Unconventional Wisdom

by Don Harkey

In case you haven't noticed, the economy seems to be struggling a bit. When you combine this with the significant changes that have occurred in the U.S. Government after the 2008 elections, this is a very interesting time.

As the Government scrambles to react to the current economic climate, I want to remind all of you to beware of "conventional wisdom". "Conventional wisdom" is a term that generally applies to knowledge that most people and experts accept as being true. An example is "smoking is bad for your health". A vast majority of experts and people believe this to be true, so people use the term "Conventional Wisdom" (CW) as a convenient way to lock into the "truth".

When people try to understand something complicated, they must start with some basic truths. In order to understand how to do Algebra, you must first understand basic math. You must accept the fact that 1 + 1 = 2 and that it always equals 2. These truths become building blocks toward understanding more and more complex ideas. Addition leads to basic math, which leads to algebra, which leads to calculus, which leads to physics...

The problem with some of the "softer" sciences like economics or management theory is that these "truths" or building blocks are harder to prove. Misinformation leads to complex theories that are simply and very wrong. A good example from the past occurred in the field of astronomy. The Earth MUST be the center of the Universe, so all theory at the time was based on this piece of "conventional wisdom".

My warning is this... beware of "conventional wisdom". In the information age, it is extremely easy to pick up "truths" that are actually not true. Worse yet, it is extremely common for theories to be presented as truth.

This brings me to our current economic situation. Few people in the U.S. truly understand what has happened, yet we were basically asked to choose between two very different approaches to the problem in the most recent election. It is a battle between "supply side economics" and "demand side economics". Both theories have significant support and yet, they can't both be correct. Yet both are often presented as "conventional wisdom" and serve as a basic building block for designing the solution to the problem.

Do you want to see what I am talking about? I present Exhibit "A". The following is a link to an ABC News World Report from January 27, 2009. The title of the segment is "Will it Work" and it refers to President Obama's plan to stimulate the economy. The information is presented with an introduction that it is "generally accepted by economists". Go ahead and watch... I'll wait...

http://abcnews.go.com/Video/playerIndex?id=6744866

This was nice presentation of a complex topic. The key information was that for every $1 the government spends, the economy is stimulated by $1.50. Also, for every $1 in tax cuts, the economy is stimulated by $0.75. The broadcast goes on to explain that tax cuts provide a quick stimulus while the government spending takes a lot more time.

Now I want to point you to an article that appeared in the Wall Street Journal on January 22, 2009 by Harvard Economics Professor, Robert Barro. If you don't read the whole article, just read the first few paragraphs... go ahead...

http://online.wsj.com/article/SB123258618204604599.html

You will note that Barro references the same "1.5" number mentioned in the ABC broadcast and argues that this number is not just a little flawed, but extremely flawed. He argues that the number may be closer to zero. Note that the article appears in the "opinion" page of the Journal (which I find admirable because they are acknowledging that there are other theories out there... unlike the ABC broadcast).

My point here is not to argue for or against the current stimulus package. My point is encourage you to be careful what blocks of "truth" you choose to stand on. Dig down to the basic truths and test them. Don't passionately live in a house built on a foundation of sand. Question everything! Do not surrender your judgment to "conventional wisdom"!