Thursday, July 24, 2008

What Ails Economics

A woman in Taunton, Massachusetts, has committed suicide because she had lost her house and it was going to be auctioned off later on the day of her suicide. She lived in the house with her husband and at least one adult child, but it was she who had managed the bills and her husband didn't even know about the foreclosure or the auction. So he came home from work to find her dead, with a suicide letter by her side suggesting that he should use the life insurance money to keep the house.

It is such a horrible story. We are unlikely to know all of it, of course. She may have been suffering from mental illness or depression, for instance. But the story highlights the tragic and devastating aspects of the housing crisis, the human aspects of that crisis. To lose your home is to lose the shelter against storms, snow, excessive heat, violent humans on the streets. To lose your home dislocates you not just in concrete terms but in the landscape of your mind. It can label you as a failure, as a drifter as someone with no protection and no power.

And none of this is really and truly addressed in the economic discussions of the housing crisis, because economics cannot measure and quantify these aspects of human suffering, except in the most rudimentary and glancing ways. That inability to measure costs which are not easily converted to dollars and cents has in practice meant that economists tend to ignore those items or at least weigh them less than the billions lost here or gained there.

Once you ignore the psychological costs in various markets it's easy to start thinking that losing a job, say, is just a question of searching for another one. And if all the jobs you have been trained for go overseas, never mind. Just go back to college for another four years and get a different job!

Now, the advice isn't bad, but it ignores all those psychological costs having to do with job loss: the need to move your family, the broken connections to your previous community, the friends your children lose, the loss of meaning in your own life and so on. Once those costs are ignored it's just one short step to pretending that they don't exist, that market transitions are frictionless and that there are no transaction or search costs, either.

Then you get the idea that markets are free and hum along like an expensive car, and if you don't want to drive in one of those, get the bus to the welfare office or walk.