Is Economics harder to understand than ‘real’ science?

After watching this video I am growing increasingly more concerned that many Canadians understand economics even less than they understand science.

Even though it sounds silly, economics is a science.  One part accounting, one part psychology.  Sure it’s not well understood, but we can perform experiments and make predictions about the results.  The results are often novel but you can do real science.  I suppose it does make sense when you think about it.  My high-school offered 4 science courses (Chemistry, Physics, Math, and Biology) up to the grade 12 honours level but only had a locally developed marketing course for econ. How will people understand econ if their entire exposure is Jack Donaghy? Most people will think of science as fundamentally achievable albeit difficult, but when the topic turns to economics most people will give up without even trying.

Consider: What is fractional reserve banking?  Will CPP run out of money?  Is it a ponzi scheme?  If I earn a dollar above my tax bracket will my take home pay go down?

To remedy this, YYJ Skeptics presents: An introduction to Fractional Reserve Banking.

Let’s say you have $1000 dollars and decide to save it in a bank.  Some people will claim the banks will ‘create’ $10,000 in some special sinister method.  These people are wrong. They use a fallacy known as ‘Being Terrible at Math’.  I’ll demonstrate through an example where Alice lends a bank $1000 and Bob borrows $900.

The Initial Conditions

Alive Bank Bob
Assets Liabilities Assets Liabilities Assets Liabilities
$1000 (Cash) $0 $0 $0 $0 $0

At this point, Alice has not yet deposited her money in the bank.  All her money is in her hands.  Now let’s look at it after she deposits it.

Alice Bank Bob
Assets Liabilities Assets Liabilities Assets Liabilities
$1000 (Deposit) $0 $1000(Cash) $1000(Alice’s Loan) $0 $0

What’s this? It looks like there is $3000 dollars in play now. Clearly something is skeevy. Well no. If you add up all the cash, it still only totals $1000. The entries are Alice’s $1000 loan to the bank and the bank’s $1000 debt to Alice. That’s right, bank deposits are loans not cash. So the total money is still $1,000. But what happens when the bank loans out the money? Well, let’s see.

Alice Bank Bob
Assets Liabilities Assets Liabilities Assets Liabilities
$1000 (Deposit) $0 $100(Cash)
$900(loan to bob)
$1000(Alice’s Loan) $900(Cash) $900(Bank loan)

We can count that the amount of money is still only $1000. All those other numbers? They all add up to zero.

Accounting is hard or at least boring enough to discourage all but the thickest glasses wearers. The fact is, it’s not that hard and is well within the grasp of anyone who wants to understand.

People who claim that banks are somehow creating money are wrong.  They either don’t understand basic addition and subtraction or they’re being intentionally duplicitous. Remember to be Skeptical of people who think the world economic system is a scam.


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