There’s a similar sentiment behind arguments for the Fed’s new policy, a simplified version of which goes something like this: Quantitative easing is probably a good idea. Why? Because we need to do something to increase economic activity. Fiscal stimulus is off the table for political reasons (at least). Inflation has been running a little low, which makes it an obvious policy lever. Expanding the monetary supply—and thus spurring on inflation— may not do much, but it’s what can be done. And that means that, well, quantitative easing is a good idea. QE2, motherfucker!
The old saying, “when the only tool you have is a hammer, all problems look like nails,” doesn’t really give the entire picture. More comprehensively, we should say that when the only tool policy makers have is a hammer, they developed incredible baroque theories to rationalize why hammering is the solution to every problem.
We have a rather compelling historical precedent for the incredible power of tool driven rationalizations.
Up until the mid-1800s and the development of scientific medicine, medical theory in the Judeo-Christian-Islamic world centered on the Hippocratic/Galean theory of humors.
In the humor theory of disease, the body was composed of four humors: blood, yellow bile, black bile and phlegm each linked to one of the four principle elements of earth, fire, air and water. For any particular person or circumstance, those humors had to be in specific balance and if not, disease resulted.
In order to treat disease, the doctor had to balance the humors sometimes by adding humors with food or herbs but more often by removing the humor in overabundance. Treatment consisted largely of bleeding, purging (induced vomiting, induced diarrhea) and burning the skin (cupping). While some of the treatment might have done some good in some cases (bleeding helps gout, induced diarrhea could clear intestinal parasites), in the main modern scientific medicine has concluded the treatments not only worthless but actively dangerous. In the vast majority of cases, they made the patients worse.
The treatments were so bad that most modern scholars of the history of medicine believe that those too poor to afford physicians received superior medical care in most cases. As one scholar put it, Tiny Tim would have been better off if Scrooge never had his change of heart and offered to pay for “the best physicians available.” Subjecting a real life Tiny Tim to the “best” treatments of the 1830s would have most likely significantly hastened his death.
By contrast, traditional Chinese medicine relied on a different theory of balancing a large number Yin-Yang inspired pairs of complementary properties. Because Chinese medicine arose from a different theory of disease, they developed different treatments. Whereas traditional Western medicine relied on bleeding, induced vomiting, induced diarrhea and burning the skin, Chinese medicine relied on burning the skin, induced diarrhea, induced vomiting and bleeding.
Yep, same damn thing with a little needle poking tossed in.
So, why would two nearly entirely unconnected medical traditions, each using a different theory of disease, both arrive at roughly the same ineffective treatments?
(It’s important here that the treatments were almost entirely ineffective. If the treatments were effective we could just say it was convergent trial and error empirical evolution, just like separate cultures independently develop technologies like bows and arrows.)
We can best explain this convergence in treatments if we look at the tools that pre-scientific doctors had to use. Beyond a few primitive surgeries and some mildly effective herbal lore, they didn’t have much. Really, when it boiled down to it, bleeding, inducing vomiting, inducing diarrhea and poking, scraping or burning the skin were really the only reliable tools the doctors anywhere could use. They could always bleed someone or make them upchuck. When people begged the doctors to do something, anything, to relieve suffering the doctors in every tradition reached for the same set of tools they all had in common.
In short, the theory did not dictate which tools they used, the available tools dictated the theory. Doctors looked at the tools they had available and then evolved a theory that justified the use of the tools.
We do the same thing today in economics. The Keynesian idea of stimulus has no empirical basis, but the only active tool the government has in a time of economic downturn is its ability to borrow and spend. Surprise, surprise: during the Great Depression, governments fell all over themselves to embrace Keynes’s idea of borrowing and spending to “stimulate” the economy. They did so not because it was proven to work (then or since) but because it justified the one action that would make the government larger and more powerful and the political class larger and more powerful as well.
The Fed is now doing the same thing with
inflation “Quantitative Easing”. There is no particular reason to believe that inflating the money supply will produce more real economic activity, indeed the history of the 20th century proves exactly the opposite. However, it is all the Fed can do right now so it is going to grab a convenient theory to justify inflating the currency.
For centuries, doctors tortured and killed their patients because neither they nor their patients had the courage to simply admit that there was little good the doctors could do. They created elaborate and detailed theories to justify their counterproductive interventions. Worse, after a time, everyone, doctors, patients, philosophers, proto-scientists, etc. all came to regard the tool driven rationalizations as facts. Not until the discovery of the germ theory of disease, quantitative chemistry and a general science of diagnostics did the nonsense theory of humors fade away. The invention of new tools drove the development of new, scientific theories.
We are doing the same damn thing with the current economic travails. Rather than admit there is little that the government can do to correct its colossal real-estate screwup, we get to witness the economic equivalent of bleeding and induced vomiting all based on a economic theories that have no other reason for existing that to justify the government bleeding and inducing vomiting in the economy.
“… but it’s what can be done,” could well be one of the most dangerous phrases in the English language. In very many cases, not just economics, the best thing to do is nothing. For any particular bad circumstance, there are near infinite number of actions that can make the circumstance worse but only a very few that can make it better. Indeed, there is no natural law that says that every circumstance can be improved with the capabilities at hand. Sometimes a “can do spirit” backfires. Some circumstances are like earthquakes or tornadoes: you can’t stop them, you just have to ride them out.
It’s not just that all problems cannot be solved by hammering, it is that some problems just can’t be solved. Sometimes you just have to set and wait. We are economically basically in the shoes of a pre-industrial peasants watching their child fighting off the plague. All those poor people could do was make the child comfortable and pray, but in hindsight the children of the poor were more likely to survive than the children of the rich who were tortured to death by the greatest medical minds of their day.
“First, do no harm,” shouldn’t just be the oath of physicians, it should be the oath of economists and politicians as well.
[Update: See also this related post “Quantitative Easing” Equals “$600 Billion Tax Increase”]