Guest Post: The Ridiculousness Of Economics?

Tyler Durden's picture

Submitted by Per Bylund via The Circle Bastiat Mises Economic blog,

People have a strange habit of ridiculing economics for its assumptions and [benchmark] models of optimality. While modern mathematical economics (i.e., professional mathturbation) admittedly rely on sometimes outrageous assumptions that make most of the resulting predictions irrelevant, there is nothing ridiculous or unscientific about economic reasoning. In order to study the social world we need to consider and analyze what’s observed empirically from the point of view of the theory-derived counterfactual. Economic science necessarily begins with theory.

As Mises noted, in the social world there are no constant relations. Consequently, inductive number crunching based on (the seemingly irrefutable phenomenon) data cannot tell us much about the world. So we must rely on what we logically find to be necessarily true, and from it derive specific truths that help us understand observed phenomena in the real world. We thus create counterfactuals that help us assess and perceive what is actually going on, rather than blindly observe.

Interestingly, while economic reasoning is laughed at and ridiculed, people tend to place great faith in applied fields such as medicine as though it were a real science. So perhaps if economics were more like medicine, it would earn the respect as a science (side-effects aside)?

While simplified, what is considered “normal” in medicine are simple averages or mode values arrived at by inductive (though sometimes voluminous) data sifting. Recommendations are hence based on what is rather than what should be (should, by the way, is considered unscientific). Granted, present average values may eventually be balanced (perhaps even corrected) by what has been learned about the functions of specific organs and the body as a whole, and about the impact of disease, malfunctions, etc. Yet these pieces of knowledge are also ultimately arrived at inductively, which means medicine suffers from a fundamental inability to identify e.g. harmful imbalances throughout populations (such that are due to long-lasting suboptimal cultural or eating habits, for instance).

The present revolution in how we view carbohydrates and fats is a case in point: medicine is of course able to measure the improved health values due to e.g. a “primal” diet (as one example), but is utterly unable to envision this result and, even less, make such predictions before the empirical observation has already been made. Instead, and based on the “normal” (average/mode) values of the population, we’ve been recommended to indulge in harmful sugars and grains and stay away from healthy fats. This is the problem of relying on induction, and while it might work well in the natural sciences, and is less reliable but likely more beneficial than not in applied natural science (such as medicine), it is impossible in the social sciences.

Imagine an economics relying on this type of approach. This field would have recognized poverty, starvation, and perhaps even slavery as the average state or mode of people in society, both at the inception of economic analysis and throughout history. We would then call this miserable state “equilibrium,” and base our explanations and policy recommendations on this empirically sound identification. Strange, uncommon, and “disequilibrating” phenomena such as prosperity, health, etc. would be statistical anomalies that could ultimately cause disruption of the established equilibrium; we might even choose to exclude them from our statistical analyses.

Economic models would show how societies successfully maximizing such misery (the mode, remember?) have little entrepreneurship, no property rights, and a despotic monarch (among other things). We would therefore conclude that a despot appears necessary to ensure the optimal state of misery, since the lack of a misery-enabling monarch would set radical processes of entrepreneurship, decentralization, and order in motion. These processes could undermine the state of misery and create pockets of prosperity, and perhaps – if no countermeasure is taken – overtake society and subject everyone to this disease.

Our policy recommendations would then be for a society to grant a single monarch absolute power, with the task and duty to stifle entrepreneurship and undermine property rights.

Had economics relied on similar methods as those employed in medicine, it would have been a worthless and dismal science indeed. Fortunately, economics is nothing of the kind. Instead, based on the undeniable truth that people want what they value and that getting more of it therefore makes them better off, we can construct theoretical counterfactuals to serve as “optimal” benchmarks when analyzing society. This is why economists can say that “yes, we are well of – but could be better off if…” This is also why economists can identify where and how suggested policies can or will go wrong. We can identify that waste, destruction, and suboptimalities will ensue, but not exactly when or exactly how much.

This is hardly ridiculous.

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goldmemento's picture

Sorry to repost this question:

Can you guys please help me with my math?

If the US wanted to return to a Gold Standard, it would need to reset the price of gold to cover it's debt, correct?

$17,000,000,000,000 debt

8,000,000 kg of gold in reserve (alleged)

= $2,125,000 dollars per Kg

= $67,000 per troy ounce

This can't be right. What have I done wrong?

dirtscratcher's picture


Q:  "........What have I done wrong?"------goldmemento

A: Considered that the US would ever want to return to a gold standard.

zaphod's picture

It's called what the market will look like after the dollar finally breaks.

There are 3 things wrong with the original calculation:

1) The amount of debt, by the time the dollar breaks we will have a few more digits (at least) behind the total debt number. 

2) The amount of gold, the FED does not have that much.

3) Off balance sheet debts, you have to add in all the paper promises and all the institutions that will be bailed out, that all adds to the debt number. 

Basically goldmemento's calculation is the conservative estimate, mine is there will be no gold price because no one will trade physical for paper notes. 

Quisat_Sadarak's picture

Step 1 - repudiate the odious debt, wipe the slate clean.  Default if you will.

Step 2 - institute a gold standard.


If you do not reject the odious debt foisted on us by the banking masters, then when you return to the gold standard you lock in fake FRNs debt payable in real gold.  Don't make that mistake!!!!!




El Vaquero's picture


This can't be right. What have I done wrong?

Ignored the "innovations" that modern bankers will bring to bear and sinned by not allowing for merely a fraction of the $17,000,000,000,000 to be held at the banks.

Skateboarder's picture

You forgot to rehypothecate.

notadouche's picture

Not to be rude but what you have done wrong is waste your time trying to figure out an outcome that will never be. The US would never return to the gold standard as it would not serve the political class.  Politicians don't generally willingly apply handcuffs to themselves and the gold standard would prove to be the ultimate pair of handcuffs.  Sorry.  The US, Fed and the establishment elite haven't exactly hidden their views on gold.  

goldmemento's picture

Good points but the US may not have any choice when China and the East all return to the gold standard and Saudi Arabia starts selling their Oil for gold.

I think the elite will all then open their dusty old vaults full of that worthless gold they've been holding on to or cheaply buying over the last decade.

MeelionDollerBogus's picture

It's not a choice: other nations will not accept USD for currency so the US will choose GOLD or RUBLES (or yuan, etc.) as their own currency.
They'll be forced into gold.

Hacked Economy's picture

Much of the current debt is unserviceable.  Before a realistic gold standard-based value (of gold, per oz) can be determined, the toxic debts would need to be disregarded and cleared out of the system (perhaps defaults would take care of some of this?).  When the "stable" and serviceable debts remain on the ledger, then you can re-calculate.

Oh wait...the toxic debts will not be removed by TPTB?  Nevermind, then.  Place whatever value you want on gold and cross your fingers.

Bioscale's picture

Once gold comes into political discussions about global monetary system, USA will be past the big thing that everyone has been talking about for years. As US gov has no gold, it will have very little to say about its price.

ebworthen's picture

You have done nothing wrong.

When the reset comes and the World searches for tangible value $67K/troy ounce is about right.

centipede's picture

Actually that is not right. His theory has a problem. You both are forgetting that the fractional reserve system would stay even within the gold standard and gold would replace only the monetary base M0 not the higher debt multipliers. So you should compare only M0 with the amount of available gold and that would yield a more realistic price 4 or 5 times lower.

withglee's picture

When you back a Medium of Exchange (MOE) with gold you are saying that the paper that circulates is actually redeemable in gold. That means not only the paper in circulation but the accounting records representing people's savings (including pensions) and people's commitment to trades. All those savings and in-process trades must also be redeemable in gold. And for a world reserve currency like the dollar, that means the whole world's savings and in-process trades. Thus your number of dollars per troy ounce doesn't come from the $17T US government debt. It comes from the entire world's GDP and savings. You're off by a few orders of magnitude. Try $6,000,000 per ounce. But then remember, right now people are willing to grind computers or dig in the dirt for gold at the rate of a little less than an ounce invested for each ounce created (or reclaimed). Right now, that's less than $2,000. As soon as you say that ounce they create is worth $6M, invest in shovels and grinders. Everyone will be in the mining and grinding business.

Hedgetard55's picture

Yes, and that $6 million will buy you a nice, not great suit, or a couple tanks of gas.

withglee's picture

An ounce of gold today is worth about 400 gallons of gas. If they claim an ounce is worth $6,000,000, a gallon of gas (1/400th of an ounce of gold) would cost $15,000. Pretty simple math.

Spankrupt's picture

My Public Library Late fee college education ($150 and counting) tells me I could take the hitorically conservative route and use a 40% currency backing. But, fractional lending distorts this mathturbation. The U.S. debt figure might be the wrong nominal #. m1 + m2 + m3 (m3 no longer is tracked by Sam). Given bank reserve requirements are roughly 10%, the reset could be m3 X 1.9 / 8m kg AU79.

all-priced-in's picture

What makes you think you can just "reset" the price of gold?






lordylord's picture

FDR did it after he stole it all.

MeelionDollerBogus's picture

That's what gold does, pretty much that's the primary monetary purpose of gold. Not just to be money but to be reset-restart money in disaster.

Vint Slugs's picture


What have I done wrong?

I haven't recalculated since 2012 but hopefully the below will answer your question:

The methodology below is copyrighted.  VS (c)2012


Reisman – Capitalism, pp 958 - 959


Determining the purchasing power of  one ounce of gold if changing to a 100% gold reserve standard today (January 2012)


Calculate total currency and checking deposits (M1):  ~2.2 trn

Calculate total US gold reserves:  260M oz

Assume 1 oz gold = 15 oz silver for part B


A.  If use all gold money and no silver =>


            M1 ÷ 260M oz = 2200000000000 ÷ 260000000 = $8461/oz

                                                2.2x10[11]      ÷    2.6x10[7] 


B.  If use 2/3 gold and 1/3 silver =>


1)      .66(M1) ÷ 260M oz = 1450000000000 ÷ 260000000 = $5576/oz

2)      Gold/silver ratio = 15.  Therefore $5576 ÷ 15 = $371/oz silver






NOTE 1:  Consider Reisman’s comments about silver (his example B uses $3000 as the gold price):


On these assumptions, a silver coin the size of the pre–1965 dime, which

contained about .07 ounces of silver, would have a buying power of about $14, while the larger silver coins had proportionately greater buying power.


Therefore at 2012 levels, .07ounces of silver would have a buying power of $25.27.  That is sufficiently high to be prohibitive in small transactions.


HOWEVER:  If one assumes digital money for small denomination currency instead of silver, then there is no need for a dual metallic standard.  Silver would be omitted and it would become a non-monetary commodity whose value would be determined by supply/demand forces in the marketplace.


NOTE 2:  In B above, Reisman is fixing the price of silver (one-fifteenth that of gold).  That is fraud.  It is also prohibiting the market from determining at what silver should be priced.

VS (c)2012



goldmemento's picture

But at the prices you calculate... the government would still be way way in default, not having enough gold holdings to cover their debt.

I don't get this calculation logic.

MeelionDollerBogus's picture

Government will default no matter what happens with gold. If anything a collapse of government(s) may influence WHEN price changes, perhaps a multiplier factor of how much, but that's about it.

MeelionDollerBogus's picture

Not correct.
Debt is not the only thing being traded.
Gold's unit of trade by weight would need to be a lesser weight (troy oz) to match the units moving of everything that isn't gold that someone would give for gold.
Fiat price may or may not exist at all but if it did the fiat price would then largely reflect total currency being used as trade units, not debts since we don't all trade debts like bonds for food at a store or gasoline. Credit issued privately as loans or for credit card balances also count as currency.

Ignatius's picture

"What have I done wrong?"

Dreaming that it will ever happen.

TeamDepends's picture

Is that LeGarde making a frenchie funny face?

Spungo's picture

I think you would only use the M2 supply to set the price of gold. It would be 10.5 trillion instead of 17 trillion.

Bastiat's picture

"outrageous assumptions that make most of the resulting predictions irrelevant,"

See Long Term Capital Management, for instance. 


Rakshas's picture

Hmmmmm I gave it a go, but I have resigned myself to never comprehending economics in any meaninful way...... maybe it's the math, maybe its the abstract assumptions that appear from the ether I don't know but I suffer a real mental block when I try to get my head around some of the chaos theory  - for example if cocaine ladden C130 lands at Stewart AFB does a civil war erupt in Syria?  Those fucking butterfly wings in the amazon ............



MeelionDollerBogus's picture

Economics is easy to comprehend.
#1 someone must buy things
#2 someone must sell things
#3 someone must be middle-men, with warehouses and/or transport and definitely influence with buyers and/or sellers
#4 fraud. Theft, fraud & confusion from marketing. This is critical to economics. Without this there'd be no economics, there'd only be listings of what's where & for how much with really not many problems
#5 catastrophe. Could be war, could be giant fire storms or ice storms or earth quakes, they happen & people are drastically affected. This requires re-location and/or re-building which spurs a huge amount of economic activity, not all of it good but it is attempted regardless.
#6 emotions and/or stupid people and/or being overly stubborn, conservative or explorative/experimental with technologies. It happens, be ready for it.

crunchyfrog's picture

If you don't use induction, what is your feedback mechanism? 

Given that anarchocapitalism has never been tried, how do you demonstrate that Austrian Economics is not a castle in the air to match Marxism?

Hey Greenspan really believed in the self regulating efficient market. He has since caved in the face of actual experience. 

adr's picture

They said deregulating utilities would cause prices to go down because there would be more competition. What they forgot to do was increase the competition in delivering utilities.

All they did was increase competition for contracts, which caused the price of those contracts to go through the roof. My gas is stored by Dominion, transferred by Dominion, and the lines are serviced by Dominion, but I can buy gas from hundreds of suppliers. The thing is that those suppliers don't store any gas, never take delivery of gas, or even have an office is most cases. They buy a contract for gas and sell a contract for gas. Since Dominion doesn't make the money on the gas they increased delivery charges, use charges, and base charges. The end result of deregulating the utility business was a three fold increase in the cost of natural gas service to my home.

Self regulating free markets haven't been tried. The Austrian model would allow other competing corporations to build and maintain gas lines that the consumer could choose from. There also wouldn't be generous subsidies and a bullshit "market" where speculators could get rich off aligning themselves with politicians.

sasebo's picture

"we can construct theoretical counterfactuals to serve as “optimal” benchmarks when analyzing society."

Why does one need a feed back loop when the author clearly explains why inductive reasoning does not work in economics. You seemed to have skipped his comments on counterfactuals.

crunchyfrog's picture

No, I saw it, but I think he's reasoning from his conclusion.

I'm sticking by my "factual" of Alan Greenspan sincerely believing that massive ongoing fraud in the financial markets could not/would not happen, because people wouldn't put up with it. That's standard Libertarian theory. He has admitted since that it is wrong, as demonstrated in the 2008 blow up.

I see no way for an Austrian to actually test his theories. Fine go ahead with the spiffy deductions, but tell me how to test them. Strawmen do not count.

sasebo's picture

The problem is not that the "people" wouldn't put up with it but that the "state" is putting up with it. Test theories? How many keynesians predicted the subprime crash? How many austrians? 

"To want to test the pure theory of economics by experience in its full reality is a process analogous to that of the mathematician who wants to correct the principles of geometry by measuring real objects." Carl Menger 1889. 

crunchyfrog's picture

Quod erat demonstrandum.

There are actually three perfectly plausible versions of geometry: Euclidean, Lobachevkyan, and Reimanian. They are all equivalent for normal cases, as are Newtonian and Einsteinian physics --orbit of Mercury, anyone?

What you have is a bunch of well off clowns coming up with reasons why they deserve to be well off, and then explaining why nobody gets to say "WTF?". Garbage.

MeelionDollerBogus's picture

Induction is unrelated to feedback.
Induction requires initial conditions & recursive steps. None of that is feedback.
Feedback is what you put into neural networks, not induction.
Anarchocapitalism has existed every time tribes encountered each other.
Our current world is one that executes all small tribes which greatly hinders this activity.

NotApplicable's picture

I'd say the machinations of "the government" have done well to "ensure the optimal state of misery."

farmboy's picture

Tell that to the Ph d Physics that makes 500.000 $ a year in a financial firm or 50.000 $ in a science lab.

ebworthen's picture

Economics is the new Alchemy.

adr's picture

Economics is the science of con men trying to figure out how to make money without earning it.

Frank N. Beans's picture

Is that a Smiley Miley ?


highwaytoserfdom's picture

mathturbation  exactly the right term..  "on the one hand and on the other"   ambidextrous jerk offs.  

deerhunter's picture

I don't always think banking but when I do I think fractional reserve!!!!!!!!!  Hang em high.   If people truly understood that the only real money trading hands in a bank is the stuff coming in,  they would quit paying their mortgages tomorrow.  OK<  maybe that was being a bit hopeful,  I'm done for now..............

MeBizarro's picture

Written by a person who knows nothing apparently about methdological design of studies, what types of studies are available, and their various strengths/weaknesses.

If this guy thinks medicine and differential diagnosis is anything like an observed law/constant in physics, he doesn't know much about that either. 

GooseShtepping Moron's picture

I agree. The OP is a word salad without philosophical underpinnings. Induction does not equal nominalism, as the author would have it; rather, sense-data allows for the intellectual apperception of the substantial form. The truth-attaining rational faculty of prudence (phronesis) teaches us what is good for human beings, not theoria.

Quinvarius's picture

I am pretty sure economics all boils down to marketing on one level or another.  Some people will buy snake oil from the right person with the right pitch.  Some people will never trade their gold for snake oil.  Human choice is malleable depending the strength of the mind and will.

RaceToTheBottom's picture

OK, if Economics wants to compare itself to Medical industry lets do so:

1)  Lets say the average heart beats 20 times a minute (probably while reading my post)

2)  Lets say it takes a second to complete a beat.  I may be 100% off here but bear with me.

3)  The rest of the time the heart is doing nothing.

Now treat Medical like Economics.

1)  All that time doing nothing would result in the Heart being loaned out to other people who need a beat that second.  Therefore Economics is telling the medical world that One heart should be shared over 3 or so people. 

This is exactly what Economics does when it says that the banks can share your deposit money over 60 to 100 other customers.

This becomes even larger when you consider what it does with Money and then Gold and then Money again.

Economics is as ludicrous as Heart sharing among people

hapless's picture

Economists assume that everyone either wants to or must take life up the ass.  Their assumption falls down when enough suppliers of capital take their chips elsewhere.