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Gonzalo Lira On The Identity Of The False Religion Behind The Mask Of Economic "Science"

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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?
 
Heavens!
 
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.

 

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Tue, 10/26/2010 - 21:27 | 679332 Aristarchan
Aristarchan's picture

Please understand, there are NO experts when is comes to matters economical. There are no set values, very little reliable empirical data, and no way to predict the future based on historical or present data. Yes, some pople hit it right....and many more, at the same time hit it wrong. There are only experts of the "moment," They are not predictible economic predictors, only lucky and ballsy.

Tue, 10/26/2010 - 21:37 | 679335 Duck
Duck's picture

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.

 
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...

Why should we believe your economic predictions?  What methodology did you use to arrive at these predictions?  Aren't you just doing here what you say can't be done?

Tue, 10/26/2010 - 23:24 | 679621 ebworthen
ebworthen's picture

Methodology?

Do you need a methodology to be of the opinion that Economics is more religion than science?

Apply a methodology to prove to me that you are not Gonzolo Lira posing as a Ghost Critic.

Next, prove to me that you are a human being and not a random response bot with a sophisticated cynicism algorithm.

Tue, 10/26/2010 - 21:35 | 679348 Milton Waddams
Milton Waddams's picture

"But actually, uh, you know, I do think that economics, its not music or math, its not something that is valuable in its, for its own sake. Economics is only useful to the extent that it helps people, that it helps the economy." - Ben Bernanke, March 10th, 2009, speaking to the Council on Foreign Relations.

Tue, 10/26/2010 - 21:56 | 679389 Eric L. Prentis
Eric L. Prentis's picture

“… schools of macro-economic thinking come at their subject from an a priori perspective. If the data does not fit the theory, then the data is dismissed, and discounted as not germane to the problem at hand.”

 

This is exactly my problem, for the past five years, I’ve tried to get my empirical research published which disproves the Rational Expectations Theory and the Efficient Market Theory. The bastard economic and finance journal editors, who have their snouts firmly up the bankers’ backsides, refuse to accept my paper because it would cut off their precious bank sponsorships. Economics and finance academics have no intellectual honesty, the corrupt bankers lead them around by the nose, like fat, dumb and happy oxen.

Tue, 10/26/2010 - 23:02 | 679584 Gunther
Gunther's picture

At least you are not alone.

Both Jesse Livermore (How to Trade in Stocks) and Robert Rhea (Dow Theory) claim to detect a trend in a pair of stocks (or indices) seven out of ten times. 

That disproves the random walk hypothesis.

Tue, 10/26/2010 - 21:56 | 679392 Wyndtunnel
Wyndtunnel's picture

Economics began centuries ago as the study of moral economy by monks. It is the bastard child of the Judeo-Christian tradition that gained purchase as the Roman Empire peaked and began to decline...I mean for Christ's sake (litarally), JC was the origial ZH. He entered a temple where the rich congregated and trashed the place in disgust. That combined with his "turn the other cheek", we are all equal in the eyes of God, those who are last will end up first, etc...got him Crucified. Shortly thereafter civilzation collapses and TIME is reset to Zero!

Expect a repeat although this TIME the reset to zero will hinge on BG and AG. Before Google and After Google. Organized relgion or Internet. Take your pick. They are both but operating systems to make the world go 'round...to enslave the masses at the service of the ruling classes. Christianity begat Economics and Finance which is in the process of begetting our Network overlord. I used to think that the Luddite wars against computers in Frank Herbert's Dune were ridiculous but now I think he was quite prescient. The coming wars will eventually be between the people who want to use machines to control the masses and those who just want to be left alone and farm and hunt and read books and make music and babies and all that and maybe not live as long or have access to "modern" medicine but who are here for a good time as opposed to a long time.

I do think that the demise of America will be the demise of democracy but for the only reason that it is to innefficient a system to deal with the magnitude of humanity's problems. It has left us with too many pent up externalities that when finally priced in mandate collapse. At the end of the day humans are a pretty fucking retarded lot.

Wed, 10/27/2010 - 00:57 | 679771 Walter_Sobchak
Walter_Sobchak's picture

Player Piano, Fight Club same ideas.

Tue, 10/26/2010 - 21:59 | 679399 carbonmutant
carbonmutant's picture

When you canonize science you get religion.

Tue, 10/26/2010 - 22:05 | 679413 jailnotbail
jailnotbail's picture

The Laffer curve. That pretty well sums it all up.

Tue, 10/26/2010 - 22:23 | 679452 jedgar.mihelic
jedgar.mihelic's picture

All Hail the hypnotoad!

Tue, 10/26/2010 - 22:42 | 679532 ebworthen
ebworthen's picture

Bravo to Gonzalo for sticking his neck out.

It reminds me of the liberal/conservative debate; two dogs chasing each others tails and making a fine circle of it.

The only way to distill politics and economics down to where they are valid and effective is to take them to the level of individual choice.

Tue, 10/26/2010 - 22:48 | 679551 Rodent Freikorps
Rodent Freikorps's picture

Is there a Dead Pool for which bank goes under first?

Tue, 10/26/2010 - 22:51 | 679561 Rodent Freikorps
Rodent Freikorps's picture

And can you render economist fat down and use it for biodiesel?

Be nice to get some use out of them.

Tue, 10/26/2010 - 22:58 | 679574 tomdub_1024
tomdub_1024's picture

Been tossing this idea/theory/whatever around in my head a while...a steady state economy...

http://en.wikipedia.org/wiki/Steady_state_economy

Not saying that I joined the "church" or anything like that, but from a middle class perspective, kinda makes some sense at a local/family/personal level the past 20-30 years.

I never did really buy the "continuous growth" "continuous improvement" mantras of the 80's-00's...I mean, in Biology class, and observations in wilderness, demonstrated to me rather tersely the concept of "the edge of the petri dish", and what happens to what lives within the petri dish at that point the edge is reached.

And we must always throw in reversion to mean, and that history is non-linear, cyclical instead.

Just musings at this time, seems every orthodoxy is reaching frayed limits these days, so why not entertain heretical ideas, if only in mental exercise?

I know that many sci-fi writers (Heinlein and Asimov especially), toyed with this idea.

Wed, 10/27/2010 - 08:11 | 680009 Winisk
Winisk's picture

Conservation and equilibrium are not allowed in economic discussions :) Populations will grow until they are constrained by a greater force.  That is the natural way.  Our economy will grow until it can't.  It always struck me as odd that the pro-reproduction and immigration policy is considered healthy and promoted while any discussion of voluntary birth control is hushed.  Perhaps a primer on the science of populations should be on the reading list.  Nevermind, I forgot that we humans are bestowed with supernatural qualities.   

Fri, 10/29/2010 - 03:03 | 685264 tomdub_1024
tomdub_1024's picture

you forgot the </jaded> or </sacrasm> tag.

:)

I hear you...I'm just trying to walk outside the box too (I hate boxes)

Tue, 10/26/2010 - 22:59 | 679580 pros
pros's picture

many economists, including summers as a younger man, adopt the visage of a rabbi...

 

bernanke is a good example.

 

Tue, 10/26/2010 - 23:26 | 679627 williambanzai7
williambanzai7's picture

Tue, 10/26/2010 - 23:44 | 679654 Insiderman
Insiderman's picture

The economy is quite easy to predict!  I left corporate life years ago and the only misplaced bet since is how STUPID the Obama administration would be in effectuating recovery.  Cost me a pile of cash on the GM bet.  However, Keynes is/ should be totally dead.  This was a non-starter/ no-brainer.  All this Fed meddling postpones the inevitable change in real variables that must take place for the economy to reach real equilibrium again.  Keep it real and we can get through this; meddle with nominal variables and you will forever be trying to mend the next bubble.

Wed, 10/27/2010 - 00:04 | 679687 Econophile
Econophile's picture

Gonzo:

You can't even talk about the subject unless you've read Hayek and Mises. Since you don't even mention them, then I assume you haven't read them. If you want to be considered to be an intellectual and have knowledge of economics you ought to know the "classics" which would include the Austrians. If you have read them, then you are just parroting some of their ideas and passing their ideas off as your own.

Wed, 10/27/2010 - 01:02 | 679777 hugolp
hugolp's picture

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. 

Ok. Shouldnt you get informed before writing about something?

I was reading you with interest because of your previous articles until I realized you dont know what you are talking about.

Wed, 10/27/2010 - 01:28 | 679807 duder
duder's picture

Correct me if I'm wrong (do I even have to ask?), but Austrian Economics is basically free market economics, right? A free market does not require economists that make predictions and calculations - that's sort of the whole point. You cannot predict the market or manipulate it to some ideal place - if you try to do that, you cause problems.

Keynesianism and all other non-free market schools of thought use their methodology / predictions and the resulting intervention as a way of achieving some political or financial goal; stimulate the economy and get your buddies re-elected, print money and make your buddies rich, etc.

Austrian economists are not the kind of economists you are talking about - the ones that argue about the best way to intervene in the marketplace and the best way to control the money supply.

If anything, what Austrian economics studies is how other economists screw things up with their predictions / methodology and intervention. What Austrian economics teaches is that interventionist schools of economic thought are rubbish. 

It's a funny thing really, because Austrian economists are basically saying we don't need economists. Just let the market be a free and let private citizens and private businesses make their own "predictions" and their own decisions. No need to study / predict monetary policy cause there should be no Fed. No need to study / predict government stimulus cause there should be no government intervention into the marketplace (beyond, of course, protecting your rights, e.g. protecting against fraud, theft, etc). 

No one needs to study the economy and develop a methodology for economic predictions in order to make economic interventions. No one needs this knowledge because no one should have this power - and no one should have this power because no one could possibly have this knowledge. And if people think they have this knowledge and somehow get this power then you're going to have some problems. (see: The World, circa Now).

Wed, 10/27/2010 - 02:32 | 679855 Tao Jonesing
Tao Jonesing's picture

Austrian economics is a double truth.

For the masses, the truth is that Austrian economics is what you've described.

For the elite, the banksters, the truth is that Austrian economics is a promise to allow the banksters to manipulate the scarcity of capital to extract rents from the real economy without interference.  Banksters don't compete because competition is bad for business.  As a result, there is no free market for money when the money supply is private.

This is how you win the game: you make sure that the only choices are ones that benefit you.  You can choose between neoliberal Chicago School economics a la Milton Friedman, or neoliberal Austrian School economics a la Freidrich Hayek.  Heads the banksters win, tails you lose to the banksters.  Choose your road to serfdom for with neoliberalism, all roads lead there.

Wed, 10/27/2010 - 10:37 | 680408 Sean7k
Sean7k's picture

In Austrian economics, there is requirement for sound money. Your cynicism paints your world in colors only you and Gonzo can see. Good luck with that.

Wed, 10/27/2010 - 10:38 | 680398 Sean7k
Sean7k's picture

Well said Duder.

Wed, 10/27/2010 - 02:23 | 679849 Tao Jonesing
Tao Jonesing's picture

@Gonzalo Lira,

You should have said you were an atheist when it comes to economics.  Me, too.

All economics is politics.  They excised the political from political economy as a marketing ploy.

This post was truly refreshing.  Keep being a heretic.

Wed, 10/27/2010 - 02:34 | 679857 tony bonn
tony bonn's picture

"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. "

not so. austrian theory is more about allowing markets to direct economic investment based upon the interplay between time and money (interest) and to let markets clear mal-investment (created by the monetarists).

the purpose of economists though is to maintain the state religion of mammon.

Wed, 10/27/2010 - 03:15 | 679876 The Alarmist
The Alarmist's picture

Just for the record, Austrians can be attributed with substantial blame for the greatest tragedies of the 20th century.

Wed, 10/27/2010 - 03:29 | 679880 hugolp
hugolp's picture

Ok, you are probably a troll or misinformed, but lets have the discussion. Can you back up your claim?

Wed, 10/27/2010 - 04:10 | 679903 zelter
zelter's picture

What he means is Hitler was an Austrian.

Wed, 10/27/2010 - 08:10 | 680006 The Alarmist
The Alarmist's picture

Don't foreget, they also brought us WWI, Schwarzenegger, Falco and Freud.

Wed, 10/27/2010 - 12:22 | 680732 hugolp
hugolp's picture

Ha, I get it now. Irony fail.

Wed, 10/27/2010 - 04:51 | 679916 dcb
dcb's picture

just like economists in their tower debating the fine points, but not fighting about if their discipline is true, many of you are doing in effect the same thing. the point of the article isn't the fine point of the schools of thought (because there sure is a lot of mixing and misunderstanding on this site that passes as pseudoscholarhsip).

the point of the article is that unlike a science where people get data then fir the theories to the data, economics has done the opposite. made the theories then fit the data. hence it isn't a science

this is in effect what makes the rogoff/reinhardt study so huge. their approach is to data mine then determine.

kind of what would be called evidence based medicine.  economics works ass backwards. they haven;'t figured out the big stuff (gravity, germ theory of disease, etc) and they spend huge amounts of time on the small shit (options pricing, etc). first you need to get some kind of foundation. well the foundation isn't based on evidence, it is based on dogma or belief systems. 

policy repsonse isn't about doing the best thing, it is about protecting the established order/dogma.

 

so you fools by debating the fine points of each school, which aren't represented correctly on line anyway, are missing the point. Just like the members of each shool DUH 

Wed, 10/27/2010 - 05:24 | 679920 hugolp
hugolp's picture

Ok. Imagine you get reliable data that tells you that after a government of a country passes 100% of its debt to GDP ratio, it defaults within two years. Can I scientifically say that passing the 100% debt to GDP ratio implies default within two years?

What else would I need to prove it?

And last, if my theory uses empirical data does it means its scientific?

Wed, 10/27/2010 - 05:27 | 679921 Coldfire
Coldfire's picture

Priests. Priests in the service of a religion.

More like religion in the service of priests.

Truly awesome article.

Wed, 10/27/2010 - 07:09 | 679963 boogey_bank
boogey_bank's picture

It's always the same. Gonzalo's articles stir up a hornet's nest.

I think it's advisable to better address the debate.

Gonzalo's detractors main argument is this: A fixed (or even falling) wages economy can't ignite hyperinflation.

So the real questions imho could become:

Could we have an nabobs ignited hyperinflation?

The few weeks ago move that provided unlimited fdic insurance imho spell HYPERINFLATION in the medium term (over 18 months span).

In other words if every buck of wealthy people (and wealthy foreigner people and governments) will be allowed to be spent maybe hyperinflation can happen even without wage increases.

In order to avoid hyperinflation govt should build barriers to contain capital flow from whealty americans and foreigners creditors to commodities and staples . Could it be done? For sure it can't be accomplished by the fed. A fascist like government could make nothing more an attempt in that regard. 

 What could happen? If every country join the currency war and don't let the buck win the race, then hyperinflation could spread worldwhile.

In the meantime the fed chairman it's still trying desperately to keep main street people spending.

WE live in a strange world.

Wed, 10/27/2010 - 07:10 | 679964 Dental Floss Tycoon
Dental Floss Tycoon's picture

I don't buy it.  At least not all of it.  If the Fed economists have no power to influence the future in a particular way then none of my conspiracy theories hold up.

Wed, 10/27/2010 - 12:15 | 680715 ddtuttle
ddtuttle's picture

The reason economics isn't a science has nothing to do with economics per se and everything to with politics & power: by controlling economics you control the economy. This obvious fact has been a key strategy for the power elite for centuries if not millennia. What people think governs how they behave, and when you control how they behave with money, you can make sure it flows into your pocket.
But how exactly does this happen in our modern society, where academic work is subjected to peer review and stringent standards of intellectual excellence? Easy.
First, the people with a serious reason to manipulate economic theory hire all the economists and make it clear how they are to earn their money. Second, those that stay in the universities to teach must publish or perish, and if they foolishly publish or teach the wrong things, they perish. The grand arbiter of economic thought, the Fed, and purveyor of the most prestigious jobs makes sure professors and departments toe the line. After several generations of this, everybody actually believes the propaganda that passes for science. Group think sets in, and even if they have doubts, there is no doubt about the price for expressing them.
Of course, the people with the most to loose are the banks. The saying "money doesn't grow on trees" does not really hold for banks. They create it out of thin air, so why fuck around with trees? They hire most of the economists, and the front man must deflect scrutiny from how the system really works. "Pay no attention to the man behind the curtain."
The fractional reserve banking system, which is the holy of holies at the core of modern economics, has several properties. First, it is unstable and leads to an endless series of credit crises. Second, this endless series of boom-bust cycles is itself unsustainable and will lead ultimately to a total deflationary crash or a hyper-inflationary blow off. Third, it makes bankers fabulously wealthy and powerful. So economics is coerced into becoming propaganda that states the banking system is the cornerstone of the complex financial world of today. Banks perform a valuable socially beneficial service.
Because banks can also get caught out by this bi-polar cycle of manias and recessions, they thought up a really neat idea: let's create a new bank whose sole purpose is to manufacture new money and give it to us when we get ourselves into trouble. This way we make money when things are hopping, and we don't loose money when it turns out we fucked everything up again. This fine institution was actually created and is called the Creature from Jekyl Island, aka the Federal Reserve. It's whole purpose is to create money out of thin air and give it to troubled banks. It's liabilities are guaranteed by the US government and the US taxpayer. Matt Tiabbi's wonderful contribution to the english language "a vampire squid wrapped around the face of humanity, sticking its blood funnel into anything that smells like money", was aimed at GS, but is really a better description of the Fed.
This power structure is the force corrupting economics. Of course, economics will never be precise like physics, but it is possible to make it more precise than the mess we have now. Yes, at its core are the actions of people and their money, which we all know can be emotionally charged. But, money comes in mathematically precise denominations, and the vast majority of people can at least add and subtract numbers, so eventually people gravitate towards a solution of self interest, which in its broadest strokes is predictable. Its a little like phase changes in physics. A super saturated solution can exist indefinitely, but eventually it precipitates out; its hard or impossible to say when, but we know what its going to do. Turbulence is another unpredictable quantity in physics, but it operates within fairly strict confines and within known time frames. Precise short term predictions are impossible, but long term approximate ones are fairly accurate. For an even better example of how precise economics can be check out Steve Keen's web site. Because he's in Australia, the Fed can't blacklist him. Awesome stuff.

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