I agree wholeheartedly with Kossack jhecht, who commented here a couple of days ago, “Economics is politics masquerading as science.”
As I’ve noted it countless times over the five-and-a-half years I’ve been a member of this community, our economy doesn’t behave in-line with orthodox economic thought—especially during economic downturns--if for no other reason than due to the basic reality that economic theories and “rules” are affected by a myriad of factors outside of the “dismal science” that are not taken into account in traditional economic models. Politics, corporatocratic media, (and how it affects) consumer psychology, institutionalized greed, corruption, and the actions/activities of various entities, including other sovereign states, come to mind as just a few of the many factors that’ll derail the best-laid plans and good intentions of economists (and one’s belief in virtually any economic construct, for that matter) within any society.
Lately, many have commented throughout the blogosphere, and even in the MSM, about the abysmal failure of the profession. Herein are just a few examples.
[Author’s Note: The blogger, “Sell on News,” has provided written authorization to this post’s author to reproduce their material in its entirety for the benefit of the Daily Kos community. h/t to Yves over at Naked Capitalism.]
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Adrift in a sea of economic data
By Sell on News, the blogging name for a global macro equities analyst
Cross-posted from MacroBusiness
Saturday, March 3, 2012
A little known fact about John Maynard Keynes, detailed in Jane Gleeson-White’s book “Double Entry” is that he was responsible for the development of national economic statistics and that he expected them to be aggregated only on a temporary basis.
It was being done for the war effort, and would, he reasoned, not be necessary afterwards. This certainly puts “Keynesianism” in a different perspective, and poses the intriguing question: where would we be without economic statistics?
The Economist recently had a leader “Don’t Lie to Me Argentina” in which it accused Argentina of some kind of unforgivable treachery for politicising its economic statistics. As if economic statistics aren’t political in their very nature (a heavy bias towards capital and against labour, for instance).
So in contrast to H&H [a fellow MacroBusiness blogger], who enthuses that without economic data we are “naked, bereft of meaning” I wish to present a very different perspective. I wish to briefly examine what it would mean not to have economic statistics. Here are a few implications, I submit:
1. We would have to stop being lazy in the way we construct meaning and do the work of creating meaning ourselves.
The worship of economic statistics encourages a certain passivity of mind because it presents us with a picture ready made that we can then seek to interpret. Trouble is, that picture is heavily biased. Imagine, for instance, if it included unpaid housework as was proposed in Keynes’ time? Economics just presents transactions and makes little distinction between good transactions and bad ones.
A natural disaster, for instance, is generally thought to be bad, but in statistical terms it is not because typically the reconstruction creates a lot of economic activity (witness the Japanese growth figures post Fukushima). What happens is that transactions are not seen as a reflection of reality; rather reality has to be fitted into the transactions. “We all must change our behaviour because GDP is not growing fast enough, or productivity is not improving enough”.
2. We would embrace a broader sense of meaning, one that did not involve just what can be measured.
Most economic growth statistics measure the exchange of consumer goods, because it is easy. Much harder to measure assets, because they are not continually transacted — that was why the asset bubbles in America were ignored for so long, because they are hard to measure – and harder again to measure long term infrastructure investment. It is impossible to measure culture, yet culture is essential to well being. Indeed, well being is not really measured, and when they have tried to use broader measures it is generally found that life has improved little despite the economic growth.
3. We would not have a financial/economics sector purporting to understand what they do not understand.
For example, the “inter-relationships” between various economic indicators (such as Friedmanites v Keynesianism). This is for the most part an intellectual fraud. There are the obvious conclusions – you can’t spend more than you own, for instance – that derive from housekeeping (that being the etymology of economics). But anything beyond that is either unknowable or a circular argument (for instance Friedman’s maxim inflation is always and everywhere a monetary phenomenon is a tautology dressed up as insight).
4. We would have a greater sense of how we can impel affairs as thinking creatures with free will, rather than being pushed about by the “economic system”.
There is a reason why economists are so poor at anticipating the future. Economic statistics are always retrospective and tell us little about what people are going to do – and it is what people DO that shapes the future. Of course the past will shape what people do, but it does not determine it. Money is a social construct and transactions are social arrangements. They are subject to individual and collective will, not the logic of a mathematical system.
5. We would not have the giant casino that is amusingly referred to as the global capital markets.
The use of algorithms, which poses deep dangers to the system, is only possible because of the blizzard of data and statistics. That is exactly what is being codified and manipulated. Intriguingly, one of the geeks made an interesting comment, saying that a 2-3% variation, which makes all the difference in GDP statistics between acceptable growth and recession is all but inevitable in his geek world. he could not understand why it is considered so significant. But that is our world, dominated by economic statistics.
So there are five reasons why we would probably be a lot better without all that data. Far from being naked, bereft of meaning, I would suggest we could put on some decent clothes and find some more substantial, dare I say it, real meaning.
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Enter Robert Johnson, the executive director of the New York City-based Institute for New Economic Thinking. He was also a former managing director at Soros Fund Management and he currently serves on the U.N. Commission of Experts on International Monetary Reform (h/t University of Oregon Economics Professor Mark Thoma, over at his Economist’s View blog)…
Economists: A Profession at Sea
How to keep economists from missing the next financial crisis.
By Robert Johnson
Time Magazine
January 19, 2012
…first, economists should resist overstating what they actually know. The quest for certainty, as philosopher John Dewey called it in 1929, is a dangerous temptress. In anxious times like the present, experts can gain great favor in society by offering a false resolution of uncertainty. Of course when the falseness is later unmasked as snake oil, the heroic reputation of the expert is shattered. ...
…
... Second, economists have to recognize the shortcomings of high-powered mathematical models, which are not substitutes for vigilant observation. Nobel laureate Kenneth Arrow saw this danger years ago when he exclaimed, “The math takes on a life of its own because the mathematics pushed toward a tendency to prove theories of mathematical, rather than scientific, interest.” ...
…The third remedy for repairing economics is to reintroduce context. More research on economic history and evidence-based studies are needed to understand the economy and overcome ... mechanistic bare-bones models...
…
…Fourth, we must acknowledge the intimate, inseparable relationship between politics and economics. Modern debates about who caused the financial crisis—¬government or the private financial sector—are almost ¬nonsensical. We are living in an era of money politics and large powerful interests that influence the laws and regulations and their enforcement. In order to catalyze the evolution of economics, research teams would benefit from multidisciplinary interaction with politics, psychology, anthropology, sociology and history.
…
…Psychologists mock what economists call the micro¬foundations of consumer behavior—a set of assumptions based on the idea that isolated individuals behave with clear knowledge of the future. That this framework is suitable for aggregate systems in a globalized economy simply because the tribe called economics has agreed to adhere to these ad hoc assumptions makes no sense. Increased interactions with disciplines that economists have often mocked as unscientific would greatly improve economists’ understanding of the real world and would be more truly scientific….
Johnson closes out his article noting that, until that happens, the entire dismal science of economics is
“…really at sea without an anchor.”
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Economics is people not arithmetic
By Sell on News, the blogging name for a global macro equities analyst.
Cross-posted from MacroBusiness
January 21st, 2012
The non-reaction of the markets to the ratings agencies downgrades of European debt underlines a persistent characteristic of the markets that is all too often forgotten. Especially by economic commentators. If it were simply a matter of extending the arithmetic of current economic performance into the future, then economic predictions would usually be right. On the contrary, they are usually wrong.
This piece in the Financial Times has a salutary reminder of just that:
Perhaps the most honest perspective, and one cherished by forecasters, is that we have “low visibility” on the US economy. It is one of those catch-all phrases that might one day serve as an epitaph for our times. It may also help to remind ourselves just how bad the forecasters have been. A few years ago a Berkeley study apparently found that monkeys aiming at a dartboard were more accurate than professional forecasters.
Perhaps we need to hire those monkeys to help us anticipate where the euro crisis is going (dart boards don’t cost much). In the meantime, it is worth asking why economists are so often wrong. There are the obvious reasons. Too many “factors” to consider. The folly of projecting to the future what has happened in the past. The irrationality of those supposedly rational actors, with their paroxysms of fear and greed. There is the problem of poor or partial information. One person I know who works in the ratings agencies says they really know little about government finances, and in any case they are required to follow certain lines to please their pay masters.
Then there are some deeper reasons. The problem of non-linearity in complex systems, which makes them inherently unpredictable. The impossibility of including in any predictive model the knowledge that people have of that model. This of course renders any prediction fragile. In a sense it means that the only predictive models that can actually be considered reliable are those that nobody knows anything about. Those that are understood can of course be undermined by the development of strategies to exploit the predictions, and those strategies will, by definition, be outside the models.
One could go on, but I believe there is another blindness in economic commentary that is especially telling. Jane Gleeson-White, in her book “Double Entry” shows how economic statistics derive from the double entry system developed by the Italian mathematician Pacioli in 14th century Venice. It is a worthy reminder that financial transactions, the capital markets, are a social artifice, a created thing. They are not laws of the universe, immutable and sovereign. Yet that is how economists treat them and that is the prism through which we have come to see the world.
Gleeson-White tracks how ubiquitous the binary system of accounting has become in economic statistics and economic theory, including Marxism. Weber equates double entry with capitalism itself. She does not mention it, but the idea of “balancing the books”, credits matching debits, is implicit in General Equilibrium theory, which drives our idea that “economic imbalances” are to be guarded against (an idea with merit, of course, if transactions are not to be undermined).
The insistence on interpreting economic transactions as an inviolate system, like a natural system, that is subject to scientific laws is, I suspect, the main reason why economists are so wrong. They are not looking at a natural system, they are looking at a created, artificial system that need not be the way it is. The statistics, as Gleeson-White shows with her description of Keynes’ development of GDP and other national economic statistics, was based on a series of assumptions about what should be considered valuable. Different assumptions could have been made. If they had been, we would now have a different picture of economic progress and relative wealth.
So here’s a suggestion.
Maybe economists should view the “euro crisis” or indeed any other economic phenomenon, as a social artifice that must be interpreted using non-scientific methods — you know, look at the people involved, for instance. As for me, I suspect that the supposedly irresolvable arithmetic cul-de-sacs of European national finances are a bit of a mirage that the market will eventually tire of. That which is created can be uncreated. There is also something suspiciously biased about the concerns with, say Italian debt. At about $2 trillion, it is one sixth of Japanese debt and one eighth of American debt. It is little more than 1% of global debt. So why is it getting all the attention? The answer, I would suggest, is to do with ideology, politics and trading plays. People, in other words. Not arithmetic.
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David Morris is Vice President and director of the New Rules Project at the Institute for Local Self-Reliance, which is based in Minneapolis and Washington, D.C. focusing on local economic and social development.
Occupy Economics Departments
Conventional economists have a lot to answer for but will they listen?
by David Morris
On the Commons
December 13th, 2011
…“You can’t get into so disastrous a situation as we are in now without extraordinarily bad thinking and the economics departments were the source of that bad thinking,” observes Steven Keen, Professor of Economics at the University of Western Sydney and author of Debunking Economics…
…
…In 2001, economist Steven Keen bluntly challenged conventional economics. “An economic theory that ignores the role of money and debt in a market economy cannot possibly make sense of the complex, monetary, credit based economy in which we live.”
…
…Again Keen is more blunt. “Neoclassical economists were effectively trained to not see this crisis coming, by theoretical fallacies that led them to ignore crucial real-world phenomena like the ballooning levels of private debt, and rampant speculation and fraud in the private sector.”…
Morris then takes a look at the abject fail and blatant, institutionalized bias of many economic evangelists of the right, including Harvard professors Greg Mankiw and Martin Feldstein. In closing, he discusses their colleague, professor and author (
The Dismal Science) Stephen Marglin’s alternative economics class at the school.
Morris tells us that Marglin: “…believes the methods of economists do embody a doctrine. Their assumptions embody certain values and predetermine outcomes.”
He notes: “…Marglin points out several potentially fatal flaws in conventional models…It is highly misleading about how society actually works. Not only do you have to leave out all the fine print about monopoly and oligopoly, externalities, public goods, asymmetric information…you have to separate individuals, focus on the individual, and leave out of the analysis the connections between individuals…”
Essentially—I strongly recommend you read this piece and come to your own conclusions—Marglin notes that: “You have to assume that it is human nature always to want more, never to be satisfied with ‘enough.’ … you have to assume these rational, isolated individuals are completely self-interested.”
The conventional thinking about economics, in other words, focuses upon greed. Without an individual’s or a corporation’s sole focus being upon self-enrichment, Marglin observes that conventional, rightwing market and economic wisdom “breaks down.”
Marglin addresses an issue ignored by most economists: the effect of their models and the policies derived from them on our sense of community. Morris points to the economist’s subtitle of his book: “How Thinking Like An Economist Undermines Community.”
“Community is important to a meaningful life,” he maintains. “Community is about human connections; we need community to foster and maintain these connections. And we are diminished as our human connections are diminished.” “The economics we have constructed makes it virtually inevitable that we will leave community out of consideration when we ask questions about economic policy.”
He offers students advice that would be considered heretical in a conventional economics course. “Choose very carefully which markets you will allow and which you will not in terms of what they do to communities”…
…
…The study of economics may indeed help us understand the world and design appropriate policies. But we need to drop the pretense that economics is a science based on laws and objective models and accept that it is a normative discipline. We need to own up to the bias inherent in conventional economic models and the social damage policies based on those models has wrought.
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As Naked Capitalism’s Yves Smith noted yesterday in her commentary on the MacroBusiness blog post (cross-posted, up above), “Adrift in a sea of economic data”…
…the overwhelming majority of economic statistics are “soft” in that they are constructions, and statisticians care a great deal about consistency over time. That is useful up to a point. The procedures that produce consistency mean that if the measurement fails to capture or underweights an issue that is becoming increasingly prominent, it will have obtained consistency at the expense of representativeness (the notorious non-farm payrolls “birth-death adjustment” is a classic of this type). And the caliber of official statistics had decayed due to reduced staffing thanks to budget cuts.
I wrote about some of the problematic behaviors that result from the propensity to give quantitative information, no matter how poor it may actually be, great weight… …One of the symptoms, and it takes place way too often, is when people rely unduly on a single or very few metrics to analyze a complex phenomenon (think of the use of VAR to measure firm wide risk!). If you must measure to get a grip on a complicated situation, use more rather than fewer views in (provided you don’t go for more just to have more but can find pretty reliable measures of different, important aspects of a complex situation).
And perhaps the most important habit to adopt is to be aware of the limits of your knowledge.
Bold type in blockquote is new emphasis.