reserve Bank’s response to rising inflation, which is an increase in the price of goods and services in an economy. There are various causes of inflation and Stats SA, on release of the December 2007 inflation figure of 9.0%, mentioned the following:
“This higher headline rate at December 2007 can be explained by an increase in the annual rate of change for: The CPI annual rate for transport which increased to 12,0% at December 2007 from 8,4% at November 2007. The main contributors to the annual increase of 9,0% in the CPI at December 2007 were food (+3,1% points), housing (+2,0% points), transport (+1,9% points), medical care and health expenses (+0,5 of a % point), household operation (+0,4 of a % point), education (+0,4 of a percentage point) and fuel and power (+ 0,3 of a % point).”
There has been a general increase in the money supply over the past few years as the economy grew; rising wages, increased government expenditure, tax cuts and so on; and as result, prices of goods and services rose to fend off increasing aggregate demand. And we must not be oblivious to the fact that our economy suffered severe supply shock inflation, which was caused by irrational fear of commodity traders during 2003 when Bush and his thugs invaded Iraq, causing uncertainties regarding the supply of oil. A barrel of crude oil rose from $27 to a staggering $100; a cost which has been unfortunately passed on to consumers. This give explanation to the increase in food, transport and fuel costs, which were the main drivers of inflation.
The Reserve Bank has opportunely freed itself from exercising reason and preferred to rather employ a blunt monetary instrument to fight rising inflation — interest rates. This is a nonsensical attempt, as any fool can see, in that the upsurge in inflation has been chiefly due to external factors which none of us could claim to have any extraordinary control over. But we could, while we lynch the Governor of the Reserve Bank, perhaps subject Trevor Manuel to similar assault for cutting taxes and increasing government spending, which without doubt had a role to play in the increase in inflation; however, interest rates, regardless of the magnitude of the increase, would have no effect. Tito Mboweni’s increase of interest rates will in no shape or form discourage the government from pursuing the expansion of infrastructure, which requires an import of capital goods in order to fulfil its mandate. The effectiveness of the use of interest rates to combat inflation may have been certain in previous cycles but it is apparently clear that it is defective in this instance. It is as if the monetarists at the Reserve Bank elected to step into a gun battle armed only with spears.
They can learn a valuable lesson in history. In 1838 Zulu warriors, armed with spears and idiotic courage, were led by a certain Dingane and Dambuza to their slaughter at the hands of the Voortrekkers, who were led by Andries Pretorius. The slaughter of the Zulus took place at Ncome River, where over 3000 Zulu men had their blood flowing endless in what was to be known as the Blood River. We cannot afford a defeat similar to that of the Zulu warriors. The SA Reserve Bank is currently fighting a losing battle, armed only with a blunt instrument.
Monetarist theory emphasises interest rates to fight inflation, i.e. by slowing the rise in the money supply; this being the domain of the Reserve Bank, who are responsible for monetary policy; while the Keynesian theory emphasises reducing demand general, often through fiscal policy (a government’s domain), by increasing taxation and reducing government spending. Is this really possible in South Africa when we are also facing hangover inflation, where workers are demanding increased wages higher than the inflation rate in order to survive? It is unimaginable for the government, charged with the burden of indispensable duty to eradicate poverty, to cut down on spending; which means compromising the growth of the economy and further subjecting those living below the poverty line to worst conditions.
What I attempt to illustrate is that Economics is ill-informed by theories which are divorced from reality. On paper, the economic theories of Keynes, Smith and Friedman may appear sensible, but subject an ordinary man on the street to precarious economic conditions, when authorities implement them without reservation or further interrogation. Rising prices are a consequence of economic reality and we cannot avoid prices from increasing. The ongoing increase in interest rates by the Reserve Bank is counterproductive and harming those to whom the government is responsible.
In the US, inflation has been on the increase since 2000 and is continuing to rise, while the economy is nearing recession; and we see the Federal Reserve Bank is cutting interest rates in a desperate attempt to boost economic growth, which is hovering around 3.2% since 2006. According to economics, when inflation rises, increase interest rates to reduce the impact; and we are seeing the opposite move by Ben Bernake. Bush and his trigger happy cronies have been on a military spending spree since 2001; currently spending $12 billion a day in Iraq, never mind Afghanistan, where a $10 million missiles are used to bomb $10 tents. Economics does not accommodate certain irrational interests by governments and people; and its theories will remain of no significance in the greater scheme of things.
“We live in a world that is deeply and antagonistically divided into groupings of nations very dissimilar in economic, social, and political outlook.” – Ernesto Che Guevara
There can be no one-size-fits all economy policy; and it is most prudent that those in authority of the monetary and fiscal policy recognise the need to adapt their economic tools to changing economic circumstances.