News Flash: Aristotle, Euclid, Newton, Einstein were all wrong

This article appeared in The Sydney Business Review on 15 March, 1995

Some authors write about other universes where you can travel through time and faster than the speed of light. Their works appear in paperback books with lurid covers. They know that what they write is fantasy, and they call their literary genre "science fiction".

Another group also writes about universes where the laws of logic, mathematics, physics and causality are different to our own. They write in respectable newspapers and magazines and they appear on television current affairs shows. They apparently believe in the reality of the universes they describe. They are called "economists".

Interest rates and the CPI

Before the last CPI figures were announced there was speculation that the Reserve Bank might have to raise interest rates to dampen inflation if it was too high. A major component of the CPI is mortgage interest. Therefore, the way to reduce the size of a total is to increase something which adds to that total.

Exchange rates

If you heard that A÷U=.774, then later you were told that this had changed to A÷U=.748, you would probably be surprised that the change was because U was less but A had remained the same. A statistician would be surprised to find that while U and A were independent (A is actually always 1), the ratio A:U is strongly correlated with both U÷M and A÷M. You may like to find different values for each of A, U and M which satisfy the equation A÷U = U÷M = A÷M. (The special case A=U=M is called an "Exchange Rate Mechanism" or dirty float.)

Economic models

Physicists and weather forecasters think that there are inherent uncertainties in nature, but Voyager found Neptune after about 10 years travel and we usually know what to wear next weekend. The economist's universe is a precision machine where you set the levers and can accurately predict the outcome. This is why it has been so easy for Western countries to reduce unemployment. Unfortunately, it is not yet possible to predict movement on the Australian stock exchange when there is a public holiday in the US, because "we are waiting for a lead from Wall Street".

Free trade

Most people believe that the world is round, and geometry tells us that a figure on the surface will have a slight curvature. Economists believe in something called the "level playing field", which is a plane. As it is not possible to mark out a plane on the surface of a sphere, economists must think that the earth is flat. On this "level playing field", all values are equal. Thus 15% tariff on Proton cars from Malaysia is equal to 300% on Commodores going the other way, and 5% duty on Thai prawns is equal to 30% on Australian beef.

Growth is good and bad

If South Korea grows at 6.7% per year it becomes a Tiger of Asia and an economic miracle. If Australia grows at 6.4% it requires interest rate rises to control the unsustainable overheating. As both are true at the same time, economists have redefined formal logic. Last year, stupid Australians kept building houses and their silly bosses increased business investment by 33.8%. It's just as well we have economists to tell us to raise interest rates again or we might overheat to the point where our children have jobs and our balance of trade goes positive.