Search for certainty

The professor grinned for a while. Then, he picked up a piece of chalk and drew a large image of a curve on the chalkboard. This represents the equilibrium curve in supply and demand. He turned to me and replied, “It is simple. Plumbers understand more than any of you the most fundamental lesson in economics — what goes up must come down.” Students began to chuckle at his statement. After finding the joke somewhat funny and disgusting, I further researched the history of human capacity to predict economic crises, and it all made more sense to me.

Few of the world’s great economists are prone to making predictions about the economy with absolute certainty. From John Maynard Keynes to Milton Friedman, the best economists were wise enough to mark their predictions with a hint of uncertainty. Our world economic conditions are always subject to change by the actions (or inactions) of political leadership, consumer demand, wars and inflation, among many other things.

Recent stock market activity reminds us that investors loath the idea of uncertainty, even when the economy is on the uptick. The uncertainty around economic booms and busts has existed since the birth of currency. Booms and busts are created by a number of factors ranging from excessive monetary easing and unrealistic market expectations by investors, policymakers and consumers alike.

The irony is that in our constant attempt to predict the market to better plan for the crashes that lie ahead, one would think we were watching the same drama unfold over and over again. The first scene displays a world where aggregate demand grows and businesses are hiring and thriving. However, the law of impermanence eventually reminds us that a boom only lasts for so long. As such, the imaginary confidence in the market that experts refer to as a “mania” comes crashing down faster than anyone could have accurately predicted.

In spite of our limited knowledge of how the economy works, many of the legislators in our state and in Washington, D.C., have decided that they can predict the next boom or bust, and enact legislation accordingly. The intent is honorable, but the unfortunate reality is that many economic regulations place an undue burden on thriving businesses that drive our nation’s economic engine, particularly small businesses.

History tells us the economy is fragile. Completely deregulate it, and human greed will prompt a crash. Regulate it too much, and panics and crashes will inevitably occur. In my humble opinion, the best model of an economy is an economic system that encourages businesses to prosper and incentivizes prosperity at every socioeconomic level. Both of these noble goals are achievable when we establish a system of regulations that protect consumers without unduly burdening our job-creators.

The reality is that there are certain things that we as humans in our intellectual capacity will always be limited. Many economists have embraced this harsh reality, and it is about time our lawmakers do the same.

A native of Pacifica, Jonathan Madison worked as professional policy staff for the U.S. House of Representatives, Committee on Financial Services. Jonathan is lead attorney at The Madison Firm and can be reached via email at jonathan@themadisonfirm.com.