Jay Hanson, July 30, 2008
Updated June 24,2008
Permission to reprint expressly granted! – http://www.jayhanson.org/economic.htm
“There is an assumption in
economics that the market system handles resource allocation in an efficient
manner unless proven otherwise.”
– Thomas H. Tietenberg
“The first thing a man
will do for his ideals is lie.”
– Joseph Schumpeter
We have seen in an earlier paper  how America was specifically designed to be a “special interest” government – a government by, for, and of the rich. This is done by giving social power (political power) to those with money. The role of the social scientist in America is simply to prevent the public from discovering how the American political system actually works – to provide an “umbrella of protection”  over the rich.
Ever since the Physiocrats, economists have begun with the political claim that “the market” is the best means to manage society and have spent over 200 years working backwards trying to prove it. They have failed. The bizarre result of 200 years spent reverse-engineering is a theory that must only reference itself to be even moderately coherent. In other words, economic theory is about economic theory – it’s a monstrous circular argument. This is typical:
"Economists assume people that people make ‘rational’ decisions but abstain from testing that assumption. Instead of testing, economists invoke ‘revealed preferences theory’ which states that choices are rational because they are based on preferences that are known through the choices that are made. In other words, economists resort to meaningless, circular arguments and mathematical conjuring tricks to justify their political program.” 
Those free marketers, who bother to rationalize their arguments, base them on five deliberate lies:
The lie that the market is "efficient" is is the most important lie (actually an “idiosyncratic redefinition” of terms) in economic theory and is designed to prevent engineers and scientists from investigating our money-based political system objectively. Economists know that people who do not have economic training are going to assume that “efficient” is used in the same way that engineers use the word: acting or producing effectively with a minimum of waste, expense, or unnecessary effort.
But for economists, “efficient” is measured in “money" and means “efficient distribution” of goods, services, and money – Pareto efficient – not the “efficient use" of materials. Since the market economizes “money” (that which is in limitless supply  ), the rich get richer and the poor get poorer. The reason economists use idiosyncratic redefinitions instead of coining new terms (like every other discipline) is to make them better liars!
Idiosyncratic redefinition allows economists to stand in front of your local Rotary Club and appear to HONESTLY use words that mean one thing to them, while Club members think they mean something completely different. This is how economists evade our innate ability to spot liars.
Far from being “efficient”, the so-called “market system” is probably the MOST INEFFICIENT social organization possible! The overhead (commuting to work, banks, insurance companies, advertising agencies, etc.) associated with our present way of organizing consumes the largest fraction BY FAR of our natural resources – something like 2 billion tonnes of oil equivalent per year! 
This is the second-most-important lie in economic theory. This lie sets one up to swallow the rest of the lies. Right wingers (it is boilerplate economic theory) deliberately lie about this because they want you to believe that Donald Trump “needs” another million dollar painting on the wall of one of his mansions just as badly as a welfare mother “needs” health care for her children. This amounts to a license for the rich to hog limited resources (on a spherical planet, all resources are “limited”) and serves as the Vaseline for the rest of the lies.
Although even economists admit this is a lie,  it is still boilerplate economic theory. Economists MUST lie about this because if people are being manipulated by marketing, then the so-called “free market” obviously requires government intervention.
In a Liberal Democracy, tax payers are ultimately responsible for an individual if that individual becomes destitute or a criminal. Economists use the “rational utility maximizer” lie to prevent government intervention in markets when intervention would serve the common good. For example, a rational government would intervene in markets to prevent con artists from peddling their worthless shit to an unsuspecting public. (We have all seen those suckers dumping their last dollar in a slot machine.)
Economists argue that government can not possibly know what an individual “needs”. If people are manipulated by advertisers, flashing lights, and sex symbols, then government has a good reason to intervene in the market for an individual’s welfare because these causalities are dumped on government to care for after the con artists have cleaned them out. For example, a federal law could be passed that would limit legalized gambling to high net worth individuals (it’s now done with options and futures trading).
By having university-trained liars (economists) convince the victims that they alone are responsible for their own actions (instead of a team of best-professionals-money-can-buy who were hired to exploit the public), the rich evade responsibility for their actions. Thus, “the market” repeats the basic motif of American politics and illustrates what makes it so clever: the rich manipulate unsuspecting citizens for fun and profit, deplete common resources, externalize social costs onto the tax payer, and blame the victims themselves or the elected screw-ups and their cronies for social problems. It’s brilliant!!!
War is continuation of politics by other means – Clausewitz
Economics is a continuation of politics by other means – Hanson
Money is literally “created” (and backed by consumer debt) every time a bank makes a loan. At the time the loan is made, not enough money is in circulation to pay the interest on the loan, so more money must be eventually “created”, by more consumer debt, to pay back the interest on the loan. 
“Politics” is defined as one attempting (and sometimes succeeding) to get another to do what one wants them to do. All higher social animals engage in politics: rams butt each other for females, a dog growls, a boss threatens to fire employees or reward them with pay raises.
Since money can also buy the behavior of other people, it qualifies is a form of political power. Thus, contemporary economic theory is actually a “political” theory which asserts that everyone will be better off if the rich are allowed to do whatever they want (so-called “market outcomes”).
Economists use the word “proved” in the sense that one part of their bogus economic model agrees with another. It has absolutely nothing to do with the real world.
Here is a very rough idea: In 2004, Americans consumed about 342,700,000 [3.4e8] Btu per capita, per year. [ http://www.eia.doe.gov/pub/international/iealf/tablee1c.xls ] This converts to about 86,358,951 [8.6e7 nutritional] calories per year [ http://www.onlineconversion.com/energy.htm ] or 86,358,951 / 365 = 236,599 [2.37e5 nutritional] calories per day. But humans only require something like 3,000 [nutritional] calories [of food energy] per day to survive, so it seems we (very roughly) waste something like 236,599 - 3,000 = 233,599 [2.34e5 nutritional] calories per day, per capita.
Studies show that food grains produced with modern, high-yield methods (including packaging and delivery) now contain between four and ten calories of fossil fuel for every calorie of solar energy. So we will allow ten calories of energy to grow and process each calorie of food delivered, so 3,000 * 10=30,000 [(3e4) nutritional] calories per day is required to keep someone alive. Thus, 233,599 – 30,000 = [approximately] 203,599 [2e5 nutritional] calories are still being wasted each and every day, by every American.
Let's allow [the equivalent of] 20,000 [nutritional] calories per day, per capita to collect and deliver food and water to each and every household in the country, so 203,599 - 20,000 = 183,599 [1.8e5 nutritional] calorie [equivalent] wasted per day, per capita in the US.
[1 nutritional calorie = 1000 calorie = 4200 joule. 1 barrel (1 bbl) of oil contains 6 gigajoule (6e9 joule) of energy. A tonne of oil contains 7.3 bbl of oil.]
Population in America is 302,664,192 (August 2007 est.), [call it 3e8] [ http://www.census.gov/main/www/popclock.html ] so [1.8e5] 183,599 * [3e8] 302,664,192 * 365 *4200 joule / nutritional calorie = [8.3e19 joule] 20,282,627,690,257,900 calories
8.3e19 joule / 6e9 joule/bbl = 1.4e10 boe (14 billion boe = 1.9e9 t = 2 billion tonne of oil equivalent.)
or 2,028,262,769 [(2 billion)] tonnes of oil equivalent is wasted each year in the US feeding people! (In 2006, oil production in the Middle East was only 1,221,900,000 tonnes! [ http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2007/STAGING/local_assets/downloads/pdf/table_of_world_oil_production_tonnes_2007.pdf ]) The market system is obviously the most inefficient organization in human history!!
On a spherical planet, governed by the laws of thermodynamics, “the market system” WILL end – sooner-or-later, one-way-or-another.
 The lie that people are so-called “Rational Utility Maximizers” provides the foundation and rationale for contemporary economics. See, for example, DECISION MAKING AND PROBLEM SOLVING, Herbert A. Simon, 1986: “Central to the body of prescriptive knowledge about decision making has been the theory of subjective expected utility (SEU), a sophisticated mathematical model of choice that lies at the foundation of most contemporary economics, theoretical statistics, and operations research. SEU theory defines the conditions of perfect utility-maximizing rationality in a world of certainty or in a world in which the probability distributions of all relevant variables can be provided by the decision makers. (In spirit, it might be compared with a theory of ideal gases or of frictionless bodies sliding down inclined planes in a vacuum.) SEU theory deals only with decision making; it has nothing to say about how to frame problems, set goals, or develop new alternatives.” http://JayHanson.US/simon.htm
The standard economic model of homo oeconomicus is characterised by the following assumptions (e.g. Frey 1999):
1. Action is centred in the individual (methodological individualism). Everything that happens in institutions and society can be traced back to the actions of individuals.
2. A strict distinction is to be drawn between preferences (i.e., values which form the basis of motivation) and restrictions (i.e. external stimuli and constraints on the scope for action).
3. An individual’s preferences are given and inalterable (c.f. Becker and Stigler, 1977). The individual’s actions are determined entirely by restrictions.
4. Only self-interested, not prosocial, preferences are assumed to exist. The preferences of other people do not concur with one’s own preferences.
5. The cognitive perception of restrictions is identical in all individuals.
6. Individuals behave entirely rationally. They are able to determine their own maximum utility according to their own preferences within given restrictions.
It is on the basis of these assumptions that the standard economic model is applied to all spheres of life, for instance, to the family, drug abuse, abortion, criminality, art, sport, religion, and suicide.3 This is tied to the withdrawal (or, better, the ejection) of psychology from economics, which, for instance, for Schmölders (1962) was still part of economics.4 Neoclassical standard economics has thus developed an imperialistic understanding of itself as the “queen of the social sciences” (c.f. Hirshleifer 1985; Becker 1976; Frey 1999), a view which has provoked significant aggression and criticism among neighbouring social sciences.
Criticism of standard economics refers chiefly to these assumptions. In particular, this is about the assumptions regarding the cognitive and motivational characteristics of homo oeconomicus and the assumptions regarding the transferability of the economic model across from anonymous market relationships to the relationships within organisations and between individuals.
The criticism of the assumptions about the cognitive characteristics of homo oeconomicus is the least controversial. They go back to Simon (1955, 1956) and have led to the idea of bounded rationality as a consequence of people’s limited capacity to process information. Individuals do not maximise their utility, but can at best achieve satisfactory results. It is on this basis that the institutional economic approaches have been developed (Williamson, 1990). However, the idea of bounded rationality remains vague in institutional economics.5 The research of psychological economics into decision anomalies (Kahneman and Tversky 1986), developed over twenty years, has not been considered. Instead “the same assumptions are still in place as the cornerstones of economic analysis” (Kahneman 2003: 162), though the research on decision anomalies provides precise and situation-specific differentiations of bounded rationality. <http://www.egosnet.org/jart/prj3/egosnet/data/uploads/OS_2007/W-031.pdf>
 Milton Friedman (1955) defended Rational Choice Theory (RCT) by insisting that economists should simply lie. Friedman argued that in accepting or dismissing a theory, we should only look at its fit with the data, not at the realism (or lack thereof) of its assumptions. Bluntly speaking, he urged us to apply to theories the principle we often apply to sausages: as far as the final product is good, better not to ask about the ingredients. This is the famous “as if” defense of RCT.
 “MONEY: Anything which is widely acceptable in exchange for goods, or in settling debts, not for itself but because it can be similarly passed on, has the character of money since it serves the primary function of money, i.e. a means of payment. As a means of payment money is an entity which is transferred when a payment is made; as such it acts as a MEDIUM OF EXCHANGE, a function essential to any economy other than the most primitive.” [ p. 285, THE MIT DICTIONARY OF ECONOMICS, Fourth Edition; http://www.amazon.com/exec/obidos/ASIN/0262660784 ].
 Watch this free video: http://video.google.com/videoplay?docid=-9050474362583451279 Or buy the DVD at: http://www.moneyasdebt.net/