He who pays the economist calls the tune

If one wonders why economists have had so much difficulty predicting and explaining the economic crisis it might be helpful to look at who pays their salaries. Isn’t there an old saying that he who pays the economist calls the tune?  As most economists work for large corporations, governments or universities (paid indirectly by governments) they have to answer ultimately to chief  executive officers or presidents/prime ministers.

The question then is what do these people want to hear?  Does the chief executive of a major bank want to hear that he is participating in a Ponzi scheme or does the president want to hear that we are going into a major recession and that his voters are going to have to accept a decreasing standard of living?

Probably not.  So economists tend to focus on things that will not be offensive to these people or that will help to support them.

Consider the book Freakonomics by Steven Levitt and Stephen J. Dubner.  This popular book is very interesting but it doesn’t  touch on any of the big economic issues with which we are currently trying to deal.  People who have lost their jobs and homes to the crisis will not find much here to help them.  Nor will the book encourage them to become drug dealers. (Here is the Wikipedia entry on Freakonomics.  http://en.wikipedia.org/wiki/Freakonomics )

Another example is this article ( http://www.economist.com/node/12851150 ) from The Economist, December 30, 2008.  This article lists eight up and coming economists and talks briefly about the work they are doing. None of them are doing research which will help us understand or cope with the current economic crisis.  Here are three quotes from this article which I think help make the point.

 

They share the same knack for finding ingenious ways to answer unlikely questions, often by plundering forgotten troves of data.

 

Mr Gabaix made a splash in 2006 when he concluded that the “excessive” pay of chief executives was not necessarily excessive. Compensation may have grown sixfold from 1980 to 2003 not because managers were six times greedier, but because the firms they ran were six times bigger.

 

What, then, unites these eight young stars and the discipline they may come to dominate? Economists still share a taste for the Greek alphabet: they like to provide formal, algebraic accounts of the behaviour they explain. And they pride themselves on the sophistication of their investigative methods. They are usually better at teasing confessions out of data than their rivals in other social sciences. What defines economics? Economics is what economists do—the best of them, anyway.

 

So long as the economy was growing it didn.t much matter what questions economists asked and most of their research assumed continued economic growth.  As a student I learned regression analysis with its upward sloping line.  It wasn’t until later that I learned about fractals with their ups and downs.  I speculate the people who sign economists’ pay cheques would not be much interested in economic projections based on fractals.

I believe most people who study economics want to make the world a better place.  Also we tend to think and act in our own short-term interests and for most people that is their pay cheque.  The economists I am criticizing probably believe they are helping make the world better – or would  be if only people would listen to them.  Who is to say one person is right rather than another when it comes to solving deep problems and shaping the future.  Sometimes, to others, our vision of the future is wishful thinking.

What then is the role of economists if not to make accurate forecasts and to solve major economic problems.  Shortly after starting my study of economics I decided economists were the theologians of the twentieth century.  Some of their debates are as relevent as the medieval debate over how many angels could dance on the head of a pin.

I have a theory that we need to believe the things we do are important and necessary.  Sometimes we need people to reinforce this belief.  As most of what we do involves the exploitation of resources we need to believe this is good.  As it becomes more difficult to extract the remaining resources it becomes even more important we have people to help reinforce our work ethic.  The theory is that this is the true role of economists.

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Counting money

Bank tellers tend to be very fast and very accurate at counting money.  Economists have a more difficult time of it.  They can’t even agree on a definition.  This post was prompted by this article criticizing The Fed on how it measures the money supply.

Once upon a time I worked as a journalist.  I used to say there are two types of figures.  One kind we photographed and put on the front page and they help to sell newspapers.  The other kind help to put things into perspective.  When I got to university and wanted to study economics I found I didn’t have the calculus skills to do econometrics so I have stayed with my idea that statistics help with perspectives.

mystica_Coins_Money_Economics is about relationships.  It is about the relationships that go with the exchange of goods and services and since some exchanges involve the state it is also about our relationships with governments.

Not all exchanges can be recorded let alone measured therefore statistics are of limited use.

Mathematical concepts are useful in that they can simplify the analysis of relationships and help us understand what is happening.  Sometimes statistics can be useful for evaluating things we want to believe.  One should be leery of drawing conclusions from emotional accounts of events.  For example, a former professor claimed that during the industrial revolution things got worse for working people before they got better.  One of his arguments was highly emotional newspaper accounts of children dying in poverty.  I would have been more convinced it he had produced statistics of child mortality rates before, during and after the industrial revolution.

Back to money.  For economists it is difficult to count because there are so many things including cigarettes and candy have been used and there are a number of economic  definitions  depending upon what types of bank deposits are included.  I figure money should be defined as anything that represents purchasing power including and especially computer impulses.

Money is my favorite subject although I have never wanted to be a bank teller.

Economists forecasting

Likely government budget cuts and the prospect for messy political fights over fiscal policy will weigh on the U.S. economy this year and hold growth to a tepid 2.4 percent, according to a survey of forecasters published on Monday.

The National Association for Business Economics said that more than 95 percent of the 49 economists who participated in its latest quarterly survey believe fiscal policy actions or concerns would slice into gross domestic product.

 

These are the first two paragraphs of a news item on the Huffington Post last night.

I’m having some difficulty with this forecast for the following reasons.

Forty-nine people make a very small and insignificant sample.  Any economist should know that.

business_peopleJust because somebody thinks something will happen doesn’t mean it will happen.

Just because somebody wants something to happen doesn’t mean it will happen.

Just because somebody believes something will happen doesn’t mean it will happen.

If these guys don’t say what their employers want to hear they will probably become unemployed.

Economists in general have not recently had a good track record with their predictions.

In a previous reincarnation I was a charter member of the skeptics association.

In this case a poll of ordinary people who are experiencing the realities of the economic crisis might be more accurate.

Economists and honesty

Can economists be trusted to tell the truth?  If they can,  why can’t they see the same truths as I see?

These questions are prompted by this article about a very small experiment which suggests that economics and business students are more dishonest than students in humanities, sciences and other fields.

The study was based on a very small sample but still it is tempting to believe there may be some truth in it.

Economists tend not to see things that at least to me are very obvious.  For example, that economic growth has come to an end.  In light of the evidence it must take a lot of faith to predict that recovery is just around the corner although lately the time frame seems to be increasing to a year or two.  There’s a song which tells us that tomorrow is just a day away and a saying that tells us tomorrow never comes.

Are economists lying or are they deceiving themselves?  Or am I the one committing self-deception?

One has to note that most of us have to support the views and interests of our employers.

I have for a long time figured the role of economists is not to solve economic problems but to give legitimacy to economic activity which consumes scarce resources and sometimes trods over other people’s lives and values.  Economists were the theologians of the twentieth century.

In any case economists don’t have a great record for accuracy or for proposing viable solutions to economic problems.

 

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Why did economists fail us in this crisis?

A number of writers have recently pointed out that economists have failed the people of the world in the current economic crisis in that they failed to predict it and appear unable to offer viable solutions.

Most of these critics, including this one, don’t appreciate the seriousness of the situation and are not themselves radical enough.  Criticizing austerity and promoting stimulus is hardly an economic intellectual revolution as this writer suggests.  Nor is forecasting necessarily the most important part of economics.

As I see it the problem with economics is that the role of economists is not to solve economic problems but to provide theological or moral legitimacy to our economic activity.    Their role is to tell us our economic activity is creating wealth even thought we are really using up scarce resources and destroying the world we value so much.

It could be that most of us are to blame for this economic weakness.  Most of us don’t want to hear that there will be no more economic growth because the implications are extremely painful.

To deal with the crisis the first thing is to recognize that economic growth has come to an end in part because we have used up the most easily accessible resources.  I would also suggest that economics is mostly about the human relationships involved in exchanging goods and services.

If economists are  going to help us cope with current problems they need to study how to cope with negative growth and the type of relationships this will involve.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Criticizing economists

Following is a quote from James K Galbraith at the start of the introduction to the book The End of Growth: Adapting to our New Economic Reality by Richard Heinberg and published in 2011 by New Society Publishers.  (Apparently James K. Galbraith is the son of John Kenneth Galbraith)

When I read this quote I thought this book has to be interesting and it is.  Hopefully there will be more from this book in later posts.

Leading active members of today’s economics profession … have formed themselves into a kind of Politburo for correct economic thinking.  As a general rule – as one might generally expect from a gentleman’s club – this has placed them on the wrong side of every important policy issue, and not just recently but for decades.   They predict disaster where none occurs.  They deny the possibility of events that then happen ….  They oppose the most basic, decent and sensible reforms, while offering placebos instead.    They are always surprised when something untoward (like a recession) actually occurs.  And when  finally they sense that some position cannot be sustained, they do not reexamine  their ideas.  They do not consider the possibility of flaw in logic or theory.  Rather, they simply change the subject.   No one loses face, in this club, for having been wrong.  No one is dis-invited from presenting papers at later annual meetings.  And still less is any from the outside invited in.

 

Here are links to a couple of my own criticisms of economists: one, two.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

How expert are the experts?

Following is a quote from the Buttonwood columnist is this week’s Economist.

“In his book “Expert Political Judgment”, Philip Tetlock shows that political forecasters are worse than crude algorithms at predicting events. The more prominent the expert (ie, the more they were quoted by the news media), the worse their records tended to be. There is also an inverse relationship between the confidence of the individual forecaster and the accuracy of their predictions.”

I wonder if these statements apply to economists as well as political experts.

(The author of this comment has a web log on economics at https://economics102.wordpress.com/)

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