Whenever I did something stupid -- on the playing field or in life -- my father would often grab me by the shoulders with both hands, stand me up, and stare me in the face and say simply: "Peter, this isn't rocket science." And then give me the straightforward explanation of what I should have done instead that would not be so stupid and would have resulted in the outcome I desired.
I have adopted many of my father's sayings as I have grown older, and this particular phrase "ain't rocket science" I tend to use all the time about economics. Yesterday the report came out that housing sales were down, and the stock market fell. I woke up this morning to emails from a very good friend in the investment business with dire predictions from Morgan Stanley and even Goldman Sachs that the US economy is going to tailspin into a deeper recession.
I don't possess a crystal ball, so I cannot forecast the economic future. But I do know that it is not good to expand the monetary base 140% or to run deficits the size we have, or accumulate public debt as we have. See Laurence Kotlikoff in The Economist. This "ain't rocket science"! There will be a day of reckoning due to the monetary mischief and fiscal irresponsibility.
I also know that the problems we are facing are not "market problems" --- it is not that actors are all of a sudden 'irrational', and it is not that markets are inherently 'unstable'. Everything we are seeing in market behavior is a rational response to the environment created by public policy. This is not a psychological problem we are dealing with, it is a public policy problem. Bad public policy produce bad incentives which in turn produce bad results. Ultimately, this is a problem of bad ideas which result in bad public policies. Again, this ain't rocket science. The role of the economists in all of this should be like my Dad when I was a teenager (and truth be told an adult), and grab policy makers by the shoulders star them squarely in the face and state clearly "this isn't rocket science" and explain clearly the Econ 101 basics of why the decisions we have made so far have not been correct.
Gerald O'Driscoll over at ThinkMarkets does precisely this today. Nothing that has gone on so far with the housing market would be unpredictable with a little return to the lessons of Econ 101 about incentives and information, and how markets work to coordinate plans through time via relative price adjustments and profit and loss accounting. Policies produce incentives, when individuals in the system follow the path those incentives lead them to pursue, we should not be surprised (and certainly not disappointed). The policies adopted produced the results we see, not individuals behaving badly or behaving 'irrationally'. Unfortunately, in our efforts to be 'sophisticated' we often confuse simple economics with simple-minded economics. But there is nothing simple-minded about returning to simple basics of economic science. This ain't rocket science, but individuals respond rationally to incentives and demand curves slope downward and supply curves slope upward.