Serious Studies

Does Economics have a future?

Pigeon

There's an interesting article in The Economist this week. It's called What Went Wrong With Economics. "In the public mind," the editors write, "an arrogant profession has been humbled. Though economists are still at the centre of the policy debate... their pronouncements are viewed with more skepticism than before. The profession itself is suffering from guilt and rancour."

You'll have to excuse the cute misspellings. The Economist is headquartered in London.

The magazine then goes on to offer a spirited defense of the profession for which it is named. There are lengthy critiques of macro-economics and financial economics, with very salient suggestions as to how those disciplines can be rethought and re-established as credible enterprises.

This exercise, ironically, comes straight on the heels of the stunning discovery of an ancient manuscript now on display at the Barfinger Museum in Minneapolis. This document was unearthed during an archeological dig in what was once Crete, and it provides a unique perspective on how a civilization that formed the bedrock of our culture handled similar crises.

The artifact in question contains a rather lengthy discourse, on papyrus. It was written by ancient Cretins whose names are now shrouded in mystery (much as the unnamed editors of The Economist). The article -- if one may call something so very old -- is entitled, "The Future of Bird Entrails as a Predictive Tool."  It seems to have been written after a particularly bad harvest that plunged the nation into a protracted famine.

Translation is difficult, since there are now few who speak the antique tongue, but the burden of the argument is clear, and summarized by one interesting passage. "If the study of bird entrails as a broad discipline deserves a robust defense," it states, "so does the entire oracle paradigm." It continues:

"Too many people, especially in Greece, Troy, Egypt and the surrounding lesser civilizations,  equate mistakes made by certain oracles with a failure of bird entrails as a predictive tool. Their logic seems to be that if oracles, seers and other supposed soothsayers got things wrong, then civil authorities can do better. That is a false -- and dangerous -- conclusion."

The writer then goes on to look at the main types of entrails then in use and both critiques and supports the employment of each, from the macro-entrails of larger carrion birds to the smaller and slightly less messy entrails of doves, sparrows and even junk birds, like pigeons, the latter being most useful in determining the price of hog snouts, which were then in short supply due to the Pelopennesian War.

The article concludes with an evocative statement with which no one in the profession at that time would disagree, I think. "In the end, those who study bird entrails -- just like astrologers and bone-casters --  are social scientists, trying to understand the real world. And the current crisis has changed that world."

Study is now being done to ascertain how that profession faced this crisis in confidence so long ago, and what lessons might be gleaned by their counterparts today.

36 Comments Add Comment

Economics does have a future, but it will be different from past practices. Shirts and ties will no longer be worn by over-educated greedy people. A new standard will replace the Corporate business model. The stock market will be outlawed-workers will only be payed for productive work- no stock options will be issued or exercised-no money will be loaned to build new churches,corporate headquarters etc... Tin cans will be in hi demand to replace banks which are no longer trusted. Change is coming!

As I sit in my mostly silent office and listen to a twenty something outside my door stumble his way through his personal life (no business to do..) I visit my favourite blog to find.....no comments. Has everyone checked out? And then of course, I read your latest post. It may have perhaps left your readers speechless. As for myself, I'm not sure I can formulate an intelligent comment on your post today, so I think I too will check out.

Yeah! You're right, Dave! Where ARE all you guys, huh?

Today's blog is truly among your best. It should be required reading for every budding economist, and would do much to prevent so many mishapen and wasted lives.

Economics suffers from the same problem as all the other sciences that use mathematical models to explain (and try to predict) real world phenomena: the models work great right up until they don't work anymore.

The difference is that we regular folks and our congressmen don't draw correlations between physicists' work and our paychecks. That and the physicists don't get interviewed on CNBC.

Predictive regression models work perfectly as long as future events mirror the past events used in the model.

Maybe economics can go back to being a social science. How may government, corporation or media organizations have cultural anthropologists, historians, political scientists, sociologists, or geographers making predictive forecasts? If not, why not???

Yeah, Jake. But what about bird entrails?

Knowing the Basics of Economics is important. Supply and Demand. Effects of Taxes and Price Controls,etc. The reason people are losing faith in Economists is that they jump too deeply into politics and policy where it is more of a question of opinion and spin.

I would still argue that anyone in public service should at least have to pass a basic course of Micro-Econ 101. Today these guys simply have no knowledge of such concepts and they are writing laws that directly affect the economy.

Bing,

I read that article a few days ago and found it quite interesting. Although many (or all) might disagree, the only real difference between economists such as Phil Gramm and Paul Krugman is political parties. The change of name from political economy to economics has never really been effective. We need to concentrate on diversity of thought and finally allow academic freedom in our universities. However, students with interest in areas of research that buck the status quo are denied admission into graduate school for various reasons.

Economics is most certainly a mere social science; its mathematical models obviously aren't very successful in predicting the complexities of human economic behavior. A true science, such as physics or a physics based discipline like engineering, can propose theories and conduct replicable experiments to establish validity.

Hell, nobody could even develop a model predicting which valuable household article my wife's chihuahuas will next destroy, let alone create order out of macro-economic upheaval. Like the military, economists are basically stuck with 'fighting the last war'.

Eww.

Oh hell, I'll pipe up.

Some of us with a background in econ did see this coming, and you busted on us for taking short positions and *causing* this mess.

Japan tried to stem a recession with cheap money in the early 90s, and the US was very vocal over the potential threat that posed to the global financial system. Then the US entered a recession a decade or so later ... and did what? Same thing as Japan ... cheap money = real estate bubble = pop ... only the US is a far larger market and actually succeded in horking up the world financial system. The signs were there, but people listen to the prophets they *want* to listen to.

Anyway, inventories are so depleted now that we should get a bit of a boost this fall just restocking the shelves, if nothing else.

We're not out of thw woods, but short of another major screw-up, things should trend back up (in small increments) this fall.

Long term, though, we've outsourced so much of our actual production that it will be hard to rebuild a robust economy ... until the US restores "made in America", all gains are relative.

Right now, things are so bad, I went to the store to get a toaster and they gave me a free bank. ;)

Hope you're all well ...

Sometimes a quote is the best comment one can make...

"The herd mentality of economic forecasters makes sheep look like independent thinkers" - Unknown

John Marc, Nova Scotia

To the tune of We are the Champions:

You've paid my dues(squash club)
time after time.
I've done no sentence,
(can't write a coherent one either)
And committed some big crimes.

And bad mistakes,
(I mean really bad mistakes!!!)
I've made a few ($ trillions!)
I've eaten my share of fois gras
But my heart has pulled through!
(cause I don't have one.)

We are economists my friends,
and we'll keep on pontificating
till the end.
(although when that will be is anyone's guess.)

We are economists!?!?
We are economists!?!?
No time for entrails,
For we are the economists...
Of the world.

This summer I'm in a zen-like state of not caring, as I think a rather clever author described once. Several months of confusing direction in the economy and stocks, combined with the lack of any clear signal that we are actually free of this mess, will do that to a person.

Now, where else can I fit in a vacation day..

Back to Galbraith, “The function of economic forecasting is to make astrology look respectable.” I guess in times past it made reading bird entrails a lucrative career for the intelligencia of the day. But the real successful Cretan “gut” men were the ones that could read entrails in an entertaining manner regardless of their prowess in correctly predicting any thing.

But hey, lots of folks in modern times make a good living out of being consistently but pleasantly wrong. Consider weathermen, they are all pretty much wrong on a frequent basis but the more entertaining among them use it as a spring board for even more lucrative celebrity. David Letterman got his start as a weatherman. Ben Stein got his start as a lawyer/economist now he is a movie, TV and commercial personality. ESPN is full of shows that will never mention how wrong they were about championship predictions at the beginning of a long season. Geraldo made do-re-me off of being wrong about Al Capone’s vault. I’m sure there are more examples in the business world as well where being entertaining and pleasant in the short run made lost of bucks and celebrity for ultimately being very wrong in the long run. And no birds had to die for it to happen.

My bet is if the researchers dig back to the Cretan equivalent of the papyrus TV Guide, Gladiator Illustrated or People and find out who was entertaining the masses and they are likely to several of them got there start in a small market reading dove entrails before the major markets kicked them upstairs to read Albatross, Vulture and Ostrich entrails and offered them the wider audience to access the big time.

Which leads me to wonder what profession was Bing wrong in before he traded in on a measure of celebrity in his own right?

So I guess the idea was to keep killing different birds until one of them gave an acceptable answer..."these peacock guts have been proven through the compilation of thorough empirical evidence to be the superior predictive tool"...the lesson being if one bird's entrails give you the wrong answer, go kill another type? Undertones of the software solution industry? More models, more models!

"When you see me fly away without you...
Shadows on the things you know...
Feathers fall around you, and show you the way to go...
It's over..."

I think of these Neil Young lyrics whenever I witness a bird exploding off a moving vehicle...little buzzards...always pooping on my truck...

I had initially planned to major in economic when I started at college. Econ and music, that is: the best double major ever. By second semester freshman year, I'd switched to sociology. Later I earned advanced degrees in history and media. At this point, I sorta wish I'd stuck with the music, at least then with luck I'd be producing something worthwhile, and indisputably valid.

In my part of the world we still quite respectably throw bones and read entrails , but have long since abandoned the lunatic mysticism of economic forecasting. When will you first world guys catch up ?

Okay, Jimmy. How does one actually read entrails?

Economics is the history of the business cycle. It's future as a prognosticator may be in jeopardy, but it's future as history will always be safe.

I'm repeating some comments, but economics is only useful to a degree. The same is true for a more pure science like physics whose theories of general relativity and quantum mechanics are conflicting, but are a useful workaround until we figure out the right answer. These accepted physics theories can be wrong when used in the wrong circumstances and so can various economic thoeries when used in the wrong context or circumstance.

Political and corporate interests spout whatever economic interpretation suits their agenda best and the media stuffs it down our throats. If everyone learned a bit about reading bird entrails we might be better off.

Hey Leeroy at 2:50 pm, speaking of horking, I horked up my toast this morning with your last comment.

Your post is RIGHT ON!

I have been an independent sales rep. for the last 20 years selling to mfrs. in the mid-south. My customer base has slowly moved to Mexico and Pac Rim. My income has dropped to the point where I buy only the necessities.

I live with my old tennis shoes, I change my own oil, I leave my ice-maker broken, I spray my own lawn.

WHO IS GOING TO BUY WHEN ALL THE JOBS THAT PAY ENOUGH FOR DISCRETIONARY SPENDING ARE GONE?

I just got a piddly little undergrad degree in econ., and it was a BA rather than a BS because I never went into all the econometrics stuff, and that degree has served me incredibly well -- I use that knowledge every day. Economics may be one of those things where the opposite of "a little knowledge can be a dangerous thing" applies. Basic economic principles are absolutely essential in understanding what the hell is going on. Go beyond those basic principles, and you get into the realm of reading bird entrails. The higher up the foodchain you go, the more you're tempted to go out on a limb. The Ph.D.s who helped get us into the current mess could arguably be outperformed by a bunch of econ BA's.

Matt & Leeroy, I've been mocked in the business community (and in this blog)for asserting the same thing. Their argument has always been that the emerging foreign market consumption would continue to offset our manufacturing job losses. We'd all be working in the financial sector, reaping the bounty, servicing this foreign consumption. We ended up serving fast food. I now have a hell of time getting such cretins to acknowledge that they once made such an argument (short memory is a cretinhood strength).

It was a patently stupid argument; if the asian consumption continued to grow (contrary to all of the glossy articles in every business periodical it tanked since it inherently depends upon American consumption), why the hell would they depend upon us for anything? Illusory financial wealth that evaporated like fog? We hardly make anything anymore, we've abandoned our long distance rail lines for bicycle trails, aren't training engineers, technicians, and skilled workers. All we've done is crap out effete MBA's (and don't get me started on attorneys) and grown a society that denigrates truly productive labor. We aren't interested in working...we just want to hit the lottery...the big score (which is really what every lawsuit or arcane financial instrument innovation really amounts to). Meantime, like casino junkeys, our future is being flushed down the tube.

I just read Bing's latest blog entry. I take back everything I just wrote; things are looking up...I hadn't counted on the bounty of Twitter. Bye now....have to get in my Twitter-mobile and go to work.

Economics by my definition is the theoretical quantification of long term irrational behavior in commerce.

To put it in more simple terms:

Just because your read a lot of Playboy and Hustler mags ,,doesn't mean you are a great lover,,,especially if you have never been on a date with a real woman..

Jack, I agree. I've honed my lady skills with the much more reliable Penthouse Forum....."I never thought this could happen to me, but I ran into a group of sorority girls who dared me to......"

Economics is a real effective tool just as statistics ... as long as the information is used properly and not twisted or applied with * that will declaim the twist or truth that is not being applied. Allow one fine example: The loan to said consumer, who the economist and stats says should not have a loan that is three times the disposable income, however is okay due to the ostrich technic that will allow for this loan to go through unattested. Excellent, we created junk mortgages that are junk CDOs, that are insured so unknowingly improperly that when it starts to default the largest corporate insurer in the world goes underwater so fast that it can't even run to start the bilge pumps. In comes Uncle Sam take my money, we will get it back from the people who used it to begin with who got these crazy earning from the stock market. We will tax them for the money we need to cover our mistake... What are you thinking...if person x makes 1 dollar and the mortgage is 3 dollars a month then person x can't afford it. Simple system... what was that from Jerry Macguire..."SHOW ME THE MONEY". We sank our own ship in essence... that really scares me. We need to listen to them (economist), but apply a little street (not the wall kind) knowledge as well to know when to say yes or no. Economics has a lot to do with the buying and demand trends and the elasticity of a market, nothing to do with the "human" factor of the model. History... Reagan...Reaganomics... S & L scandal.... one big circle baby.

I'm late coming to this party. My company installed a "Big Brother" device that tracks our web use. Even over lunch, when I liked to catch up on Bing's thoughts. the up-side is that I've become less of a news junkie now.

My education included economics. Lots of it. I understood the guns and butter thing, supply and demand, and other clearly observable concepts. But the theoretical parts left me cold. Too many unknowns. Microeconomics, yes. Macro, not so much. Voodoo economics.

At one company where I worked, they said they could predict upcoming sales by tracking cotton futures. Even though we had nothing to do with cotton, or later cotton processing, or any aspect of that business. Good correlation, bad conclusions. Perhaps they should have tried bird entrails.

I love to read the work of leading economists. They are so serious, and so well-meaning. My heart goes out to them. It is hard to laugh at people who are so earnest in their scholarly pursuits.

I wish them well, but my realistic side just doesn't see it. I'm pretty sure the folks in Crete had discovered some correlations between the changing diets of the birds, and the economic situations in which they found themselves. Interesting, but not predictive.

No need to read the bird's entrails, just note that the bird is a swan and it is black. That's about all you need to know about why nearly every economist missed this - they are experts at driving by their rear-view mirror and expecting all recessions and recoveries to look alike.

Reading Entrails,,,I'm all for opening up a stockbroker and reading his entrails,,,to find out why my stock tanked...

An Mike I tried to envision your escapade,,,but my blood pressure got very high and I had to think of some less exciting...

Yes, Mike, we used to know how to do things in this country. We could get raw materials out of the ground. We could convert them to goods. We could build machines and systems to transport those goods. Others could too, but across the broad spectrum of human activity, we were more widely talented, more efficient, more productive. Were.

Now we are a "service" economy. Some services are essential, but when there's no underlying production, who or what are they to serve? We can't build an economy rushing about selling one another derivatives.

Once upon a time, the average American was a small businessman, (often because he/she was a farmer). He or she understood the financial markets. Commodities instruments were traded for risk management, not as a form of gambling as they so often are today.

Somewhere along the way, all those financial tools ceased to be tools, and became the end objective ... and the system failed.

It's hard to sell your service econonomy to the world, if you've made a dog's breakfast of it.

I still think it will all come around, eventually. I bought a made in China can opener, and it looked like a can opener, but it couldn't open cans. Once all the real can openers are gone from yard sales, demand for things that actually work might just come back. The $#!4 may really have to hit the fan before that happens.

Funny. Barfinger Museum? Can't seem to find. Are you sure the Bird entrails don't apply to the financial industry who dreamed up the bad investments?

Someone posted earlier. The Economic models worked up to the point they didn't. yep. Exactly. Things I didn't know prior to the fall. Investment Banks allowed to leverage up 33 to 1. Never knew it was possible. People in large numbers will stop paying their mortgage (I'm not saying what they are doing is not rational, just something the models only picked up on in the tails). What I do see and every Economist knows the Government printing tons of money will end badly. Inflation and higher taxes are the future. As the old commercial says. You can pay me now or pay me later. Does matter if an Economist tells you or your priest. Thats the truth.

Jake, yeah just what we need,a bunch more useless achedemics who have never participated in the real
world telling us what to do. If they really know what they are doing, why arn't they all mutimillionaires. no they just sit back in thier tenured jobs looking down their noses while esposing this therory and that theory. If they think they are so smart then they should put their own money and financial well being where there mouth is. Therories are fine if they only affect the rest of us.
The main problem is that greed has become the driver of our economy and the banks and insurance companies who have now become too big to fail are calling the shots and the taxpayer ahs to pick up the pieces even though they have absoloutely zero control.

RELATED THINGS