“Are you an Austrian?” I was asked recently, in the polite tones reserved for asking if I were, say, Jewish or Muslim or Christian.
I’d been asked the question while discussing macro-economic policy in the United States—
—actually, “discussing” doesn’t quite capture what I’d been doing:
I’d been lambasting the Neo-Keynesian drivel of spend!-spend!-spend!, which I deplore—“They’re like drunk sailors with the national credit-card—trawling for good blow and cheap whores in a Tijuana back alley!”—
—while at the same time ridiculing the Monetarists’ obsession with money supply—“Money-supply fetishists are just like foot fetishists—only twice as creepy, and only half as reasonable!”—
—all the while insisting that in this Global Depression, savings had to be the priority—austerity the only policy prescription that made any kind of sense.
“Are you an Austrian?” came the question.
“I'm an agnostic,” I answered flippantly—but then instantly realized that my answer went to the heart of the problem with economics.
It’s no great insight to say that economics—the so-called “dismal science”—has had a dismal track-record in terms of predicting macro-economic events over the last forty-odd years.
And as for the last couple of years? Sheesh—a monkey throwing darts would have done a better job of predicting how the macro-economic picture would play out.
Very few people have been asking why this is so. Very few people have been asking why economics has failed so spectacularly at predicting the Global Financial Crisis, and very few people have asked why economics cannot seem to solve the Global Depression we are currently experiencing.
This is an important question—especially if we are collectively putting so much of our faith in economists and their dismal science, as the sherpas who will lead us out of this current mess that we’re in, and back up to the mountain top.
First of all, what is economics?
The dictionary definition is, economics concerns itself with the study of the production, consumption and transfer of wealth—everything from accounting to finance to macro-economics.
Now, I have no truck with micro-economics, generally speaking; accounting and finance. All good to me, within certain limitations. When I speak here of economics, I’m referring to macro-economics.
What does economics do, as a discipline?
The answer is obvious: Economics tries to predict the future.
Lots of sciences try to predict the future—and they succeed, too, without much controversy.
For instance, physics and chemistry claim that, if gasoline is mixed with air inside an enclosed cylinder, and then ignited, the force will drive a piston which will drive a crankshaft which will drive a car.
Lo and behold, several hundred million cars drive around the planet, amply fulfilling physics’ and chemistry’s predictions. Score for them.
But what about economics?
Well, economics claims it is a science—yet for all its “scientific” models, economics found itself in 2007 with its hands up against the wall and its collective pants down around its ankles, when it utterly failed to predict the Global Financial Crisis, and the subsequent Global Depression.
Actually, there were a number of non-economists whose predictions were far more accurate than any paid economists’. But all those eccy Ph.D.’s with all the academic trimmings? They got the big ol’ raspberry, when the Global Financial Crisis hit.
In fact, economics definitively showed itself to be a failed science much earlier: Back in 1998, the spectacular failure of Long Term Capital Management showed them up to be fools.
LTCM—run by legendary trader John Meriwether—was a hedge-fund that used “scientific” trading methods developed by Myron Scholes, Robert Merton and Fischer Black, who invented options pricing. In fact, Scholes and Merton won the Nobel Prize in economics for their work—in fact, Scholes and Merton worked at LTCM, applying their “scientific” methods to LTCM’s trading strategies.
Talk about the best and the brightest! Meriwether opened his shop in 1994 with these two Big Brains running the engine room, along with a host of other Big-Brains-in-Training—and what happened?
In less than four years, Long Term Capital Management blew up. A “once in a billion years event” happened in less than four years—which means that either LTCM was the unluckiest outfit in the world . . . or maybe economics and finance isn’t a science.
Why be coy: Economics isn’t a science—it never has been. It can’t be—because its subject matter is people: And people aren’t predictable.
Circumstances being equal, water will freeze at 0°C, and will boil at 100°C—every time, time after time, no matter what.
But people? You can never predict when they’ll freeze you out, or boil over in rage.
That hasn’t stopped economics from pretending to be a science. That’s why the discipline has spent the last 60 years importing math and physics wholesale: So as to create a veneer of scientific certainty and respectability.
So if economics isn’t a science, then what is it?
Well: What human activity pretends to higher knowledge of a super-human power that controls human lives and destinies? What human enterprise tries to convince other human beings that they—and only they—know what will happen next? What group of human beings claim that their secret knowledge uniquely allows them to know what will happen—and so therefore, you must listen to all that they say, and never ever question their commands, decrees or pronouncements, no matter how foolish?
Easy: Priests. Priests in the service of a religion.
Ancient Mayan priests used their knowledge of the stars and the planets to not merely predict the future—they used that knowledge to control the populace, and therefore get their own way.
That is exactly what economics has been doing, as of late: Claiming knowledge of the future, and claiming unique access to a higher truth—unavailable to the ordinary man and woman—so as to get the populace to do their bidding.
Just like religions, economics uses esoteric knowledge and language to discriminate between its acolytes and the unlearnéd, the elect and the unwashed.
Just like religions, economics builds sophisticated-seeming theoretical structures, that seem to explain reality.
They don’t, of course: The mathematical models economist spend all their time building are simply not up to the task of faithfully reproducing the macro-economic reality, and thereby predicting it.
Why? Because there are so many variables that human invention simply cannot cover them all. Human invention cannot predict all the moves in a game of chess—and chess only has six classes of pieces moving on a mere 64 squares.
Imagine something like a world’s economy: How many classes of pieces? How many squares? How many moves? How many variables?
Yet economics—ridiculously—claims it has models which can predict the future—but what’s even more ridiculous...