THE PROBLEM WITH ECONOMISTS

If you pay attention to the mainstream media, America is either headed for a spectacular reawakening of our economy or a catastrophic bust. With economists commenting more on politics than economic policies.

And, if you listen to well-known and well-credentialed economists opine on economics, one would believe that they operate in the known world with the assurance and certitude of physicist. However, it appears that most economists get it wrong rather than right. A fact noted in the 1974 Nobel Prize Speech of another eminent economist, Friedrich August von Hayek, titled “The Pretense of Knowledge,” a condemnation of economics masquerading as science.

 Am I Next? The Problem with Economists: Hayek

“It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to outright error. It is an approach which has come to be described as the "scientistic" attitude - an attitude which, as I defined it some thirty years ago, "is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed." I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.”

 Am I Next? The Problem with Economists, Paul Krugman

Consider the 1998 prognostications of 2008 Nobel Prize winner, economist Paul Krugman, as he opines on the future of the internet.

"The growth of the Internet will slow drastically, as the flaw in 'Metcalfe's law' --which states that the number of potential connections in a network is proportional to the square of the number of participants -- becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."

The original context of Metcalf (circa 1980) was an attempt to mathematically quantify and describe the value of an electronic network, specifically devices connected to an Ethernet network. Without the mathematics, it is a simple reiteration that the value of a network increases in proportion to its use and utility within a given community. 

So where did Krugman go off the rails? 

By misunderstanding the context of valuation in a social network where individuals seek not just to convey some important and relevant information, but also to engage in somewhat mindless chatter to be recognized, valued, and allowed to display totemic symbols that indicate status, wealth, education, or to simply signal virtue. Or, if angry, have a responsive platform where they could connect with like-minded individuals. 

Krugman failed because he did not see the ramifications of mass human behavior. 

This is one area in which you would assume Krugman had significant experience as it is the basis of most economic activity.

Exactly why the stock market is volatile and chaotic. The simple fact is that the stock market is the instantaneous result of an undetermined number of individuals taking action on what they believe to be true at the moment, an n-dimensional chess game that defies long-term modeling. Investors take action on the economic news, the news of a disaster, or even the possibility of a disaster, or they follow some guru – totally ignorant of the survivorship bias with fails to note the myriad of similarly situated individuals who have failed and lost money. Totally oblivious to the fact that most high-powered individuals employ public relations flacks to whitewash their history and to present the most flattering, however unreal, picture. 

One of the most amazing paradoxes to be found in the financial world is that most brokerages routinely include the disclaimer “past performance is not an indicator of future success” and then go on to tell you that they have some proprietary method that looks at past performance and yields an actionable prediction. The same thing occurs with economists who know they will be mostly wrong but are willing to take your money for predicting the future.

And when economists are wrong, they will still offer up answers by pointing to counterfactual statements – “it could have been worse.”

Which brings me to my favorite economist joke.

Three economists were out hunting in a field. They all saw a deer in the distance. The economist on the right shot and missed the deer by one foot to the right. The economist on the left shot and missed the deer by one foot to the left. And, the economist in the middle started jumping up and down and shaking the hands of his fellow hunters. Puzzled by this behavior, the two economists asked why the middle shooter was so happy without having fired a single shot. “Don’t you see?” replied the economist, “On the average, we bagged that sucker.” And so it goes in the real world.