Of course, I have some education in the fine tradition of self-study. I’ve read some greats in the field: Friedrich Hayek, Ludwig Von Mises, Milton Friedman, Amos Tversky and Daniel Kahnemann, and others from Nassim Taleb to Ayn Rand to Thomas Sowell to Fredrich Bastiat to Bertrand Russell, Malcolm Gladwell, Steven D. Levitt (with the other half of the Freakonomics team, Stephen Dubner), and anything by Michael Lewis – he of Moneyball, The Blind Side, and now The Big Short (and for whatever it’s worth, the movie suffers by comparison to the book).
In any event, you begin to get the picture that I read a good bit on economics. It’s a bit of an obsession, honestly. Of course, an unhealthy interest and a lengthy reading list don’t necessarily qualify anyone to regurgitate someone else’s ideas and claim some basis of knowledge on the subject matter. Strangely enough, that is exactly what the current education/regurgitation system looks like. Two of my daughters have completed college, another one is in college, and the youngest has finished high school. Along the way, some economics courses have been taken. It is always an exercise in regurgitation, never an exercise in exploration, or discussion, or alternate ways of looking at historical examples to tease out trends and possible answers.
In fact, I am of the general opinion that most of what passes for “Economics” in the current education system is really just politics dressed up with numbers. It’s indoctrination, warmed over with statistics and some formulas to give it an air of science, if you will. As it turns out, I’m not the only person who feels this way – so do economists (! ). “Dismal may not be the most desirable of modifiers,” wrote the editors at The Economist magazine, “but economists love it when people call their discipline a science.” The piece I linked above is short, but gets to the heart of the problem in economics: it may be a little heavy on the “social” in “social sciences,” and maybe a little light on the “science,” notwithstanding what members of the profession tell themselves.
The opening paragraph well captures my point:
They consider themselves the most rigorous of social scientists. Yet whereas their peers in the natural sciences can edit genes and spot new planets, economists cannot reliably predict, let alone prevent, recessions or other economic events. Indeed, some claim that economics is based not so much on empirical observation and rational analysis as on ideology.
The problem with science isn’t in accumulating data – at least not anymore. We’re awash in data and every day we produce new and ingenious ways of collecting it – (just ask the NSA). The problem is that (almost everywhere and always) the “science” is tied to a hypothesis that supports a particular public policy. Those policies are (typically) based upon the same flawed view of the world: that the best way to accomplish goals large-scale is to have government tell people how to behave… And the way most people seem to prefer to do that is through the use of force or compulsion, whether its penalties, taxes, and fines, or outright throw-your-ass-in-jail because you don’t want to do what we have ordered. Nowhere – except among people who still believe in the idea of individual liberty and responsibility – is anyone advocating for what actually works, or for something that works without using coercion and other surrogates for force.
Additionally, policy results (in many cases) are no longer even relevant nor measured. Let me provide a brief example of this in the area of public welfare. i.e. Social safety nets. “USDA Boasts: 1 in 4 Americans ‘Rely’ on Federal Food Assistance” read the title in a March 2015 article, written in response to a USDA press release, claiming that statistic. Leaving aside whether this is a good thing or a bad thing from an ethical or moral point of view, isn’t it possible to at least metric the results of that social experiment/economic policy and make some judgments about whether they have been “successful” or not? Interestingly, nowhere does the USDA talk about what this has done for health outcomes among the people it is feeding. As it turns out, it’s not only not good, it’s truly awful. From the second link, the Time magazine article:
Since 1980, when the government issued its first set of dietary guidelines, the number of Americans who are obese or have type-2 diabetes has more than doubled. Roughly half of all American adults now live with one or more chronic, preventable diseases, and rates of childhood obesity have reached “epidemic” proportions, according to the National Institutes of Health.
So the same agency that publishes the food guidelines, which have – so far as we can tell – resulted in over a 100% increase in obesity and Type-2 diabetics, is crowing about how it feeds one in four Americans! Joy. The USDA is proud that it’s feeding one of four Americans, without any analysis of the actual efficacy of the policy.
My own experience with economics is entirely practical. While I’ve read a ton, most of my experience has been putting economics to the test in the real world, as CrossFit, Inc.’s General Counsel. For the last 7 years or so, I’ve had the amazing opportunity to be a part of one of the fastest growing companies in history, by some metrics. It is important to understand that while we are not a revenue-driven business, a requirement of business is that it make money. Unlike government, there is not some endless trough of other people’s money through which you can burn and then simply keep on spending more, no matter how much your idea fails. You have to make enough money to sustain operations, as well as to put away for rainy days, which (ironically) includes things like increased governmental regulation, efforts to steal your business name, and a variety of other frauds and deceits that get played out every day in the dog-eat-dog world of business. Notwithstanding that rather dismal view of business, I should state that the alternatives are all worse. The most redeeming feature of even our hybrid (somewhat-free) markets is that they don’t rely upon force, nor are they predicated on anything other than freely engaged in transactions of value for value (I’ll discuss fraud in the marketplace separately). I’ve also learned a ton from traveling to, studying, living in, and/or observing the economies of countries as diverse as Afghanistan, Japan, Korea, Uzbekistan, New Zealand, Spain, and Mexico, among many others. I’ve also spent some time around black markets (the military and other government service always provide opportunities to observe illicit trade at its smallest and largest), as well as some time owning a couple of small businesses, and being a part of a couple of others.
This, then, is to be a course in what I’ll call practical or pragmatic macro-economics, rather than theoretical. There will be very little math, unless I find some use to be made of a formula, but that is not what I propose to do as a general matter. From my observations and experiences, I’m going to attempt to point to “good theories” of macro-economics – i.e. those that actually work in the real world – and simultaneously, to point out the (current) crappy economic models, by showing where, to what extent, and why they fail.
I might be getting a little ahead of myself, however, because I do want to make a point about what economics really is and what it isn’t and why the vast majority of political punditry or latest government legerdemain are not, in any sense of the word, economics. This takes me back to a point I briefly mentioned in an earlier post regarding science. Economics is a science only to the extent that it provides models with predictive power beyond what could be expected from mere chance. Of course, by logical necessity, those models also have to provide testable hypotheses, not just be a jumble of meaningless word salads, about which anything and nothing can be claimed. In order to even be worthy of claiming that one is engaged in science, you’ve got to at least provide some falsifiable claims. This brings me to mind of the story about the eminent physicist Wolfgang Pauli. Rudolf Peierls tells the story of a young physicist bringing a paper to Pauli, who – after looking at the paper – said in his native German: “Das ist nicht nur nicht richtig, es ist nicht einmal falsch!”
“That is not only not right, it is not even wrong!”
It’s amazing just how many people will get on TV or write columns that play at being economist because they have a B.S. or Ph.D. in economics, and then spend their time pontificating about economic public policy with complete certainty, as if the two were the same thing. Here’s the kicker – they’re wrong so often it’s almost laughable, but no one ever calls them on it…well, except the Queen of England. It’s an important point and one of the central themes of Michael Lewis’ “Big Short.” There were several different groups of people who had recognized that the housing crisis was coming; they knew the underlying mortgages were garbage and likely to default at insanely high rates, though they were being bundled up and traded as if they were high-grade commercial paper. Those people, many of whom do not wear the title “economist” proved, to my mind, to be better pragmatic economists than a whole lot of other people with pointy heads and even so-called “Nobel prizes” in Economics. (I say “so-called” because Alfred Nobel did not establish a prize for economics. The “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel” wasn’t established until 1969, long after Nobel had already written his famous trust. I am not, however, trying to dis anyone’s accomplishments. Several of my intellectual heroes, including Hayek and Friedman, have won that prize…)
…Then again, so has Paul Krugman, and he is regularly full of shit, yet honestly believes he’s the smartest guy on the planet. And that is not hyperbole. As this link notes, he advocated for the housing bubble, and yet to this day still pontificates about how right he is as to what we should do in response.
But can the debate really be as one-sided as I portray it? Well, look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I’m Krugtron the Invincible!
The “Krugtron” line is linked to the blog of some fanboy or Krugman’s who claims to show that Krugman is always right by virtue of his unparalleled understanding of Keynesian economics. Seriously, read his opinion of himself in that link above. Given his place in the current zeitgeist of economics – I believe he has published a textbook that is used by many economics students – I believe that fact alone justifies the need for what I’m writing.
Krugman titles his column for the NY Times, like his book, “The Conscience of a Liberal.” And somehow, with that title, he wants to be taken seriously (and is, by the echo chamber that listens to him) as a scientist. Try to imagine Newton writing, “The Sorrow of Gravity: Why It Hurts to Pull Everyone Down.” Economics is supposed to be both descriptive and predictive, not a matter of conscience.
I don’t hate Krugman personally. Hell, I don’t even know the guy. Krugman’s distinction, however, is in claiming he’s “right about everything” when he’s actually had a track record of being wrong – A LOT – about all manner of things economic. Notwithstanding this, he continues to have a considerable following and is considered an “expert” on matters of economic policy. My favorite moment was during this debate when Krugman is on a panel arguing about the Nirvana of socialized medicine – (think Obamacare) – and asks for some back up from his Canadian friends in the audience. Canada is frequently pointed to as some great example of how universal healthcare is supposed to work.
The video speaks for itself. All I can say is, “whoops.” The best of all, however, is a public debate in the aftermath of the financial crisis, when Krugman gets calmly annihilated by a Spanish professor of economics, Pedro Schwartz. The Spanish gentleman begins his remarks at about the 35:20.00 mark, in rebuttal to Krugman’s original claims about the cause of the Spanish economic crisis. In short, Professor Schwartz points out something brilliant in its elegance:
What inflated the bubble would, according to Krugman and other economists like him…what inflated the bubble is going to remedy the blowout. We first inflate the bubble with an inflationary policy. Then it bursts; we have unemployment, and then we go back to inflationary policy…what kind of science is this? It’s homeopathic medicine of the worst kind…Your ailment comes from excessive demand, and you use excessive demand to cure your ailments.
Prof. Pedro Schwartz. That Professor Schwartz has to make a case to convince people that “saving is good” and not, “as Krugman and Keynes believe,” some kind of sin, is a sign of the times. This should tell anyone with even a modicum of common sense just how bizarre a world we now live in. Just let the concept sink in.
As I have noted elsewhere, “capitalism” is nothing more than an observation. It’s not an adjuration to do anything. It’s really nothing more than an empirical observation that in order to “get ahead” in any economic sense, you have to save and/or accumulate capital. Notice I did not say “money” because they are not the same thing. You can accumulate capital in the form of goodwill, for example, even when you’re losing money or just breaking even. Capital accumulation can eventually be translated into money – and is usually what most people try to do, but not always. Paul Graham has a brilliant primer on the subject and many important points, so I think it’s as good a place to start as any. In my opinion, contained in that essay is a graduate level course in (my newly named field) practical economics.
Imagine you are living check-to-check. You would like to somehow move up the economic ladder. How is it that you do this, according to Krugman? You have to spend more money, of course, money you don’t have. Because if you don’t, it could lead to an “excessive hoarding” problem that Krugman and other like-minded economists have invented out of thin air, as it has no basis in reality. It’s like the bogeyman under the bed and the Loch Ness monster. No one has ever seen excessive hoarding actually occur, but it’s a central tenet of Keynesian economics and so it is taught as part of the current economic dogma. And we can’t figure out why there are generations of people living in perpetual debt, running up more, and being told that this is what they need to do in order to “stimulate” the economy.
It is at this point I feel compelled to also point out what I hope is already obvious, but might not be: the economy – whether it’s the US, or EuroZone’s, or some small black market in Somalia – is not a living thing. It is not stimulated, nor is it hopeful, nor is an economy any other of the quaint, trite adjectives of personification that get used all the time to describe it. An economy is nothing more than a mental construct, a way of thinking about all of the transactions that occur within a particularly territory. It should also be evident to anyone with a double-digit IQ (I hope) that in a territory the size of the United States, with a population of 300 million people, any claim of knowledge of how exactly the economy will perform in response to shifts in any one, two, five, or twenty particular variables or metrics, much less account for the innumerable economic transactions that occur daily, is simply impossible. In any other context, we would laugh at someone who claimed to be able to make such predictions about people’s future behavior, but that is exactly what economists claim to be able to do.
Krugman, however, is not an isolated case. Daniel Kahneman helped illustrate how wrong economists, stock pickers, and financial experts are in “Thinking Fast and Slow,” a book version of the research that got him his (not quite) Nobel prize in what is now being called behavioral economics. What people in the policy world would do well to understand is that economics is really nothing more than a look at some of the forces that help to drive commercial transactions. I was glad to see that Kahneman and Tversky finally were able to destroy that theoretical fiction, homo economicus. I’m not suggesting I knew anything before either of those gentlemen did, just that it was the first question I asked a friend of mine when I was studying for my Series 65, many years ago. At the time, I was getting my Series 65 in order to go into business with a friend. It would allow me to both handle some portfolios under his tutelage and do the occasional legal work associated with a CFP practice. In the materials for the Series 65, homo economicus was in there. It occurred to me just as a matter of common knowledge that people make wacky purchasing decisions that have nothing at all to do with reason or economics. Hell, I was in the middle of a rough divorce, and I was living through, and paying for, the consequences of some of those irrational economic decisions. I knew the market had more than just my wife out there. Later, as CF’s General Counsel, I was intimately aware of something from the commercial (globo)-gym industry: that the entire business model was oversubscription, and always had been. Allow me to explain…
I don’t know if it was this article in American Economic Review that someone sent me, or maybe some other similar one, but I read something that showed that only something like 1 in 7 people who sign up for a gym membership are still going – at all – by the month of June, even though they’ve paid for the whole year. Greg Glassman has a great story he has told dozens of times publicly about the oversubscription model. While working as a personal trainer inside of a large, commercial gym, he was training his clients on a Sunday morning and he and his crew were the only folks in there. The owner of the gym called him over and brought Greg back to the owner’s office. In the office, the owner noted that he really appreciated Greg’s clients’ enthusiasm, but that, in general, Greg’s clients were not the owner’s favorite, notwithstanding their enthusiasm for using the facility. In response to Greg’s puzzlement, the owner pulled out a file card box, opened it up, and said: “These are my favorite people.” He then showed Greg a thick stack of index cards with “PIF” stamped on them and the gym ID cards still paper-clipped to the cards. PIF stands for Paid In Full. And the ID cards still clipped were because the people had never picked them up. There were hundreds of cards of people who had paid for a gym membership and had never even come back to pick up their ID cards.
When I was about fourteen or fifteen, my dad had a gym membership and every so often, I would go with him to workout. Friday afternoons and Saturday mornings, the parking lot would be packed and the gym would be filled. You couldn’t use the benches and most of the other equipment was being used. It was horribly inconvenient and sometimes we would just leave in frustration. It never occurred to either of us that my Dad had just been deprived of the benefit of his membership. He paid for a service that he couldn’t use. Most people are the same way. They just think, “Oh, I came at a bad time.” This is because globo gyms have ALWAYS used the over-subscription model as the economic basis for their entire industry. If everyone who actually signed up availed themselves of the service they had paid for, the gyms could not function. They weren’t actually designed to hold that many people. They were all based on the business/economic knowledge that people do NOT act rationally. Many (in fact, most) people buy a gym membership with the best of intentions, but they keep it because it allows them to tell themselves, and others, that they belong to a gym, even if they never use it.
In The Fatal Conceit, Friedrich Von Hayek, himself a winner of the same prize as Krugman, pointed out that “[t]he curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Striking a similarly cautious note about economic prediction, Hayek titled his Nobel lecture “The Pretence of Knowledge.” Much of what Hayek says in this lecture about economics as a science – and how it is also not a science in the same sense that physics or chemistry is – and about the humility that should come with being engaged in the study of economics covers what I wanted to write, but I’ll let Mr. Hayek speak for me:
The particular occasion of this lecture, combined with the chief practical problem which economists have to face today, have made the choice of its topic almost inevitable. On the one hand the still recent establishment of the Nobel Memorial Prize in Economic Science marks a significant step in the process by which, in the opinion of the general public, economics has been conceded some of the dignity and prestige of the physical sciences. On the other hand, the economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.
“The Pretence of Knowledge,” by Friedrich Von Hayek, December 11, 1974.
One final note to this introduction that I think is worthy of clearing up is the use of the term “markets.” Markets also do not have personalities or any other human traits. Markets are nothing more than the aggregation of individual consumer transactions. To the extent that one studies them, it should be clear that prices are just signals. For example, when we hear that crude oil has dropped below $30 a barrel, it does not tell us much. It is simply a signal that, on the whole, there are some factors – increased supply, reduced consumer demand, better technology (like horizontal drilling), and on and on – that have caused the price to drop. It is also important to note that, much like other signal communications technology, one has to be able to sort the signal from the noise – sometimes known as distortion. And, to close with a flourish, it is my position that the greatest distortion of market signals is government. Always and everywhere. If that does not seem intuitively obvious, then let’s just set it aside for the time being and pick it up later.
Welcome. (And yes, I know I missed last week. I’ll make it up.)