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Posted June 28, 2022

Sean Ring

By Sean Ring

The Inability to Quantify Human Action

  • Economists are scratching their heads, wondering how they got it so wrong.
  • Larry Summers looks like a genius, using back of the envelope calculations.
  • The mathematical models used in economic analysis arent fit for purpose.

Happy Tuesday!

As the monthly asset class report is coming out this Friday, Ill try to touch on other topics before then.

Today, Ill look at why the professional economists got this crisis - and every other damn crisis - so wrong.

But first, a joke:

Why did God create economists?

To make weathermen look good.

Taleb on Economists

Next, lets look at what Nassim Nicholas Taleb has said about economists. By the way, if you have spare time, you should read his books.

I genuinely believe Fooled By Randomness, his first mainstream book, will be required reading 500 years from now. Its that amazing.

The Black Swan is also excellent and many peoples favorite. That may be part of the reason why its not my favorite.

If youve heard the term Antifragile, that, too, came from Taleb.

The Bed of Procrustes is a fun book of aphorisms.

And finally, in Skin in the Game, Taleb writes, Never trust anyone who doesnt have skin in the game. Without it, fools and crooks will benefit, and their mistakes will never come back to haunt them.

And that, my friend, will give you a clue about how he feels about economists.

I must thank Business Insider for compiling this list of Talebs best insults to economists. Here are my favorites:

    • An economist is a mixture of 1) a businessman without common sense, 2) a physicist without a brain, and 3) a speculator without balls.

    • Those with brains no balls become mathematicians, those with balls no brains join the mafia, and those w no balls no brains become economists.

    • To have a great day: 1) Smile at a stranger, 2) Surprise someone by saying something unexpectedly nice, 3) Give some genuine attention to an elderly, 4) Invite someone who doesn't have many friends for coffee, 5) Humiliate an economist, publicly, or create deep anxiety inside a Harvard professor.

    • A trader listened to the firm's "chief" economist's predictions about gold, then lost a bundle. The trader was asked to leave the firm. He then angrily asked his boss who was firing him: "Why do you fire me alone not the economist? He is too responsible for the loss." The Boss: "You idiot, we are not firing you for losing money; we are firing you for listening to the economist."

    • Friends, I wonder if someone has computed how much would be saved if we shut down economics and political science departments in universities. Those who need to research these subjects can do so on their private time.

 

Now that weve had our chuckle, lets look at the navel-gazing the economics profession is engaging in and why.

Larry Summers Makes a Comeback

ZeroHedge likes to post this picture as a reminder to those of us who once trusted government:

That cover came out in February 1999.

I hadnt moved to London yet, had never even heard of Austrian Economics, and thought Alan Greenspan was a god.

I just shook my head as I wrote that last sentence.

Oh, the naivety.

Of course, the market topped a year later and fell for the next three after that.

Reputations were tarnished. Greenspans will never recover.

And this magazine cover holds a place in infamy that rivals Businessweeks The Death of Equities.

However, one of the men on the Time cover has made a stunning comeback into the mainstream.

Larry Summers, the portly chap over Greenspans left shoulder, correctly called the inflation were seeing now.

I had been absentmindedly flicking around the boob tube when I stumbled onto Wall Street Weeks interview with Summers a couple of weeks ago.

He alleged the Fed called an audible with the 75 bps move and had underestimated the gravity of the situation.

Summers said he thought stagflation was a possibility and the economy was overheating.

He said hed be surprised to see inflation come back down to 2.5% without inducing a recession.

All this raised my eyebrows, as you rarely hear dissenting opinions from world-famous economists.

But I agree with his views.

And then yesterday, I flipped to WSJ.com to see Greg Ip writing about Summers.

Greg Ip Asks Why

Ip is the Chief Economics Commentator for The Journal and has been a Fed watcher for decades.

His article, On Inflation, Economics Has Some Explaining to Do, is a good read if you want to know some of the ways professional (government-employed) economists get things so wrong.

The Philips Curve is still in use? Really?

The Philips Curve posits theres an inverse relationship between inflation and unemployment. But during the 1970s, weve had high unemployment and high inflation.

A model disproven 50 years ago still underpins many of the Feds models.

And that leads nicely to the next risk: model risk.

We treat models as sacrosanct. But there can be many errors in assumptions, coding, and computation.

These models tell us a story. They try to remove the human element from the proceedings.

The problem is you cant remove the human from human action.

And that, ultimately, is what economics is about.

Not this silly mathurbation professional economists dazzle themselves with.

The best bit of the piece was this (bolds mine):

Mr. Summers is one of the few economists to have warned of inflation early in 2021 (and to have published several NBER papers on the subject).

While hes critical of the Feds models, his framework is similar: He thought President Bidens $1.9 trillion stimulus would far exceed the output gap.

He said this was a back of the envelope model that didnt yield precise forecasts but, combined with history and judgment, provided enough information to say overheating was an enormous risk.

Imagine that!

An academic who uses logic, common sense, and experience to forecast?

My god, hes nearly a practitioner!

Wrap Up

This article isnt meant to absolve Larry Summers for his myriad mistakes when he served in government.

But it shows that even a dyed-in-the-wool academic economist can wake up and think for himself.

Its great to see. If only there were more!

The bigger mystery is why anyone even pays attention to what the professional class of economists spouts.

Theyve been wrong about everything - the pandemic, shutdown, stimulus - for the last few years.

And its not like they had a stellar track record before that.

My last quote from Ips article:

Economists at both the Federal Reserve and the White House were blindsided. The European Central Bank recently reported that the accuracy of its inflation forecasts declined significantly during the Covid-19 crisis.

Blindsided?

I cant believe they cant believe how inaccurate they were.

Until tomorrow.

All the best,

Sean

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