Frank J. Tipler, Professor of Mathematical Physics at Tulane University and published author, argues that macroeconomists — and by implication the politicians who rely on their models — are flying blind because none of them work with any reliable precision. He writes that both Galbraith and Friedman were alike in one respect: neither could tell you what was going to happen to the economy.
In the early 1980’s, the Wall Street Journal asked liberal economist John Kenneth Galbraith and conservative economist Milton Friedman to predict the macroeconomic trends over the next two years. Both agreed that inflation would rise above 10%, and both accused the other of obtaining his prediction by reading chicken entrails. Both were wrong about inflation, but both were right about the chicken entrails.
Galbraith and Friedman were two of the leading late twentieth century experts in macroeconomics — the study of the national or global economy. They applied different macroeconomic theories to make their predictions. Both predictions were completely wrong, which indicates that the theories from which the predictions were made were also wrong. Today, the United State government is about to embark on a vast macroeconomic experiment to prevent the global economy from collapsing into depression. How can we tell if the course of action recommended by a given economist today is any better than reading entrails? Basing an action on a macroeconomic theory that is wrong is acting at random: the action may make matters worse, much worse that doing nothing. If you don’t know how a machine works, don’t mess with it.
Greg Mankiw argued that macroeconomics was still worthwhile because it was a discipline struggling to emerge from a cocoon of obscurantism; and that although it had the predictive power of astrology, there were no defects that little more research couldn’t cure. Better facts and better models would ultimately lift the dismal science from the mire just as astronomy raised from the soothsayers during the time of Copernicus. It was a science in embryo. But Tipler believes that is all the more reason for macroeconomists keep silent until they have something to say. Until then, macroeconomics is merely opinion journalism.
The moral of the story is simple. Macroeconomists should realize that the inability of their theories to make accurate predictions means that they do not know what they are talking about. We non-economists should realize this also, and realize that our leaders, who are being advised by macroeconomists, haven’t got a clue where they are leading us. Their actions may lead us out of the current recession, or they may lead us into a depression as bad as the Great Depression.
Franklin Roosevelt is often given credit for experimenting with the economy in a scientific manner. He did nothing of the sort. Any experiment involving human beings has to be a controlled experiment, as in medicine. Half the patients are given the new medicines and the other half, the controls, either the old medicine, or a placebo. Then, and only then, can one tell if the medicine actually improves the condition over doing nothing (the placebo), or is making matters worse. In contrast, Roosevelt — and today’s economic advisors to the President, unfortunately — propose to apply their economic medicine to the entire economy. This is astrology, not science. The professors of economics have no true, experimentally confirmed knowledge of macroeconomics.
I think both Mankiw and Tipler make valid points. Mankiw is correct to say that all truth begins in bunk. But Tipler is also right to claim that it cannot remain there, and as long as it does macroeconomics is still bunk. Yet neither makes the point that it is precisely the unscientific, open ended character of macroeconomics that makes it so useful to politicians. If macroeconomics ever became as powerfully predictive as physics or astronomy politicians would never go near it. Science has the disquieting property of establishing a right and a wrong answer. What would be the fun in that?
The abundance of lawyers and social scientists in politics is matched only by their unsuitability for other duties. Lawyers and activists can figure out how to save the planet in just eight hours. Politics is the art of being right even after you’ve been proven wrong.
Economics is not simply a modern-day version of astrology for politicians and Wall Street hustlers.
It is also a tool for moralists, for expressing the dictates of “common sense” in a pseudo-scientific, quantitative language.
If your underlying morality is right, then perhaps the economic analysis one develops from it is useful. At the very least, it is useful for thinking about things and brainstorming, if not for prognostication and analytical understanding. Which, of course, is the analogous situation with astrology in times past.
I agree with Tipler. The economy is an emergent phenomenon, meaning that the whole is greater than the sum of the parts. This means that any attempt to understand the whole by looking at specific parts will necessarily fall short. Changing the whole by tinkering with the parts likewise is not possible. The only thing that comes from that is unintended consequences.
However, because America is made up of 50 states we do get something resembling a controlled experiment. Look at cities and states that have had democratic leadership for decades. Invariably you find more poverty, less economic growth, crumbling infrastructure, fleeing businesses and ultimately fleeing populations. But politicians never learn, because ultimately what they are interested in is not fixing the economy but buying votes.
The actions of politicians are incomprehensible if we assume they want the best policies to fix the economy. They are completely understandable if we assume they want to buy votes to stay in power.
For a conservative, the chief sin is to change things. For a liberal, the chief error–they don’t recognize the concept of sin–is to leave things alone. Unfortunately for conservatism, it’s a rare politician who can successfully campaign on a promise to not do anything.
As currently practised, economics works rather poorly apart from relatively short periods because dynamic and living systems cannot be modelled. This is not calculating load factors for beams or the melting point of copper.
Dynamic systems are characterised by their non-linearity, whilst humans are noted for their tendency to rely on linear extrapolations. That’s one reason why economists are wrong 75% of the time when asked to predict the direction of interest rates 6 months hence — direction (up or down), not magnitude.
If you flip a coin for that question you’ll be wrong only 50% of the time. Any ‘discipline’ in which flipping a coin doubles its practitioners’ predictive success rate … is not particularly useful.
Dynamic systems do, however, include waves and cycles enabling a certain level of prediction. The brilliant economist, Peter Bernstein, in his seminal work ‘Against the Gods’ (a history of risk), points out that something like 80% of risk can be controlled by two factors: a) recognise that there is a cycle, and b) understand roughly where you are in it.
In very banal terms you don’t plant tomatoes in October … unless you live in the southern hemisphere.
Macro-economists tend to stuff it up because they’re not thinking macro enough, and consequently get caught out by natural non-linearity. In dynamic systems you can predict the what and the why reasonably well if you’re willing to accept considerable uncertainty regarding *when.*
Is the economy a very complex system, for which gradually better and better predictive models can be developed? Or is it a chaotic system, for which it is impossible to develop long-term predictive models because it is impossible to specify all of the initial conditions?
If it is the latter (my guess), then the goals of prediction have to be much more modest. Meteorologists are able to predict the weather (a chaotic system) in the very near future better than they could a century ago. Economists are not that far along; they can not yet predict the direction that inflation or the stock prices will take in the coming week, even the next day.
Maybe we expect too much of economists because we want to believe them in order to feel in some control of the future. Maybe neither they nor we accept the difficulty (or impossibility?) of their goals of prediction.
Best wishes,
JIm
FDR had his own coterie of Ivy Leaguers who nearly “managed” the economy into oblivion. Unemployment was 20% when FDR took office in 1932 and unemployment was still 20% when FDR was well into his second term immediately before the War. FDR used the public treasury to buy votes for his own reelection and to ensure himself a Democratic majority in Congress. Openly and unabashedly in Republican strongholds in Maine and more surreptitiously elsewhere.
Many of FDR’s Ivy League academons got their inspiration for central management from visits to the Soviet Union and to Mussolini’s Italy in the late 20′s where they were marched through Potemkin Villages and watched the trains run on time. Obama is doing exactly the same thing today. His Ivy League academons are no smarter than their predecessors although they should be with 60 more years of reality to temper their arrogance.
Anybody claiming that the so called Obama stimulus package is for the common good is either a liar or a fool.
If macroeconomic modeling were worth a damn it would have successfully modeled the current credit crisis and its aftermath. With supercomputers you can do regressions with 100 variables and get all the answers you want but your answers have no relation to reality when there are 1,000 or maybe even 10,000 or 100,000 other variables that are unknown.
Politicians are foisting the same kind of nonsense upon with with Global Warming models that failed to predict, or even acknowledge, the decade of global cooling reality we are experiencing.
The Roman Catholic Church, indeed religion in general, suffered a loss of confidence and influence on public life in the Enlightenment because it had become politicized by less than honorable men. Science is undergoing the same kind of politicization today and will likely suffer the same fate.
So what shall the post-religion, post-science belief system look like?
The company I work for develops models for such things as predicting where the pieces of rockets go when they blow up and what the effect will be when they come down.
Various mathematical and computer programming approaches are used in these predictions, but whether Baysian statistics are used or not or regardless of C Plus or Linux programming employed, all the models have to be grounded in two things: Good physics and good history. We have to know what the parts will do when subjected to the forces involved and what they actually did when this did happen in the past. Added to this is the necessity of figuring out the probabilities of specific mishaps, which is where I come in.
None of this is true in economic models. There appears to be no economic equivalent of physics. What really happened in the past is tossed off at best, or claimed to have worked when it did not in fact.
The real value of a science is said to be its ability to predict. Psychology does not show up well by this measure. Neither does economics. It’s called the Dismal Science for more than one reason.
Finally, I recommend the book “Roosevelt’s Folly” for a history of the New Deal.
One can understand cars without being able to predict who’ll win a race. One can understand weather without being able to predict what’ll happen next Saturday. One can understand geology without being able to predict the date of the next earthquake.
Predicting the future is simply impossible, because it’s the future. I don’t understand why economists are judged solely on their ability to do so.
I would like to see the date on the Friedman prediction and for what time frame, i.e., 6 months, 1 year, ten years. As a quantiy theorist he would have been watching the action of the Fed and monetary growth. From 1980 on the Fed curtailed monetary growth and inflation fell rapidly.
Friedman advocated constant growth in the money supply precisely because you cannot accurately predict the course of the economy. He was against discretionary fiscal and monetary policies. Lumping the predictions of central planner Galbraith with free market advocate Friedman shows that Tipler knows little about economic theory.
Peter B @ 6:
“Anybody claiming that the so called Obama stimulus package is for the common good is either a liar or a fool.”
That can be extended to any major Federal legislation. Fools are thus. It’s the liars I worry about
Undertoad @8: “Predicting the future is simply impossible, because it’s the future. I don’t understand why economists are judged solely on their ability to do so.”
Economists are judged on their ability to predict the future because they recommend policies based on those predictions. If they claim that a certain policy will cause interest rates to fall and it is followed and then interest rates go through the roof, then we need to call them to account for it.
What we need to do is stop basing policies on the predictions of macroeconomists.
Bart Hall, you are correct in that we can see that there are cycles involved. The conservative approach is to acknowledge this and say truthfully that there is nothing we can do to prevent the inevitable recessions. Furthermore, any attempt to prevent such cycles from occurring will actually make the swings worse, like the resonance that occurs in a driven spring. If you drive the spring at or near its natural frequency, the amplitude of the oscillation is increased dramatically. The moneterists at the Fed are attempting to drive the economy out of this recession with dramatic increases in the money supply, however this will only cause inflation to be much higher than it otherwise would.
No matter what we try to do, there is no way of getting out of this economic mess without pain.
Alas – the problem is that politicians MUST be perceived as DOING SOMETHING when times are bad, or they get fired by their constituents.
Lamont
I am so pleased to see this blog on BC. I am friends and ex colleagues with two macro economic Nobel Laureates. I never met Milton but I know his son. I also know and am known by four living Nobelites. I started by academic career in a top management school and I have been a professor of economics in a very good department and then move down for personal reasons.
I am one of the Associate Editors of the journal Macroeconomic Dynamics and the Studies of Nonlinear Dynamics and Econometrics.
Those of you who have some knowledge of economics do not know how bad modern macro has become. The rational expectations theory of Lucas and Sargent attempted to formalize expectation and thus provide a theory that bypasses the fundamental uncertainties inherent in the future. The theory is an exercis in simplistic time series.
The Real Business Cycle (Prescott) in something one would expect of a scholar in the Middle Ages.
The use of the so called Representative Agent requires assumptions that have zero probability of being true.
I read one of Benrenke’s empirical work. I would give it a grade of D for its econometrics (I am an easy grader).
In support of Friedman he argued for a fixed and predictable increase in the money supply to match economic growth.
Galbraith was a lefties propagandist and his son is a raving lunatic but gets air time.
Even microeconomics has gone of the track. Economics is now a bunch of mathematical models that are at best tested with bad data and sloppy metrics. If the results falsify the theory the data is tortured to confess the truth of the theory.
There are some honest and talented economists but they tend to be pushed aside by the ingroups that gets into the policy orbs.
The law of demand only requires the admission of scarcity. The law of supply is more complicated since it requires that producers have expectations that a rise in the price of their product will hold for a while. For example who is going to drill for oil in expensive drilling tracts?
Yes the economy is nonlinear and highly dimensional. I have contributed to the literature on nonlinearity in stock rates of return. But our work shows that Black-Scholes model for pricing options is fundamentally wrong. That model has been used to generate a 415 trillion dollar market for derivatives. See how successful it has been!!!!
“Dynamic systems do, however, include waves and cycles enabling a certain level of prediction.”
Bart Hall you are living in the past. You must have missed the Clinton Administration announcement in the mid-90′s that they had defeated the economic cycle process.
Either that, or all the Clintonistas did was manage to stretch it out and delay the inevitable via the Community Reinvestment Act, selling off the Strategic Oil Reserve, drastically cutting military spending, and pumping up the Dot Com Scam – and thus make the next downturn that much worse.
@Peter Boston,
The number of variables in Input-Output analyses that underly Obama’s macroeconomic assumptions were limited by ability of Wassily Leonief to get his graduate assistants to perform calculations with hand cranked adding machines. Computers later added volume without changing the theoretical underpinnings. Leontief worked for the NBER under FDR and taught Paul Samuelson at Harvard.
In fairness to Economics it is persistently attacked for what it does not pretend to do as much as for what it does. People joke about the Economist with a can of food on the desert island who says “assume a can opener.” The point is that Economics is the science of studying choice under conditions of scarcity given pre-existing conditions. That includes the conditions of taste, desire, and morality that Economists refer to as Utility. What your “utiles” are is not the economists problem. Many errors arise from persistent efforts to get economists to determine what people should want or need and how to change their preferences to others which in the opinion of the observer are somehow better. The problem of desire or what is a Utile is not an economic question but a moral or psychological question. The more than 100 year effort to delegitimize the use of moral standards in public policy, except as window dressing to support politically predetermined conclusions, reduces policy to a mechanical activity without a purpose. Rudderless it is doomed to fail.
All my life, I have achieved a tactical edge because others predict my behavior by believing that I will act in my own best interest and employ common sense.
Having said that, I must admit it doesn’t always work to my advantage.
people usually say these days that FDR didn’t get us out of the depression of the 1930′s. Rather it was WWII that got us out of the depression. This explanation is taken as sage. And then the conversation moves on.
But what was it about WWII that brought the US out of depression. Surely making tanks or aircraft carriers can be no more productive than prettyfying the countryside as the Japanese did in the 1990′s. In both cases once the job is done …. the job is done. There’s nothing multiplicative or even additive about the work. Neither are the basis for more work. Much less profitable work.
You can say there was a lot more work in WWII. Great. The carriers were decommissioned. The tanks were stored. The men took off their uniforms. Their work was done. It was also finished. Tanks don’t make more tanks. Carriers don’t make more carriers.
The Hoover Dam and the TVA were built during the New Deal. Some great railroads in Appalachia were built to bring coal to markets in the east during the New Deal. This kind of work has multiplication powers.
So what was it about WWII spending that made it different from New Deal spending.
Charles, throughout the 30′s FDR’s policies shackeled business, making it hard for them to grow, ie, add employees. When we got involved in WWII, FDR removed most of the shackles, allowing business to expand rapidly.
“But what was it about WWII that brought the US out of depression.”
One of the things that kept the Depression going was that FDR thought competition was too high, and wanted prices and wages higher than the market would set. After the Supreme Count stepped on his overt wage and price setting, his administration just turned a blind eye to cartel and monopoly price fixing.
After Perl Harbor the rules changed.
The laws of physics are to climate as the whims of man are to the market. What is the cycle of whims? Who truly knows the whimsical?
The depression was a crisis of confidence. Nobody was borrowing money during the thirties, even with near negative interest rates. The WWII spending was, however, quite real, and any business man could see that it wasn’t just another 90 day WPA wonder, subject to political whims, but a real commitment to some kind of economic activity, with actual legs. An aircraft assenbly plant needs thousands of ancillary nodes to keep it going. Until the war, the untapped potential of the entreprenurial class was just wasted. Even then, the recovery was somewhat anemic. The rationing and war production boards were a great handicap, but a bit of confidence in the future brought back some semblance of markets.
I think one of the problems that sorcerer’s apprentices have with tinkering with the American economy is that there are many forces that affect the American economy that are simply beyond America’s power. This is not a new condition.
One of the reasons behind low oil prices in the 1980′s was the Iran-Iraq War; each side was pumping oil like a madman to fund the war effort. The enmity between “Ayatollah” Khomeini and Saddam Hussein was not a variable the United States could control, even if it had tried. One could imagine what could have happened if Iran and Iraq were somehow allied against the United States during that period; the price of oil may have been very different as the balance of power would have pushed heavily in the Soviet Union’s favor.
Politicians in Washington, DC (and George Soros!) may wish to believe that they can control all variables that affect the economy, but they are nowhere near as powerful as they imagine themselves to be.
Why are economic predictions wrong? Because one of the principal actors cannot be predicted with any precision, the government.
How did WWII lift us out of the depression? Taking 11 million young men out of the private sector workforce certainly helped unemployment. The physical destruction of most of our world competitors infrastructure and capital equipment while our remained intact also helped.
Which is not to say that an economic model that rewards productivity is preferable to one that rewards voting a certain way. Which we’re fixin’ to find out the hard way. Even though there is ample relevant evidence to support said argument.
ACTUNG!
Das geldmaschine is nicht
fur gerfingerpoken
und mitten grabben.
Ist easy schnappen
der springwerk,
blowenfusen und
spitzen sparken.
Ist nicht fur
gerwerken by das
dummkopfen
Das dogooden, nitwitten
und bunkenfloggen
keepen hands in das pockets.
Charles and Elby: You both make very good points. I don’t know the answer, but here are some factors to consider:
The Depression was caused largely by government policies, for example, banks could not have branch offices. This was done to protect the small banks from competition from the large ones. This meant that small banks did not have much of a base. In Canada they had no such limitation and they had almost no bank failures. Another example is the Smoot Hawley trade tariffs.
The New Deal added a lot more regulation. It is not clear that WWII removed any of this, but they had to focus somewhat on efficiency rather than Politically Correct gestures.
In WWII you employed a great many men in the military. And a private made something like $22.50 a month; that is something like 14 cents an hour. Cheap labor. And they sold a lot of War Bonds; even schoolkids bought bond stamps that could be turned in for a bond when they fileld up their book.
The really curious thing about today’s situation is that no one is suggesting that the simplest and easiest and cheapest way to boost the economy is to identify which regulations hurt the economy the most and then removing or suspending them.
The 77th Annual Report from the Bank for International Settlements, dated June 2007 makes the point that “economics is not a science” and goes on to say that that everything is basically working just fine, thank you. From this July 2007 Nyquist column (asking “Is Dissolution Just Around the Corner?”) the BIS Report is quoted:
“The consensus forecast for the global economy, which is obtained through a poll of economists, anticipates that recent high levels of growth will continue, that global inflation will stay quite subdued, and that global current account imbalances will gradually moderate.”
(Nyquist adds) “This would be good news if economic forecasters could actually forecast the future. As the BIS Report noted, the majority of economists failed to predict the Great Depression of the 1930s and the great inflation of the 1970s. Despite the prevailing economic optimism, the BIS Report noted some troubling developments in the world economy. First, there is the “possible resurgence of global inflation.”
(back to me) So, re these two links from just last summer, global bankers are happy as clams but a little concerned about…not this monster deflation that was actually already upon them (on us), but…inflation !
Inflation, which we are all now, only a few months later, straining mightily to induce, in order to stop the deflation, in order to not sail off into the pre Renaissance.
Clioman: For a conservative,the chief sin is to change things
Nonsense. For a conservative, A chief sin is to destroy that which we have inherited that is good, true or beautiful, and the sin is particularly egregious if what replaces that which has been destroyed is evil, false and ugly.
Conservatives do not resist change in and of itself. They resist indulging the flaws of human nature: Vanity, destructiveness, decadence, decay, moral laxity, but to name a few.
Conservatives uphold civilization as it is now, hope for the best and hope for real progressbut are skptical of those who would take it opon themselves to “improve man” without so much as talking to him (or us) about it. This is hardly fear of change. This is fear of vapid stupidity.
One of the reasons behind low oil prices in the 1980’s was the Iran-Iraq War; each side was pumping oil like a madman to fund the war effort.
Its also the case the Saudi’s recognized that the US was creating an alternative fuel industry. At that time, they had considerable surplus capacity. What they did was to overproduce to kill the cost of oil and stop the nascent US alternative fuels industry.
I’ve heard it said that those low oil prices helped the reagan recovery of the early 80′s.
But if energy were key, then why didn’t gas a pennies per gallon in the 30′s propel the US out of the depression–especially when all the oil was domestically produced.
This is of interest today because national security, environmental and monetary people are all in agreement that the US has to kill dependence on foreign oil.
oops, ‘summer before last’. not last summer. but still. it’s one thing to be wrong, another to be as wrong as possible.
My macroeconomists prediction:
Democrat=0bama=Socialist=economy=Stagnation (eventually Socialism turns into Communism=Depression=rebellion)
Capitalist=Conservative=Economy=GROWTH
FDR started the socialist programs and lead us to where we are today…It really is only decades away from an American Emperor or a Stalin both are the future!
The moral of the story is simple. Macroeconomists should realize that the inability of their theories to make accurate predictions means that they do not know what they are talking about.
Great line. The problem here though is that they may not quite understand the moral force behind the conclusion “they do not know what they are talking about”. Pointing this out is no guarantee of either humility or silence. They may not care. witness the Democrats.
Even if there were an economic modeling machine that could show precisely how much to spend and what to spend it on Obama’s stimulus package would be still be 5 or 10 times that amount.
Obama is using the public treasury to buy future votes for himself and (as he envisions it) a perpetual Democratic majority. Almost half of the current package directly benefits government related unions.
In a democratic republic you do not have to satisfy the needs of 5 million workers to get their votes. Your constituency is a couple hundred union leaders. Spend public money to enhance the leaders ability to stay privileged and in power and they will take care of delivering the 5 million workers’ votes.
Every state but Texas had a loss in private sector jobs in 2008. The Federal government added employees in 2008 and is on track to add another 600,000 in 2009. The Democrats deliver for the government unions and the government unions deliver for the Democrats.
RWE @ #27 The really curious thing about today’s situation is that no one is suggesting that the simplest and easiest and cheapest way to boost the economy is to identify which regulations hurt the economy the most and then removing or suspending them.
Boy, I’ll say. It’s so curious, in fact, that it’s got me finally trying on the tin hat.
Charles: I will point out that 500 millions Americans aloned died in WW2, and the country mobilized for higher goals that commerce. Emmnse amounts of material capital was destroyed and needed to be replaced.
elby: international trade started to open up too.In fact we could pry them open with fleets of warships. The fact that our factories were not in ruins and we could guarantee safe passage helped too.
Then their is the promise of controlling markets after the war, and new markets developing. Good solid basis for loans
A fundamental erroneous assumption in economics is the notion of equilibria. Supply and demand are supposed to balance at some equilibrium point.
Unfortunately, this is never true for long. Economic ACTORS, not analysts, strive mightily to create DISequilibria because at equilibrium, there are no profits except for the lucky few. So millions of energetic people, highly motivated by profit and fully as intelligent as the professors, work to violate the professors’ core assumption.
Add political actors with power over the economy, and those economic actors might work, not for profit, but for protection of their assets. I think this was a major factor in the Great Depression – people with assets were more concerned with protecting those assets from government actions than with seeking profit.
A popular fund-raising game for groups like the 4-H in rural areas is “Guess the weight of the steer.”
People plunk down a couple of bucks and enter their estimate of his weight. On the last day he’s weighed, and the closest guess gets a hundred dollar bill. The steer is auctioned off, and all the auction money plus the rest of the ‘guess the weight’ money goes to the 4-H or whomever.
A few years back there was an 1198 pound steer, and something like 1500 guesses, ranging from about 700 lb to over 1600 lb. The *average* of those guesses was 1197 lb — and for stats wonks median was 1199 lb.
A free market economy is the *average* of millions of private guesses. What is the probability that a particular individual — be (s)he bureaucrat or economist — is going to guess even close to correctly every single time?
That’s why command economies fail, and why academics tend to be very precisely … wrong.
@Jay #14: Is it true that John Kenneth Gailbraith’s final words were : “Friedman still lives”?
And did you ever hear how Coke Stevenson used the Texas Rangers to thwart Gailbraith’s
(and Hoovers and Roosevelts) economic machinations during the war? IMHO, Texas could not have produced more than 50% of what she did had it not been for that.
Marianne, that’s 500,000, 0.4% of the pre-war population; not 500 millions.
I think macro economists are really historians attempting to emulate Hari Seldon.
Unemployment dropped during WWII for obvious reasons but the economic recovery did not begin until after the War ended when FDR and his central planning schemes were both long dead.
There is plenty of literature from the era including tomes from FDR’s closet policy advisers who, for the most part, admitted that the New Deal both lengthened and worsened the Depression.
The Schechter Poultry Case dramatized how out of control FDR’s central planning had become. It doesn’t mention it in the Wiki abstract, but it was illegal (go to jail kind) for a butcher to recommend a specific chicken to a consumer, or for a consumer to look at a bunch of chickens and pick the one he wanted.
Quig: And how would you price that?
Give me the unit cost?
lots of new modernized plant capacity in USA after WW2, lots of new process and efficiencies, and lots of worldwide demand for everything. also, no one else on the globe had much if any modernized capacity (USSR had some), and indeed several large nations, in fact Japan & Germany, the #2 and #3 (well, China has just in the last month or two passed Germany for the #3 slot) GDP economies of today, were then in actual ruins.
Marianne, typo, you meant ‘thousands’ not ‘millions’ in your #36 line one.
Good news item; according to FoxBizNews just now, FBI is actively investigating 24 wall st firms & investment banks, SEC is investigating 50 subprime investment prorams and 25 ponzi schemes (unclear if the 25 is within or net of the 50). Some of the schemes, reports Fox, “originated in the early 90s”. FBI has to prove ‘criminal intent’ or its brief closes; the target entities are mainly the “dark pools” transnational and which “resemble the Islamic blind banking practice known as the havela (sp?)”.
Bad news item; December 2008 sales, Chrysler, Ford, GM, Toyota down 53, 34, 31, 36% respectively, Januaery 2009 forecast down 50, 40, 32, 27%, and later today, several of these companies will hold conference calls to impart “bad news”.
The very thought of leaving my screens for more than a few minutes makes me break out in a cold sweat.
Another example of the hubris of the modern macro economists is their claim that central bankers learned how to moderate business cycles. This is called the Great Moderation.
when I taught micro to MBA’s I told them that I would cover the basics and would explain what is meant by “normal rate of return” and also about rents. Then I told them if they were successful in business they would get abnormal high rates of return from patents, failures of their competitor, government protect, or the formation of oligopolies. But then competition would try to erode their rents and thus they should not demonize their competitors.
Economics is not a science. I do not have time to provide a concrete example based on the treatment of one of my papers on the FX market.
All students should take a GOOD course in micro economics but one taught by a professor with some humility. Even the hardest of the sciences has limits for what can be predicted. To pay the likes of Bernenke (Geitner is a lawyer) and the top macro professor in the top universities for their fantasies masquerading as science is more criminal than the Wall Street bonuses. After all the it is possible for the finance managers to lose their jobs.
Like the business of climate prediction by AGW believers, they try to apply a linear analysis to non-linear phenomena.
Weather (and climate) are chaotic systems; so is human behavior (which is what the study of economics is all about).
those sales declines are against previous year same month, not to be subtracted serially from 100.
Buddy:
Tinfoil hat? Don’t be ridiculous!
Everyone knows it has to be aluminum!
Lead actually works better but I guess they have outlawed lead foil, presumably for that reason. Toothpaste tubes used to be made out of it.
But it is indeed curious that NO ONE, not even Rush Limbaugh as far as I know, has suggested suspending regulations of any kind. The aprpoach being taken is to get the government more involved in controlling the economy, not less so. But it is probably less a case of it being an example of thinking the unthinkable than it is for the same reason that fish have not invented bicycles.
My father and I were just discussing the “sick chickens” case – Schechter -a few days ago. For Christmas I had bought him Amity Schlaes’ “The Forgotten Man.” My father was born and raised a Democrat, and venerated FDR for looking out for the working man during those turbulent years. Amity has him now rethinking the efficacy of massive and uncontrolled government intervention in the economy, especially given that the social engineers and gov’t Lefties ignore the plight of the middle class.
I think “The Forgotten Man” is becoming an under-the-radar tome for our times. Not widely discussed in the media, not currently in vogue with the literati or the Beltway class. Those of us who read it sense truth there, but it’s an unpopular and disfavored truth. “Hive Queen and the Hegemon” anyone?
And Huzzah! for a Hari Seldon reference
RWE, i hate to be a bore on rule 157, but if you search just that term, and read the screaming that’s going on every day about the nuclear weapon it has been against the entire system, and how tiny and harmless would be the effect of an instant shift to the pre-sarbox model, you’ll be duct taping toothpaste tubes around your cranium as fast as you can move your hands.
should’ve said, “…the dowside effect….”
Jay, L3, Slade, Fred, Buddy, Others:
Why don’t you all chew on this theory while I am at work. I’ll check back in this PM.
The theory: Inflation, the expansion of the money supply can be controlled through various and sundry monetary measures.
Deflation, the contraction of the money supply is fundamentally uncontrollable. Like defecation, it happens.
The former is analgous to bacteria. It can be killed without harming the patient. The latter is more closely akin to a virus. Cannot kill it without doing in the patient as well. Have to keep it from killing until it spends its life cycle.
The Volker-Greenspan Fed reversed inflation.
Prior to them, money was created and then consumers asked to borrow some of it to buy a car or whatever. Impossible to keep a balance between money and goods. So, the change was that when the consumer took out the loan, that was when the money was created and not before. Voila!
Now taking out the loan creates new money. Paying off the loan on schedule or ahead of time keeps the money supply the same. Defaulting on the loan contracts the money supply.
When there is an abnormal number of defaults/foreclosures (due to excess quantities of debt) the intial contraction(s)
multiply as money not paid one place translates into money not paid elsewhere as well. The de-celerator if you will. Money supply contracts viciously creating a bonfire effect.
Starting with Freddie and Fanny and subprime
deflation got underway. It continues to spread.
NO MATTER HOW MUCH MONEY THE GOVERNMENT SPENDS
IT CANNOT< REPEAT The bonfire works faster than the printing press. In fact, the products of the printing press may well be feeding the bonfire.
I know what the official stats show about the money supply having been doubled in less than a year. But those stats are incapable of showing any of the money that has disappeared and continues to disappear. Yep, history repeats itself.
Three things will get us through. 1) Thrift
2)Thrift and 3) Thrift.
Okay, now you have an unscientific analysis by an unqualified non-economist. Whaddya think of it?
now add an ‘n’ between the w and the s and you’ll see it was the professor in the parlor with the wrench
Buddy: could you type a little louder, I have toothpaste in my eyes.
should have read; CANNOT, REPEAT, CANNOT
Seems to me one continuing mistake is to grossly overestimate governmental capabilities.
dave right on all counts but 3 x thrift slows velocity and more people lose their jobs. In fact employment is the other side of the ledger on any number of better practices.
mongoose, good idea, i’m gonna put some in my eyes too
“The very thought of leaving my screens for more than a few minutes makes me break out in a cold sweat.”
Buddy, go outside and take your .45LC. Fire a full cylinder for affect even if it is just into the Texas soil. You will feel a bit better when you come back to your “screens”.
or effect, your choice.
Prof. Tipler’s comments are interesting. It’s clear that macroeconomics as a ***predictive tool*** has failed repeatedly. I think one can use macroeconomics as an analysis tool of past economic activity or as a tool for economic warfare (use it to break things). However macroeconomics is not usable for planning future economic activity along the lines of Hari Seldon in Asmiov’s “Foundation Trilogy”. I think the problem boils down to a large economy being composed of many weakly and non-weakly coupled nonlinear systems. This is the worst sort of problem to solve mathematically (it’s a “stiff” problem). Also, I believe that large economic systems have a chaotic aspect along the lines of a double compound pendulum. I urge the reader to lookup the Wikipedia article “Double Pendulum”. Double pendulums are extremely interesting. In graduate school as a lab experiment, we’d build them and then tune them based upon their equations of motion for maximum chaos. We’d then set them into motion and they’d act like they were alive (the thing would swing around willy-nilly and randomly go into wild motions). The lesson that our teachers were trying to make was a chaotic system was uncontrollable and it was an engineer’s responsibility to make sure the basic system was NOT chaotic before trying to devise a control law.
Unfortunately with a national economy, the only way one could make it controllable would be to reduce society down to a simple hunter-gathering tribe or small village based upon barter exchange. This brings us to my comment’s punchline:
Socialism ASSUMES that macroeconomics can serve as a basis for controlling an economy (Karl Marx was an economist).
This is an interesting absurdity. One really has no clue what the outcome of a control input would be for a large economic system. The people trying to control our economy are really just pushing buttons at random and hoping that something will work right by accident.
There probably is some possibility of using macroeconomics as a limiter. For example, through macroeconomics one understands that inflation is a bad thing. If an economy is deliberately brought into recession by suddenly increasing the prime interest rate then short term inflation can be stopped. This is sort of like controlling your computer by cycling the power switch. Due to the chaotic nature of large economic systems this maybe the best one can do.
you know, that’s a damn good idee, Buzz –
Latest list, partial, the G Men are now inside AIG, Lehman Bros, Bear Stearns, Fan & Fred, and Credit Suisse. Re Credit Suisse, Swiss, note, interestingly, since this bank (and its protected secrecy charter) is heavily involved with the UN, World Bank, big celebrity-politician NGOs, AIDs Africa, IMF, the Democratic foreign policy heavyweight permanent establishment (Richard Holbrooke actually got caught some years back–search holbrooke credit suisse –and had to “take the 5th” in the investigation –he is now your fresh Hillary-appointed Special Envoy to a placid backwater called “Pakistan”). Where is Maurice Strong?
is Obama the Messiah after all? nobody was ever gonna know about the crooked elite had mccain won. I don’t even think the FBI was gonna do much, too many career ambushes for bureaucrats who slip up and make a republican look good. Now, as Obama marches the American financial upper echelon off to jail, in the best Marxist fashion (maybe they won’t shoot the children like Lenin did), we need to mobilize to keep it known to Joe & Jill that by and large these crooks at the top were Democrats (natch, it’s the party of the crooks!).
“What can we know?” LOL. Wretchard rhetorical questions are delightful!
The control of the economy could never be left to mere science even were macroeconomists to achieve their breakthrough.
When the wrong answer is provided by science, Wretchard’s publication of What is “Post-Normal” Science? tells us he knows to what lengths rulers will go to avoid hearing that answer. Shadows on the wall is what you and I “can” know.
Buddy: we aslo need to get out what crooks inside government are not being prosecuted.
And they are (mostly) Democrats, natch.
Charles 18…
WWII exploded the supply of business credit…
The first wave was French and British military export contracts.
Once these were signed, they were presented as security for American bank financing.
Extending loans to business, and such is how the money supply really goes up.
In the second wave USG cost plus contracts became the security backing for another round of loan outs…
And if that wasn’t enough security, the USG indirectly paid the bill: the accounts receivable (from USG )were directly assigned to banks.
And if that wasn’t enough, the USG would use eminent domain to secure the site and wage and price controls to set the deal.
It was the massive expansion of private credit quality triggered by war contracts that re-capitalized the corporate sector.
Very shortly thereafter the nation was locked into a virtuous circle and was unable to avoid a rising tide of success.
Two points:
1. You could be seen as a little unfair to Milton Friedman. One of his most outspoken positions within the economic community was that macroeconomics is unreliable. He rather famously compared the economy to a “black box” where it is impossible to accurately monitor what was happening inside. This was his critique of huge statistical models of the economy which continue to be relied upon.
Rather, he pushed for a greater reliance on microeconomics — i.e. the incentives faced by individuals in the economy. Most of his macroeconomic thinking, to the degree he dabbled in it, was based on this or on monetary economics separate from traditional macroeconomics.
2. The problem with macroeconomics is that we’re dealing with adaptable people rather than a machine or an ecosystem. If a theory works with the economy at one time, people adapt to exploit the theory which changes its operation. For example, if it is accepted that a country should devalue its currency to deal with an import surge, traders will begin to move their assets into foreign currency at the slightest hint of rising imports (which may create economic instability and other problems). Thus, an approach that might have a chance before there is an accepted theory would not have a chance after it is understood (and foreseeable) what will happen.
This effect means that macroeconomic “rules,” even if they seem to be valid at one time, run out of effectiveness.
it’s a weather system with a moral dimension.
I’d it looks more like a moral tsunami, but that is just me.
I’d SAY*
“The abundance of lawyers and social scientists in politics is matched only by their unsuitability for other duties.” – In fact, that very abundance in the political field demonstrates that they are unsuitable as either lawyers or social scientists period!
“Lawyers and activists can figure out how to save the planet in just eight hours.” – And if they would just write a forgettable book and disappear that would be very considerate of them. However, they seem to insist on sticking around and using my money to finance their silly experiments. Being of the opinion that, arguably, I know as well as any other man how I would like my money used.
“Politics is the art of being right even after you’ve been proven wrong.” – Or in being able to stretch the truth, subvert the language and control the narrative until exhaustion overcomes intellect.
Apologies for any errors. I’ve got toothpaste in my eyes.
Some more in the “You cant make this stuff up” category;
Bailed out Wells Fargo books 12 nights in Vegas..:
http://www.newsday.com/business/ny-bzwells0204,0,4972514.story
Moral?
lord a mighty –would they were but ‘silly’ experiments. And not dances of death.
crap –and i’m holding WFC –@ 35 ish, about x2 today. BTW Buzz, i expends me .45 battery thru a 1911 which belonged to my Uncle Lewis, an arty lieutenant in Pershing’s army. I should have it in a glass case and not laying around the hut.
i mean, x.5 today. ah, senility, thou bright magnetic light….
Buddy, are ya sure it’s not just the toothpaste?
1. In my many years I have come to a conclusion that one useless man is a shame, two is a law firm and three or more is a congress. — John Adams
2. If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed. — Mark Twain
3. Suppose you were an idiot. And suppose you were a member of Congress. But then I repeat myself. — Mark Twain
4. I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle. — Winston Churchill
5. A government which robs Peter to pay Paul can always depend on the support of Paul. — George Bernard Shaw
6. A liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money. — G. Gordon Liddy
7. Democracy must be something more than two wolves and a sheep voting on what to have for dinner. — James Bovard, Civil Libertarian (1994)
8. Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries. — Douglas Casey, Classmate of Bill Clinton at Georgetown University
9. Giving money and power to government is like giving whiskey and car keys to teenage boys. — P.J. O’Rourke, Civil Libertarian
10. Government is the great fiction, through which everybody endeavors to live at the expense of everybody else. — Frederic Bastiat, French Economist (1801-1850)
11. Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. — Ronald Reagan (1986)
12. I don’t make jokes. I just watch the government and report the facts. — Will Rogers
13. If you think health care is expensive now, wait until you see what it costs when it’s free! — P.J. O’Rourke
14. In general, the art of government consists of taking as much money as possible from one party of the citizens to give to the other. — Voltaire (1764)
15. Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you! — Pericles (430 B.C.)
16. No man’s life, liberty, or property is safe while the legislature is in session. — Mark Twain (1866)
17. Talk is cheap…except when Congress does it. — Anonymous
18. The government is like a baby’s alimentary canal, with a happy appetite at one end and no responsibility at the other. — Ronald Reagan
19. The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery. — Winston Churchill
20. The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin. — Mark Twain
21. The ultimate result of shielding men from the effects of folly is to fill the world with fools. — Herbert Spencer, English Philosopher (1820-1903)
22. There is no distinctly Native American criminal class…save Congress. — Mark Twain
23. What this country needs are more unemployed politicians. — Edward Langley, Artist (1928-1995)
24. A government big enough to give you everything you want, is strong enough to take everything you have. — Thomas Jefferson
Did not Hayek say “In Capitalism man exploits his fellow man, and in Socialism it is the other way around”? something like that.
well at least Obama has found better odds of having tapped a noncrook for Commerce, having gone to the GOP for it, but who’s counting. The previous Commerce designee, Gov Bill “call me Pancho Villa sometimes” Richardson of New Mexico, having flunked due to some silly and chronic secret cash-for-gov’t contracts trade, is the United States of America’s ex-officio nuclear proliferation treaty enforcer assigned under a previous Clinton administration and apparently as a sort of inside practical joke, to the joint Clinton/North Korean nuclear ballistic missile force.
@joe buzz,
Just hit the pillow
http://www.youtube.com/watch?v=x5wQeBLQ194
@Marianne,
If Acorn was keeping the records 65 years ago 500 million would have died, but they would still be voting.
“Politics is the art of being right even after you’ve been proven wrong.” Dammit Wretchard, that is gold, man! Gold!
That is going into my quote vault…
“The problem with socialism is that you eventually run out of other people’s money.” attributed to Margaret Thatcher
The two points are so true, and should be the bottom line of any long term economics planning. I do not believe the economy is (always) naturally chaotic, given that there are many rapidly evolving external constraints that have been playing havoc with it in these last hundred years or so: an order of magnitude increase in the world’s population, two crippling world wars (and many, many, many localized ones), an increase by a factor of three of mean human lifespan, enormous gain in overall health for most of the earth’s population (producing a huge gain in productivity), and lately, an inversion of the population’s distribution due to an extremely fast fall in fertility rates. All these factors, and many others, are like external fields tugging the economy towards sometimes inconsistent directions. Being a macro-economist in the current times certainly must not be an easy job!
Science has the disquieting property of establishing a right and a wrong answer. What would be the fun in that?
Are you sure? I certainly am not.
You know well that certain areas of science (AGW is one) the current modeling resembles closely the macroeconomic ones we have been warned against. That brings the possibilities of answering specific questions with a clear and precise ‘yes’ or ‘no’ down to a level near zero…
Dang. I wake up this morning and this post has zero comments. By the time I get back to it after work, there are 82, and some so knowledgeable it makes me embarrassed to even try to post. What a cyber-pub this is! Hey, I dated Fischer Black’s daughter once for a few months. Does that give me some economics cred? Didn’t think so. She broke my heart too, that girl. She’s a hell of a short story writer. But I digress.
As for Mr. Roosevelt, back when the gov’t set the price of gold, he once decided to raise the price by 21 cents. Why 21? Because it was 7 three times, a lucky number. And so great decisions get made.
I get the sense that the bright young things of the New Deal were true believers. Arrogant and naive fools, granted, but they were actually trying to help and had people’s interests in mind. I don’t get a whiff of that from the present crop of monsters with a capital D. They are so blindly in it for power that it’s frightening.
And for weeks my mind has been churning around all the “coincidences” of the past year that have been discussed here. Why aren’t the obvious fixes tried? Hell, I know nothing about economics but even I can understand Buddy and others about the mark-to-market rules and yeah, it makes sense to correct that problem, and it would cost nothing.
Is that why it’s not done? Because it doesn’t obviously accrue money or power to someone important?
And how does it all tie together? Was it mere chance that the price of gas peaks in July 2008, stays in the near $4.00+ range until the end of September and finally begins to drop in October, just a few short weeks before the election? Were “they” just unable to sustain the price any longer? Though surely, the damage had been done long before.
Maybe someone should start a Belmont spin-off Wiki and everyone could contribute bits and pieces to the puzzle. And then strange men in black coats might start paying us visits.
I am forever going back to Wretchard’s post of some months back. Who sent Obama?
Yes indeed, Peterike. Who sent him?
fear & loathing are being distributed copiously, and whether or not it is justified is often biased toward the affirmative by the very act of its distribution, and the effect that has on the sine qua non of a working capitalist system, that is, confidence. Confidence in the leadership, the institutions, the currency, the military, the neighbors, the corner grocery, one’s sanity. Item: this email a day or two ago from a financial industry friend, quoting (i assume correctly) Robert H. Hemphill of the Federal Reserve Bank of Atlanta:
“If all the bank loans were paid up, no one would have a bank deposit, and there would not be a dollar of currency or coin in circulation. This is a staggering thought. We are completely dependent on the commercial banks for our money. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp upon the picture, the tragic absurdity of our hopeless position is almost incredible – but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and the defects remedied very soon.”
But Hemphill ignores the other side, that if the banks called all the loans they would have to give the depositors’ money back and the depositors would then go lend it to someone else. Why was this left off the statement?
64. blert:
Very shortly thereafter the nation was locked into a virtuous circle and was unable to avoid a rising tide of success.
Do you believe a virtuous circle in the opposite direction has just kicked off
Peter Boston wrote
With supercomputers you can do regressions with 100 variables and get all the answers you want but your answers have no relation to reality when there are 1,000 or maybe even 10,000 or 100,000 other variables that are unknown.
This may be so, as far as it goes, but there is one thing which is not really a variable, but a predicatble presence in practically any political/economic situation: corruptible human nature. If a moral hazard is built into a system, there will always be at least a few individuals who will take it and run with it, and these hazards are not really hard to see. After all, corruptible individuals see them quite readily; why not congressmen? If you put government guarantees behind highly risky loans, you are creating this kind of hazard. I’m an English major, and I can figure this out. This is not a case of unpredictable consequences. One is tempted, nay compelled to say, it is a case of expected and planned consequences. If so, the question becomes: planned by whom, for whose benefit?
If there is a rebuttal to this (and surely there is, in some degree), it is only that things are not all that predictable, even by people who have seen it operate and have the ropes in their own hands (those congressmen again).
As the song says, “We elect ‘em, again and again.”
God help us.
eloquent and perfectly put, Thomas Drew. Blert, i think there is a titanic battle going on, and that powerful forces are trying to do just that, reverse the motion of a virtuous circle, actually a virtuous sphere since all our perceptions, mood, sense of universal sacredness, feed from it. The opposing force, which we feel ought to come from above us, from top down in earthly manifestation as political cultural spiritual leaders and opinion makers, or from top down as the invisible guy who lives in the sky keeping a naughty-and-nice list, seem absent. The opposing force is i think is bottom up and powered by kaleidoscope, resistant to the dark force by just the sheer habit of people in the targeted systems to get up next morning and try again, by ordinary folks stubborn determination to see hope in life, figuring where there’s life there’s hope. When we finally understand that the test is just beginning, and that there is far worse to come, and in that realization do not wilt but just say “f**k it, let it come” –that will be he moment of the turn, that’ll be the solstice, after that things will start back in the virtuous circle. not from where it was, but from a place we’ll be grateful to be, a place where we’ll be happy to have what we have and be with whom we’re with –and that’ll be by then known again, as it has been forgotten, as plenty good and the best we should’ve ever expected in the first place.
Buddy,
Unfortunately, millions of Americans and Euros have been indoctrinated into a fashionable anarchism, where it is the height of being cool , with it and sexy to tear down any and all positive social, political and cultural institutions, as you say debilitating the motion of America’s virtuous circle of success.
I don’t think most of these anarchists have the slightest concern that they are assisting and making common cause with the Vlad Putins, the Dinner Jackets and Hugo Chavez’s of the world, These indoctrinated aren’t that bright and/or are way too into themselves to be bothered with the consequences of their actions, no matter how deadly or horrible those consequences may be . Being cool is more important than the consequences to them.
This willing army of fellow travelers are what gives Vlad Putin, Obama, or George Soros their power. Without the consent of these fashionistas Vlad or DinnerJacket would just be two bit dictators. They could be easily crushed.
The trick is how to reduce the power of these fashionable anarchists. My gut reaction is to ridicule them. The cool set hate, absolutely hate to ridiculed. And they must be confronted and ridiculed forcefully and publicly. Soon and often. Time is running out on the virtuous circle.
The good Americans cannot be afraid any more. Time to get angry.
Unsk:
With his Provincial Papers, Blaise Pascal advanced the Age of Reason by ridiculing the corruption of the powerful. The elite’s morality was lax, and he showed how all their scholarly casuistry had debased into sophistry.
We live in an age where the powerful and corrupt are shameless. Still, if scorn is heaped high enough, even they can’t but role their eyes at some point, and it reveals what they’ve been thinking all along: that the rest of us, the hoi polloi, are stupid. No leadership can withstand such exposure for long. They either resign or fall back to despotry. Me thinks the latter is afoot.
Yes anger is appropriate while yee still may and while not too many have been reduced to eunichs.
…or reduced to vampires and zombies. They who have no offspring and no sense of nobility could not give a damn if your descendants will have to pay for their lifestyles. This is the dirty secret of the socialist schemes being floated now. Borrow on the future of those who will survive while those who are living and have no bloodlines of their own can suck the life out of those NOT YET LIVING.
Economics is a social, behavioral study – a study of how people and groups of people behave in certain conditions – specifically scarcity of resources (in its broadest meaning) or options/choices. It is definitionally different from physics in that the object of study is conscious, exerting its economic choices on the very act of studying and analyzing and testing. Studying an economy has more parallels with a game of chess and with assymetrical warfare than it has with hard sciences like physics or chemistry. It is simultaneously an object of study and an opponent trying to leverage that study for its own economic gain. In the parlance of economics, the study and the management of economics is an endogenous and evolving variable with dynamic feedback loops.
The Lucas Critique began to recognize this when it postulated that once any economic measure (say GDP or CPI or M1) was generally known to be a driver or target for economic policy, that measure would begin to lose its usefulness for that policy. Mr Greenspan’s famous and mis-undertood “Irrational Exuberance” speech of 1996 elegantly warned how M1, M2 and CPI were on their way to irrelevance, and called for new and more usefull measures to help measure and drive price stability.
We’re flying blind. We always will. Deal with it.
Prof. Jay points out some of the weaknesses with Macro and Micro economics. As you might guess by looking at the names of the two fields, there is a clear dividing line between micro and macro economics. And this is an indication that economics is broken between the two realms, which is an indication that economics is broken. Period.
If one started with individuals acting rationally then it would be possible to build up a consistent theory of economics that covered both micro and macro behavior. This is, in fact, what Ludwig von Mises did in Human Action. Mises is one of those Austrian economists.
Austrians, unlike other economists, have a unified field theory that covers both micro and macro economic behaviors and prescriptions. Mostly its prescriptions boil down to “leave people alone to make their own economic decisions.” But it has a vast and amusing literature on exactly how each violation of economic freedom affects the market and the people in it: Usually tragically. From socialism to communism to mercantilism to government granted monopolies, Austrian economics demonstrate how wealth grows under conditions of human freedom and declines or stagnates under all other conditions.
The main problem with Austrian economics in the political marketplace is that while it predicts behavior based on how people rank their choices, it does not have a way to model the choices they will make. Thus its ability to predict what the economy will do does not satisfy the macroeconomic fiddlers. This is grounded in the fundamentals of the system, which assume free will and mostly rational self interest, and not solvable.
Charles 85
Buddy 87
It is very worthwhile to take a peak at what happens when the debt carriage turns into a pumpkin:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
I constantly see blog posts predicting a major war as the inevitable outcome of our troubles.
It’s extremely unlikely that ANY dictator will play a game of Hitler & Saddam…
However the unlimited global financial cold war will produce serious casualties:
Pakistan
Indonesia
Venezuela
Iran
Turkey
Syria
It will be quite astonishing if any of these countries can stay afloat during the Greatest Depression.
The City’s days as a dominant financial center are fading fast. Put a fork in the Pound, it’s done.
Switzerland has followed the Icelandic game, but at a much higher power level. That’s too bad.
Massive Dollarization will spread into ever more economies. As it stands even now both China and Russia are massively dollarized.
With clueless BHO at the helm the theme song must be Paint It Black:
I see a red sum and I want it painted black
No losses anymore I want them in the black…
Its not easy facin’ up when your whole world is broke…
No more will my greenbacks return a deeper blue
I could not foresee this thing happening so soon
If I take cash enough into the settin sun
My crew will laugh with me before the mournin’ comes…
Maybe then I’ll fade away and not have to face the facts.
Yeah!
For some additional deflation analysis:
http://globaleconomicanalysis.blogspot.com
The above blog is rated number one in the financial blog universe. Read it and see why.
@blert #94: I am sticking with my massive deflation theory. (#51 above).
Looking at the tumble all those other currencies are taking would seem to indicate
my stroke of genius——okay—-dumb luck.
All those exchange rates are (directly or indirectly) between currency in question and the dollar. Unless all of those others are being debased simultaneously, then the dollar is getting harder and harder to find. Deflation.
Blert,
The ‘Roving Cavaliers of Credit” by Steve Keen- is just a tremendous article. An almost necessary read for understanding what’s going on in today’s economy.
The analysis of the present situation is just devastating though; it explains why the so-called huge rise in money supply by Bernacke won’t cure the problem. We’re in a ‘credit banking ” instead of ” fractional reserve Banking ” economy, and the banks have gone from multiplying their assets in lending credit from 30 to 1 to nearly 1 to 1.
Huge contraction underway. Ug. Really bad Ug.
BTW, one of the economists the other day I reading from the MIses Institute was defining ” deflation” not as a fall in prices, but a fall in demand. That fits in with Keen’s concepts and why were in such a fix.
@#18 Charles,
Consumer consumption was pretty minimal during WWII. All sorts of goods were rationed and directed to the war effort. In addition, manufacturing had to build up production, this meant new capital goods (in one job I had in the early ’90s I used lathes from the war) and more efficient production methodologies had to be adopted.
War over.
All of that pent up consumer demand is released and the demand is not being satisfied with promises but real wealth (add to it, the rest of the world was in a war-torn shambles). Not only that, but we had a large number of people returning to the work force. In this case it was a perfect economic anti-storm.
Wow –great stuff –sorry i missed it timely –#88 all the way down –including the links, and ”Paint it Black” –superb. The Stones and the Who perform free sometimes for the Robin Hood Foundation, made up of hedge fund managers (hope not the subprime pushing-followed-by-bank bear-raiding hedge fund managers), including a Kravis of KKR fame [the inventors of the LBO, the 'leveraged buy-out'] and the president of GE, who is on the new presidential economic recovery advisory board. GE has lots and lots of global interests, backs a green tech revolution, and has had an 80% drop in it’s stock value from the recent top, really twice what you’d expect, wonder why investors are abandoning them. maybe it’s MSNBC being such flamboyant reds. Today GE announced, on the same day of the presidential council announcement, that its dividend was safe ‘for the year’. I own some shares, so i noted the news. Almost sold back when ORielly announced the co. was selling heavy industry to Iran. wish i had –sold –it was much higher then. anyway Robin Hood ought to sever with the Who, one of ‘em has a some sort of kiddie porn rap sheet. And the Stones –as much as i love the music –they do make ‘the devil’ look sexy –hardly good messages for urban young poor kids the foundation is devoted to, rock’s pelvic abandon being hardly what the kids need by way of a higher vision. the foundation is also affiliated with cityyear.org , a group running kind of weird tv ads on cable –i saw one on Fox, which is why i clicked the addy. man, this new admin –did ya ever see “Gremlins”? Speaking of which, maybe the UAW will bring back the Gremlin. Maybe they’ll make us an offer we can’t refuse. “Buy a Gremlin –only five hundred million dollars (this is two years from now, see) –and you won’t have to attend re-education camp!” they’ll sell like hotcakes. no, like Vodka.