Submitted by Gonzalo Lira
“Our God Is Money”: Economics Isn’t a Dismal Science—It’s an Ersatz Religion
“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, there are many who believe them.
Just like all successful religions, economics is very good at convincing people that it is the One True Path to Wisdom—and not just unsophisticated or uneducated people: Actually, as all good con-men know, the easiest people to fool are sophisticated, intelligent, educated people. It’s precisely their sophistication, intelligence and education which makes them arrogant, makes them think they can’t be fooled: They think they’re too smart to be fooled.
So of course, they’re fooled most of all.
Just like all religions, economics is used to explain away the actions of its more powerful adherents, and to protect the interests of its most powerful patrons.
What did economists and the other clergy of economics claim, in the Fall of 2008? “If we don’t save the banks, we are all doomed!!!”
That was of course not true: If the banks had not been bailed out, they would have gone into bankruptcy, the stock holders would have been wiped out, the bond holders would have gotten a haircut (or a buzzcut, rather)—but life would have gone on.
In fact, the financial sector today would be healthier, if the Too Big To Fail banks had been allowed to fail, and then restructured along Sweden ‘92 lines.
But not one economist in any position of influence advocated the bankruptcy and restructuring of the Too Big To Fail banks. Some actually advocated a “hold your nose and get it over with” approach to the TBTF banks—
—which is unsurprising: Establishment religions are not in place to change a society, but to maintain a society. Establishment religions benefit those in power by maintaining the status quo—their job is to make sure the populace never questions the status quo, no matter how wide the gap between the stated principles on the one hand, and what is actually done on the other.
The fact that the TBTF banks were not allowed to fail—and instead were bailed out to the detriment of the economy as a whole, but to the benefit of a small, well-positioned minority—goes to show what the establishment religion of economics is used for: To shore up the interests of those in power, to the detriment of the society as a whole.
Not only that, the Religion of Economics is used to explain away blatantly hypocritical measures as part of The Grand Design.
“It’s a bad solution, but what are we gonna do? Let the banks fail? That will bring about a market collapse! The end of the free market! So we gotta hold our noses and get it over with.”: How many, many times did we all hear economists say this, about saving the TBTF banks? That it was systemically necessary to save the banks.
Are those the words of someone who truly believes in the “creative destruction” that is supposed to be such an integral part of the free markets?
No: They’re the words of a priest of the establishment religion, protecting the interests of his masters.
Just like all powerful religions, economics has different sects and denominations.
Marxism used to be a creditable example: It was one more cult in the menagerie of economics. But this particular sect was discredited by the collapse of the Soviet Union and the Warsaw Pact nations. The gross and blatant failure of Marxism made it impossible to argue that it was a viable macro-economic policy option—so its fiercest followers were driven underground. (But they’re still out there, by the way: Like Gnostic Christians, waiting for their chance to come back out.)
Marxism is an obvious example of economics-as-religion—but I would argue that all schools of macro-economic thinking are no different from Marxism. The reason is because, like Marxism, all the schools of macro-economic thinking come at their subject from an a priori perspective.
Thus, Austrians are no different from Keynesians, or Neo-Keynesians, or Monetarists, or Modern Monetary Theorists, and these all have absolutely no difference from Marxism: They all come from theoretically arrived at principles, which are then applied to the empirical data. If the data does not fit the theory, then the data is dismissed, and discounted as not germane to the problem at hand.
This dismissal is where the various schools of economic thought get in trouble: That which they dismiss is usually the brick wall they find themselves crashing into.
Neo-Keynesians are arguing spend!-spend!-spend! on stimulus and whatnot, up to and including war as a possible solution to the fall in GDP. The more insane among this crowd, like Paul Krugman, argue that the Obama stimulus package was not enough—it had to be bigger.
Neo-Keynesians don’t realize that no stimulus will ever be big enough—but if they have their druthers, they’ll bankrupt a nation.
Monetarists, like Ben Bernanke and his Lollipop Gang at the Federal Reserve, argue that increasing the money supply will create inflation—which will mean the economy is getting back on track.
Monetarists don’t realize that they’re committing several logical flaws, principal among them being the post hoc ergo propter hoc logical fallacy, with regards to inflation. If they have their druthers, they’ll drive the nation into hyperinflation.
Austrians argue that the government should cut spending and raise taxes, so as to balance the budget—and magically, the economy will improve, with no loss of GDP.
Austrians are smoking something—and whatever it is, it’s powerful. So I want some.
Just like all religions, the various sects and denominations confer membership to its believers. They invite you to belong.
Notice how economists of a particular school rarely question the fundamental orthodoxies of their sect. Sure, little spats here and there over minor, peripheral issues within their denomination. But about the big pillars of their order? Nary a quibble, nary a peep, nary a doubt.
In fact, debate within the various churches is so small-bore and trivial, that you quickly realize that the quibbles aren’t about economics: The quibbles are jockeying for position within the school of economic thought. Like peacocks, showing off their useless plummage? Like that.
The one thing all the sects of the Religion of Economics all agree upon is growth: All agree that an economy must grow every year—year after year—no excuses—no matter what.
This is where economics fails most of all.
Of course, perpetual growth is ridiculous: Nothing can grow every year without fail. Nothing should be forced to grow year after year. Trees need to be pruned, growth consolidated.
Nevertheless, the current leadership of the American, European and Asian economies are all under the delusion of the same orthodoxy—growth!-growth!-growth!
The American economic leadership in particular is a slave to this economic orthodoxy. But as I argued in The Short-Sightedness You Get From Staring At A Single Number, deliberately and systematically turning all your macro-economic efforts towards inflating the Gross Domestic Product inevitably leads to distortions in the overall economy.
Growth, in and of itself, is not a metric of anything—and it can easily be perverted. Much of the debt accrued by the U.S. Federal government over the last 30 years—and the last ten in particular—was used to goose the economy to levels of growth that were unsustainable, and which have led to the situation we currently find ourselves in.
And what is the situation we currently find ourselves in?
The United States government and the American people spend more money than they bring in. They have been doing this for going on 40 years—and now the bill has finally come due.
That’s America’s problem—it’s really not more complicated than that.
My solution to this problem? “Cut spending and raise taxes, so as to balance the budget. With a balanced budget, begin building a solid economy on a solid economic foundation.”
This apparently makes me an Austrian—Monetarists and Neo-Keynesians dismiss me, of course. They assume that, like all Austrians, I believe that cutting spending, raising taxes and closing the budget deficit will magically spur growth in GDP.
Actually, I don’t.
See, I’m not an Austrian. Not only that, I do not commune at the church of economics. Call me a son-of-a-bitch if you must, but don’t ever call me an economist.
Rather, I’m a pragmatist: At this time, the best thing to do in order to maintain long-term social stability is to cut spending, raise taxes, close the budget deficit, and have negative growth for three or four years.
In other words, stop trying to avoid the Global Depression, and fully dive into it. Avoid Japan’s fate of Lost Decades. Let the markets really do their creative destruction. Let the debt overhang be wiped out via bankruptcies. Let the chips fall where they may—let the whole unstable house of cards crash to the ground—just get it over with, once and for all.
Of course, this will never happen. The orthodoxies of economics won’t allow it.
So instead, we’re going to get a combination of Neo-Keynesian and Monetarist solutions, to the problem the United States has.
This will bring hyperinflation by December 2011; severe social disruption starting in Q3 of 2011 and accelerating through Q4, before really exploding in Q2 of 2012; the dissolution of the European Union by December of 2012; and very likely—insane as it might now sound—a de facto dictatorship in the United States.
But hey, I’m probably wrong. After all, I’m a heretic, in the eyes of this particular religion. In fact, I hear Brad DeLong wants to burn me at the stake.