The problem with economists

The central problem with economists is that not one of them fully understands how the world economy came to be in the mess it’s in.  They can give partial explanations that describe a series of events and actions that have brought us to where we are, but these explanations are always incomplete.  The complexities of national economies and how they interact is so bewilderingly multifaceted, the intricacies of the interactions among the myriad of variables so byzantine, that the human brain is incapable of comprehending them.  Only a powerful computer would be capable of processing the millions of bits of information involved, and even if that were available, inputting the relevant data would be an overwhelming task.  Anyone familiar with systems theory and chaos theory will understand this.  So economists have to do the best they can with the limited information they have at their disposal and the inadequate processing capability available.  So we ought not to be too critical of their inability to give us unassailable insight and clear direction. [more]

But an even greater problem with economists is that some are unaware of the problem just described.  They exhibit a sad unawareness of their own professional ignorance of the complexities involved and their own inadequacies.  The only thing that’s more damaging than ignorance is unawareness of that ignorance.  This is compounded if the unawareness is accompanied by an erroneous belief in one’s understanding and competence.  Some commentators on matters of economics are too willing to pontificate as if they really understand.  This serves only to mislead those who listen to them.  Occasionally an economist will admit that no one fully understands how we got into this financial crisis, how to adapt to it and how to counter it.  We should be pleased rather than critical when Government spokespersons concede that the situation is exceedingly complex, not fully understood, and that proposed actions are by no means certain to work.  ‘This is not a silver bullet’ is an oft-repeated phrase.  There are commentators in business and in the media who concur, but there are as many smart-alecs who believe they know best and that proposed actions ‘won’t work’ or are ‘reckless’, are ideologically ‘outdated’, or more stridently, ‘stupid’.  These people are a hindrance to rational debate.

Another problem with economists is that some are wedded to a particular theory of economics, a paradigm that governs their thinking.  There are scores of theories, but the ones being touted in this debate on macroeconomics are Keynesian economics, Friedrich Hayek’s free market capitalism, and Milton Friedman’s monetarist, anti-regulation policies now advocated by John Taylor of Stanford University.  The debate seems to be broadly between those who believe government needs to regulate financial institutions to avoid situations such as we now suffer, and free marketeers who eschew regulation, who believe private enterprise operating in free markets with minimal regulation is the way to prosperity.  On ABC TV’s Lateline on Monday night Taylor argued this, if not convincingly, certainly persistently.  He quoted the studies he believed showed the superiority of permanent tax cuts over stimulus packages, dismissed studies that showed the value of fiscal stimulus, would not contemplate similar studies of which he had not heard, confidently asserted that Barack Obama’s massive stimulus will not work, nor will Rudd’s modest package, and insisted tax cuts were the way to go.  He would not be moved from his position.  It is this dogged insistence by some economists that they are right, and others are wrong, that makes balanced discourse difficult.  They talk with a certainty that is unjustifiable, yet political positions are adopted on the basis of their assertions, beliefs and advice.

The best that can be said of the Government’s $42 billion stimulus package is that it has the possibility of being effective in ameliorating the effect on Australia of the global financial crisis.  There can be no certainty, a fact the Government acknowledges.  But it is supported by many economists, most commerce and industry bodies, small and large business, the social service sector and unions.  Treasury and the Reserve Bank support it although Reserve Bank member and professor of economics at ANU Warwick McKibbin doesn’t.  The truth is that nobody knows, so the best the Government can do is to go with the best advice and the consensus, and see what happens.  By contrast, the Coalition believes it knows best, that the Government is over-reacting and spending recklessly, that a package half the size would do, and that tax cuts would be better than ‘handouts’.  They are not just following John Taylor’s line of argument; they seem to believe that the crisis is not sufficiently serious to warrant such a large package so urgently; they use words like 'knee-jerk reaction' and 'panic' to characterize the Government's actions.  In fact they seldom mention the global financial crisis at all, as if it did not really exist.  They seem to be living in a parallel universe, out of touch with reality and public opinion, which now rates the government as better able to handle the crisis, and as good at economic management as the Coalition.  If you need any convincing of this, read Possum Comitatus’ piece in Crikey yesterday: The coalition got it really, really wrong on the financial crisis.

So the arguments will continue.  The open-minded will concede nobody knows for certain what will work, and will do what seems to be appropriate; those who believe they have found the answer will not truck any argument with their position.  Only time will tell what works, and even then the opponents will argue that it didn’t really work, or that some other factor brought about the result.

So the overriding problem with economists is that no matter what has happened, no matter what happens in the time ahead, there will be opposing views stubbornly held, adamantly advanced about what’s occurred and why.  But the people will judge.  They will decide whether they have benefitted from the Government’s actions, and just as importantly whether the Government has done what the public expected it to do.  So far they have given the Government a big tick.

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Bushfire Bill

18/02/2009Loved this: "Some commentators on matters of economics are too willing to pontificate as if they really understand." That includes most political commentators. How often do we read garbage like, "The Australian economy is heading down, further than most believe." How does Michelle Grattan know this? How does Shanahan know it? Or Hartcher? They are simply regurgitating trash-talk gloom and doom, water-cooler rumours that become self-fulfilling prophecies if care is not taken. The recent jobs figures were an example. We had universal predictions among the political pundits that Rudd was going to be doomed as a result of the February jobs numbers. One even said (I forget who) that the "end of Rudd" would be marked as starting on this day. What happened? Nothing very much. In fact permanent jobs went UP by over 30,000. The overall unemployment figure rose by 0.3% to 4.8% - a number that, just a few years ago, would have been triumphantly heralded by the likes of Howard and Costello (and their barrackers in the media) as "proof" their policies were working. The same with the Xmas retail figures. The same with housing affordability, building applications, interest rates and inflation. The political commentators, pressured by the need to write something, anything, every day, just make it up. They are no better informed than the guy in the loading dock, or driving a cab, or digging a ditch. Perhaps they are actually worse informed, as most ordinary people (irritatingly to the pundits) still express reasonable cheerfulness about the future of the country (take a look at Morgan's "Heading in the right direction figures") and close to universal approval of what the govenrment is doing to keep us afloat and properous. Another example... "We're already in a recession." A recession has a precise definition. Two consecutive quarters of negative growth. So far Australia has not had even one quarter of negative growth, but the pundits persist with this meaningless statement. If there is a definition of a recession, why is it ignored in favour of the "gut feeling that things aren't real good" sentiment? Gut feelings do not recessions make. Figures, statistics, precise definitions do. It seems that with Labor in power "gut feelings" are enough to condemn our economy. I don't remember the likes of the News Ltd. trash talkers being so lackadasical with their reporting of bad economic news under Howard. It got all very technical under the Little Master. My own theory is that the pundits want to put themselves forward as the harbingers of something. If it can't be prosperity, they go for misery, every time. And they do want to be miserable about a Labour government. Most of them are Bachelors of Arts, not economics. They spend most of their waking hours talking to "insiders" in underground parking garages, or outside in the street on mobiles. It's all "whisper, whisper". They are useless, except a purveyors of tragedy and gossip. I tell youse... it's a cryin' shame!

Ad astra reply

20/02/2009BB, I agree. What annoys me most about most of these commentators is not their ignorance, that is expected as they have no training in the area about which they pontificate; what annoys me is their use of unnamed sources, of hearsay, and their use of unsupported assertions such as the one Terry McCrann made in his 17 February [i]Herald Sun[/i] article [i]If the job goes to Hockey the others can jockey[/i], namely [quote]“the voting public remains deeply sceptical”[/quote] about budget deficits. http://www.news.com.au/heraldsun/story/0,21985,25064616-36281,00.html There was NO evidence to support this; indeed the Essential Research poll a day earlier showed just the opposite. When challenged via email by a blogger on [i]The Poll Bludger[/i], McCrann could come up with no evidence, and finally admitted that he was just expressing an opinion, presumably his own, evidently based on what he wanted to believe. I expect you may have seen the exchange with McCrann. It is this sort of journalism that incenses me, and is one of the reasons I started The Political Sword. I see that yesterday a new blog started: [i]Pure Poison[/i], with the byline [quote]“Intellectual dishonesty is pure poison…”[/quote] - Edward Lazarus. Its purpose is: [quote]“Exposing intellectual dishonesty in the mainstream media, across the political spectrum. We’re looking at you, Bolt, Blair, Marr, Akerman, Albrechtsen, and whoever else wishes to stray onto the path of fatuous opinion.”[/quote] It should be fun to read.

Ad astra reply

20/02/2009Clearly John Howard is no economist either, and what he believes he knows about the subject is contaminated by his own paradigm of economics. His speech last night where he attempted to preserve his 'heritage' and debunk Kevin Rudd's essay, and went on to condemn Rudd's stimulus package, has been witheringly critiqued in a [i]Crikey[/i] editorial today at http://www.crikey.com.au/Crikey-Says/20090220-Crikey-says.html It's well worth a read, and filing for reference. By the way [i]Pure Poison[/i] is at http://blogs.crikey.com.au/purepoison/

janice

21/02/2009'Clearly John Howard is no economist' - must be one of the greatest understatements you've made, Ad astra. The little bald-headed old swell has little between his ears other than a mountain of ideology formed in his youth and and hung onto with thoughtless tenacity since. What amazes and infuriates me is the obtuseness of these know-it-all journos and their willingness to attack and denigrate those who have been blessed with superior intelligence and have used and expanded their gift to be forever learning and collecting knowledge. Btw, I wonder what pricked the conscience of Joe Hockey to offer thanks to the Governor of the Reserve Bank? Perhaps a need for absolution after the viscious attacks the coalition made on the RBA and Henry during the Senate Inquisition?

Just Me

21/02/2009I have never taken Terry McCrann seriously. He has be plain wrong on economic issues (especially forecasts) so many times, that it is better to assume he is wrong until otherwise proven. Saves a lot of work.

Ad astra reply

22/02/2009charles, you are correct. We live in a world of complex non-linear systems. But columnists, and even some economists, try to reduce complex problems to simple linear cause-effect relationships. No wonder they can't find plausible solutions. Just me, you're right. McCrann looses most of his credibility with his exaggerated language, but completely blows it with disingenuous statements such as appeared in his 17 February [i]Herald Sun[/i] piece.

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27/02/2009Peter Martin draws attention today to a paper titled [i]The Financial Crisis and the Systemic Failure of Academic Economics[/i] authored by several economists from Europe and the US. It supports the assertions in this post. The conclusions of the paper read: [quote]"The current crisis might be characterized as an example of the final stage of a well-known boom-and-bust pattern that has been repeated so many times in the course of economic history. There are, nevertheless, some aspects that make this crisis different from its predecessors: First, the preceding boom had its origin – at least to a large part – in the development of new financial products that opened up new investment possibilities (while most previous crises were the consequence of overinvestment in new physical investment possibilities). Second, the global dimension of the current crisis is due to the increased connectivity of our already highly interconnected financial system. Both aspects have been largely ignored by academic economics. Research on the origin of instabilities, overinvestment and subsequent slumps has been considered as an exotic side track from the academic research agenda (and the curriculum of most economics programs).This, of course, was because it was incompatible with the premise of the rational representative agent. This paradigm also made economics blind with respect to the role of interactions and connections between actors (such as the changes in the network structure of the financial industry brought about by deregulation and introduction of new structured products). Indeed, much of the work on contagion and herding behavior (see Banerjee, 1992, and Chamley, 2002) which is closely connected to the network structure of the economy has not been incorporated into macroeconomic analysis.[/quote] [quote]"We believe that economics has been trapped in a sub-optimal equilibrium in which much of its research efforts are not directed towards the most prevalent needs of society. Paradoxically self-reinforcing feedback effects within the profession may have led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest. Defining away the most prevalent economic problems of modern economies and failing to communicate the limitations and assumptions of its popular models, the economics profession bears some responsibility for the current crisis. It has failed in its duty to society to provide as much insight as possible into the workings of the economy and in providing warnings about the tools it created. It has also been reluctant to emphasize the limitations of its analysis. We believe that the failure to even envisage the current problems of the worldwide financial system and the inability of standard macro and finance models to provide any insight into ongoing events make a strong case for a major reorientation in these areas and a reconsideration of their basic premises."[/quote] You can read the pdf file at http://www.debtdeflation.com/blogs/wp-content/uploads/papers/Dahlem_Report_EconCrisis021809.pdf

Ad astra reply

1/03/2009There is an interesting article that is relevant to this post titled [i]'The sound of a paradigm shifting'[/i] on the blog site [i]'Inside Story'[/i] at http://inside.org.au/the-sound-of-a-paradigm-shifting/
How many oranges do I have if I have 3 oranges and take ONE away?