If Economists Are So Smart, Why Are They Always Wrong?

Econophile's picture

When I took Econ 101 and 102 as a young college student back in antediluvian times the textbook we were assigned was Paul Samuelson’s Economics: An Introductory Analysis. This book is the all-time best selling economics textbook and is still around today (19th ed.).

I had the 1961 edition. In it, Samuelson, a prominent Keynesian economist who won the Nobel prize in economics, predicted that the economy of the Soviet Union would overtake the U. S. economy in 23 years (by 1984). Even as late as the 11th edition (1980), Samuelson stood by his prediction.

As anybody who knows anything about the Soviet Union, their top-down centrally planned economy was a disaster that left its citizens in poverty. It was inefficient, wasteful, driven by coercion, politics, corruption, and cronyism. Consumer wishes were ignored. Goods were under-produced or overproduced. There were shortages of everything, except vodka and hydrogen bombs.

There was a joke floating around Moscow at the time about shortages: Yuri Gagarin’s daughter (he was the first man in space and hero of the Soviet Union) answers the phone: “No, mummy and daddy are out,” she says. “Daddy’s orbiting the earth, and he’ll be back tonight at 7 o’clock. But mummy’s gone shopping for groceries, so who knows when she’ll be home.”

They were far, far behind us.

So how is it possible that Samuelson and his fellow Keynesians could even consider that a planned economy could work better than a free economy? For 11 editions he persisted in believing that failed theory. And a generation of students left school with the idea that a centrally planned economy could work.

Mainstream economists today aren’t much better.

For example, one would think that you could rely on those economic wizards at the Federal Reserve, those guardians tasked with the dual mandate of creating full employment and stable prices, but they got it wrong too. In the run-up to the Crash of ’08 and the Great Recession, Ben Bernanke, the then chairman of the Fed, not only didn’t see it coming but he failed to grasp the magnitude of the problem when it hit.

The truth is that almost no mainstream economist predicted the Crash of ’08 or the ensuing Great Recession. Most economists, Bernanke included, were forecasting that the economy would recover soon and any downturn would be mild, and certainly there was no recession on the horizon.

If these are the brightest guys in the room, why didn’t they understand what was happening? It makes you wonder if these guys really understand how economies work. The obvious answer is that they don’t.

Therein lies the problem: contemporary economics is not able to explain what happens in the real world. The lack of valid theory, the improper use of mathematics (econometrics) and raw empirical research as a substitute for good theory has led contemporary economics to a dead-end. Even worse, they recommend economic policies that often achieve the opposite of what they intended and make problems worse. And, we end up paying for their mistakes.

Oh, dismal science, you have failed us.

So here we are trying to figure out what to do. Do we buy a house? Do we change jobs? Do we start a new business? Do we move to another town or state? Do we invest in the stock market? Do we invest in Bitcoins? Do we take on (more) debt? Do we buy a new car? Should we save or spend? Should we retire?

It would have been nice to know back in 2006, for example, that everything would eventually blow up (as it did in 2008). But the conventional wisdom then was that things were fine, don’t worry; it was the worst possible advice.

Business cycles occur on a regular basis. And boom-bust cycles are now the norm. At any given time, we are somewhere in the business cycle. The Fed, the generator of these cycles through its monetary policy, is always fighting the last war by attempting to bail out the last bust, and by doing so creates the next boom. If you don’t know where we are in the cycle, you can get crushed.

But, who can you trust?

It’s obvious that you can’t rely on conventional economic wisdom.

If you dig a little deeper you will find that some economists did see the 2008 bust coming, but they were ignored or laughed at. Most of these economists were free market types who understood the causes of the boom-bust business cycle. Also, some contrarian investors were aware of the problems and when the bust came, they made billions for their clients.

Let me impart a basic truth: no one can accurately predict the future. But, if you hear the train coming down the track, it’s best to get off the rails.

I am not an economist, merely a student of the science. I have shed my Keynesian upbringing as well as what the mainstream likes to think is economic “science”. On the other hand, free market economics has only helped my understanding of the economy and its cycles. I try to do what essayist Richard Epstein said, “True freedom comes only to a lucid mind unbound by conventional wisdom and suspicious of received opinions.” It’s not easy. But being a contrarian helps.

Which gets back to the question of “who can you trust?” Based on my 40+ years of observing and studying the economy and investments, I have formed some guidelines which have worked for me. Perhaps they may help you:

  1. Free market economists tend to be contrarians and you should listen to them—but if they are selling you something, run for the door.
  2. Contrarian investors are worth listening to—but if they are selling you something, run for the door.
  3. Because someone was right before doesn’t mean they’ll be right again.
  4. There are permabears and permabulls. Simple Internet searches will reveal who is who. Avoid both.
  5. If you increasingly hear experts say we are not in a bubble, we probably are.
  6. If you get advice from someone who says, “this time is different”, run for the door.
  7. If the stock market is making all-time highs, such as the present, it probably is too high.
  8. If home prices are at an all-time high, such as the present, they may be too high.
  9. If commercial real estate prices are at all-time highs, such as the present, they may be too high.
  10. If personal and corporate debt are at all-time highs, such as the present, there may be greater risk to asset values.
  11. A lot of debt at this stage in the cycle will kill you on the downside.
  12. Booms can last longer than you think.
  13. Be patient.

Source: AnIndependentMind.com

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Captain Nemo de Erehwon's picture

Economists are wrong because humans both compete and cooperate, to varying degrees, at various times and both characteristics are critical to the functioning of society. Free-marketeers emphasize competition and when their models fail to deliver desired results they complain that if only everyone were forced to compete things would be fine. Leftists dream of cooperation and then complain that if only people would play nice their models would work. It is like if you are trying to go from Tucson to Phoenix, which is north and west of Tucson, and  were to either believe you had to go just north, or that you had to go just west. Now if you were to walk there, the jostling between "go north" and "go west" crowd might just result in your getting closer to Phoenix. Computerized trading, and the ability to move billions in seconds is like having a jet plane. Try going north-west-north-west in one with each group jostling for their direction, when no one has really even seen Phoenix so you never know if you are over it or not. This is why "some" economists are right "some of the time" and the debates have continued for centuries. No one side has conclusively shown it can get to where we want to go. Do we really even know where we want to go?

Rather than hoping people would all become "good" or "rational" where "good" or "rational" is whatever would make our modeling easy, we have to make our assumptions realistic and design a system consistent with these assumptions. What do people want? If you were to let a 100 people free on a hundred different islands, all would first want to ensure their survival. Other than that we cannot predict what each one would want to do with any spare time they had.

 

 

 

Econophile's picture

Thanks Nemo for your reply. Good comment. But ... I follow Austrian theory economics and they emphasize what people do without bothering whether or not they are smart, dumb, good or bad. The question they try to answer is: will actions taken achieve the desired results? And actually, based on a few axioms, you can pretty easily get it right.

RagnarHadAPoint's picture

"Essentially, all models are wrong, but some are useful."

George E.P. Box

 

Box, George E. P.; Norman R. Draper (1987). Empirical Model-Building and Response Surfaces, p. 424, Wiley. ISBN 0471810339.

AgAuSkeptic's picture

Economists get things wrong as they assume people don't like to pay more for useless crap that doesn't work. Top on this list are pharma drugs which seem to have no relation to disease cure.

GoinFawr's picture
"If Economists Are So Smart, Why Are They Always Wrong?"

Actually they are not always wrong, the mistake is in thinking that they work for YOU; two sides to every trade you muppets.

McGeer Monetary Policy FTMFW!

Kendle C's picture

Pamphleteer's Guide to Understanding Economics

 

First forget everything you learned at school and were told about economics. Good. 

Now, imagine a huge milking machine like they clap on cows udders. You're the cow.

That.

TeethVillage88s's picture

51 Important Economic concepts - http://www.econlib.org/library/Topics/HighSchool/KeyConcepts.html

Well the Broken Windows Fallacy is correct. "Downward Sticky Prices" seems to make sense to me. Fisher's Quantity Theory of Money with Velocity of Money seems good, but they stopped using it when Economics became a hard science or when we closed the Gold Window for conversion of USD... OR when the Trade Imbalance grew too large to hide.

http://www.investopedia.com/articles/05/010705.asp QTM (Fisher)
http://www.investopedia.com/ask/answers/08/broken-window-fallacy.asp (Bastiat)
http://www.investopedia.com/terms/s/sticky-wage-theory.asp

UnKeynes's picture

They call themselves "Keynesians", but that's just to afford themselves some believability with the economically ignorant masses.  The over-arching plan of those at the top is to manipulate economies worldwide and to enrich themselves as quickly as they can, while impoverishing the rest of us, eventually bringing everything down in a heap, according t the "Illuminati's" motto, "Ordo ab Chao", order from chaos.  Central to this plan is a continuing accelerated rate of inflation, which they claim is "beneficial" to the economies of the world.

But Lord Keynes himself said something quite different on the subject of inflation, didn't he?

From “The Economic Consequences of the Peace” by John

Maynard Keynes

Lenin is said to have declared that the best way to destroy

the Capitalist System was to debauch (devalue/inflate) the

currency. Lenin was certainly right. There is no subtler, no

surer means of overturning the existing basis of society

than to debauch (devalue/inflate) the currency. The

process engages all the hidden forces of economic law on the

side of destruction, and does it in a manner which not one in

a million can diagnose.

By a gradual, continuing process of inflation, governments

can confiscate, secretly and unobserved, an important part

of the wealth of their citizens. By this method they not only

confiscate, but they confiscate arbitrarily; and, while the

process impoverishes many, it actually enriches some. The

sight of this arbitrary rearrangement of riches strikes not

only at security, but at confidence in the equity (fairness) of

the existing system of distribution of wealth.”

Please note that the operation of this process is totally

independent on the type of economy, whether “capitalist”,

“socialist”, “communist”, or “other”, and 100% dependent

on the power that the banksters have over the monetary

life of the nation. As Lord Rothschild said, “Give me control

of a nation’s money and I care not who makes its laws.”

This happened to the USA in 1913, with the creation of the

“Federal Reserve”, and later expanded with the creation of

the Exchange Stabilization Fund, a totally UNregulated

quasi-governmental organization, answerable to NO ONE,

which has the ability to LEGALLY manipulate the price of

the dollar, precious metals, etc. (i.e., through buying and

selling futures contracts (“paper gold” & “paper silver”) in

unlimited quantities, using funds created by the Fed). 

Econophile's picture

Thanks for the comment Unkeynes. This is one of the few things Keynes got right.

Econophile's picture

Thanks for the comment Unkeynes. This is one of the few things Keynes got right.

TeethVillage88s's picture

Once Europe became alarmed at our spending in Vietnam & stealing from Social Security Trust Fund... US Ratings and World Reserve Currency & Breton Woods Agreement & US Credit Ratings all lead to currency crisis. The Fiat, USD, then was always going to be deflated to 'game the system'.

It is all a progression:

1964 - Gulf of Tonkin, Congress gives up War Powers, Legislative Powers, and Budget Powers
1971 - Smithsonian Agreement, decoupled USD from gold standard,
1973 - War Powers Resolution (Allows 60 days combat/war without congressional declaration)
1974 - Federal Energy Administration Act of 1974 (R. Nixon)
1978 - Bankruptcy Reform Act of 1978,
1980 - Depository Institutions (J. Carter, followed by S&L Crisis, 5000 convictions, RTC)
1981 - Executive Order 12287, (R. Reagan, removed price controls on Petrol)
1982 – Garn–St. Germain Depository Institutions Act
1984 - Caribbean Basin Initiative (Free Imports to USA)
1985 - Plaza Accord
1987 - Louvre Accord
1992 - Energy Policy Act (H.W. Bush)
1994 - NAFTA, Deregulation of Trade, 3 Nations (W. Clinton)
1995 - Community Reinvestment Act, the Clinton Admin urged flexibility,
1995 - HUD advocated greater involvement of state and local organizations
1996 - Energy (W. Clinton, followed by ENRON Scandal)
1996 - Telecommunications Act (W. Clinton, cross ownership)
1997 - M2 Money Velocity Top
1998 - Brooksly Born Rejected on her concerns on OTC Derivatives
1998 - Derivatives expanded and were not regulated
1999 - Gramm–Leach–Bliley Act (Phil Gramm, followed by 2008 Financial Crisis)
2000 - Commodity Futures Modernization Act of 2000 (P. Gramm)
2002 - McCain–Feingold Act, soft money unlimited
2005 - Energy Policy Act (subsidies, excluded clean air Water acts)
2005 - CAFTA-DR Ratified,
2008 - 2014 QE & LIRP/ZIRP (B. Bernanke, J. Yellen, B Obama)
2010 - Citizens United v. Federal Election Commission
2014 - lift ban on crude oil exports (Commodities Deregulation)

P'Od_Accountant's picture

Its because economics is NOT a science.

TeethVillage88s's picture

Universities are not Universities.

There is no Tradition of Inquiry.

There is only... Followership. Not Scholarship. Fascism demands Followership, Paroting, Modeling, Miming, Acting like the Leadership.

Silver Savior's picture

The only economist I trust is one who says we are in a recession now and heading for a great depression and one who looks to silver and gold as the savior of economic activity. All others be dammed!

aliens is here's picture

Smart? LOL. They are book memorizers.

Totally_Disillusioned's picture

Maybe because they cannot be truthful and admit all markets/currencies/economies are rigged by the central banksters?

PitBullsRule's picture

If I was an economist, I would be ashamed to tell anybody.  Its a wonder there are any of those assholes.

TeethVillage88s's picture

I thought you said you were an Economist, lol.

You go to Universities and you find Mezmer.

Lucky Leprachaun's picture

Peter Sutherlland, NWO open-borders globalist (although he claims to be a 'proud Irishman') ex-Chairman of Goldman Sucks and overall genius allayed fears in Irish banking systems in 2008. 'The Irish banks and the Irish economy in general are on a sound and prosperous footing.'  He went on to describe naysayers as 'unpatriotic'. Less than three months later one of the biggest busts in history took place with the Irish tapayer left on the hook for all of the bank debts.

Lucky Leprachaun's picture

Q. What do you call an economist with a forecase?

A. Wrong.

The economist's dilemma: It works all very well in practice but will it work in theory?

LawsofPhysics's picture

It really depends on their true objective....

Most eCONomists today are simply mouthpieces for the status quo.

"Full Faith and Credit"

CEE's picture

Schroedinger effect? do the predictions affect future reality in adverse way?

overmedicatedundersexed's picture

crime, crime crime..the very smart reptiles have rigged everything and modern tech has made it much more efficient..economics just hides the fact ..

Henry Ford, a genius, said: this is his real statement..

The people are naturally conservative. They are more conservative than the financiers. Those who believe that the people are so easily led that they would permit the printing presses to run off money like milk tickets do not understand them. It is the innate conservation of the people that has kept our money good in spite of the fantastic tricks which financiers play-and which they cover up with high technical terms. The people are on the side of sound money. They are so unalterably on the side of sound money that it is a serious question how they would regard the system under which they live, if they once knew what the initiate can do with it.

Memedada's picture

This article was a waste of space and time. The author himself is obviously one of the deluded “economists” who clings at his empirically disproven theories because he’s made a living out of them. Wonder who pays him for this drivel? Ahh, just looked as his biography: the usual suspects of corporate fascist propaganda institutions…

Harry Lightning's picture

Economics as a science is most often wrong in fulfilling itgs mission of predicting economic trends for a quite simple flaw in its operational methodology.

Simply stated, it tries to drive a car forward while looking in the rear view mirror. 

Economics in many ways was a subsidiary of history, the concept being that if you know what happened in the past you, can learn from those events and look for when they are repeated. Then you will know how best to deal with the events since you saw them before.

Along the way, fnancial market participants as well as government and corporate planners said that it was not enough to have a database of events and how to deal with them when they happen. Instead, what would be msh more useful is if the events could be predicted before they happened with some degree of probability, so that dealing with the events could begin before they occurred. As a corollary, central bankers thought that if they had a good understanding of what events were coming, they would have the means to dull the baneful effects of those coming events.

And so the study of econometrics began. 

Basically, none of it works because you cannot predict the chronology of future events. I know there is a business cycle, I knw the economy will do well and perform poorly. I just don't know when. I can try to use a set of forward looking indicator and with a big enough staff and enough time I can use what happened in the past to model which indicators will predict what swill happen in psecific sectors of the economy going forward. But it is an incredibly complex task that relies all too much on the premise that history repeats itself down to the very granular level. In fact it may do thayt, but not at regular enough interb=vas than to allow for generalized rather than specfic predictions. Variables change too quickly and for unpredictable reasons. Models require more reliable informaton and periodicity. 

Which explains why the central abanks and most economic groups fail in accurately predicting economic trends. For where it is the duty to worship the sun, the laws of heat are poorly understood. There is an over-reliance on methods and indicators that very well may not be as valuable or as predictive as thought. And perhaps there is no Holy Grail, no Rosetta Stone perhaps it is a random walk through the economic life of a financil system that cannot be accurately predicted. 

If that is the case, and all of our empirical data says it is, then the best economics is to wat for a trend to develop and get on board. Stay with it until a counter-trend takes precedence. Don't sweat the small stuff. Most everyone nows what goes up and what goes down in economic expansion and contraction. Stick with those general rules and you;ll probably do better than the economists. Definitely better than the central bankers.

Memedada's picture

Economics as a science is a good idea. It should be tried. Instead of economic as religion as represented in the article above.

 

CRM114's picture

In a word, feedback.

That's why economists are always wrong.

I have an engineering degree, and a one year course on economics. I've got every crash right in my lifetime. I've seen them coming at least 2 years away, and so far got the timing sorted about 4 months out from the event. My brother's a cab driver and mechanic, so he has a PhD in Realism ;). He's worked the crashes all out too, independently of me. He pays and receives cash for everything, so he knows exactly what M2 really is, even though he doesn't know what the term M2 means."I'm a bit short now, can I pay you for that brake job next week?"

Economists do not gather feedback from what is happening to real people on the ground. They take some nice sanitized numbers and pretend they know what's happening. They assume everyone down the line is going to be honest, thrifty, and sensible. They don't chase down obvious incongruities. They don't listen to truckers having breakfast at the next table. They don't wonder how on Earth someone working shifts at MaccyD's has a brand new truck. Maybe they do hear about business conditions from senior management at dinner parties, but probably not enough. Economists are boring b@stards; few people invite them to parties.

 

And the nice, sanitized numbers are even less connected to reality now than last time.

Blue Steel 309's picture

The "Social Sciences" have no value, because they have no definition. They shouldn't exist, because there are better tools for understanding the things they claim to be interested in. It's like "I want to study big green things, lets start a new academic field!".

exomike's picture

I went to this guy's wwbsite, he ws just as clueless there.

shinobi-7's picture
If Economists Are So Smart, Why Are They Always Wrong?

Because the economy is smarter?

hibou-Owl's picture

It's because nearly all research and economists minds are owned by someone else.
Ever see a negative report from a broker!!!!!

Do your own analysis

Aireannpure's picture

With fiat currency running wild there are no economists. Austrian school says it all and makes it all pretty simple, like most things really smart folks mess with it and it fails. Fiat currencies make economists artists and very abstract. We are doomed. Raise the debt limit as always and lets have tax cuts?? Are you high?

Golden Phoenix's picture

Traditional economists spend their time pushing a cooked spaghetti noodle. They have a product to push and tell people what they're supposed to want and do. That's why they don't like free markets. That's why they don't like freewill.

Reaper's picture

Economists are modern alchemists promising to turn dross in gold, aka money.   They use mathematical abstractions as their magic potion. 

GRDguy's picture

In 1961, economic education was already under Federal Reserve superision.

The profession was rewarded for lyin', (even if they really didn't know the truth)

while those who told the truth lost their teaching jobs.

 

Radical Marijuana's picture

Yes!

"those who told the truth lost their teaching jobs"

Dragon HAwk's picture

Let me Guess.. the Parasites need somebody to make it sound complicated.

lasvegaspersona's picture

Wealth...it is far more than stuff and way far more than paper promises. 

On a national level once equipment sits idle it will soon go from 'capital equipment' to junk.

The rule of law is tenuous, if we lose that all wealth is at risk.

Education is a form of personal wealth. Make sure you get the good stuff though.

How to save wealth is the question of the era. If you are very rich a Picasso may be the answer. If you are poor then you will need suvival goods not wealth assets. If you are able to save then gold is the most fungible item and the one most likely to increase in value in a crisis.

If you are unsure where you fall in the scheme of things...I'd figure that out first.

yellowsub's picture

It's a tremendous feat for the "highly educated" working in Wall Street to crash the markets twice almost within the same decade...  

deimos178's picture

If you laid all the economists in the world end to end, they still wouldn't reach a conclusion.

ali-ali-al-qomfri's picture

Numerical Alchemists.

Turning paper into gold

and of course back into paper

in the blink of eye.

CRM114's picture

If you laid then end to end across the Atlantic....most of them would be drowned ;)

Downtoolong's picture

 

The best thing about being an economist isn’t the rare occasions your analysis or predictions turn out to be right.

 

The best thing about being an economist is that no one can ever prove you are wrong.

 

 

   

SidSays's picture

Always wrong?

Nah....

Just doing what they've been trained to do...

All central banks exist for one purpose....

https://m.youtube.com/watch?v=Gji0VLZCyxU

Radical Marijuana's picture

I agreed with that 2 minute video's statements.

TeethVillage88s's picture

What is wrong with Historical School of Economics?

".... Based on my 40+ years of observing and studying the economy and investments, I have formed some guidelines which have worked for me...."

https://en.wikipedia.org/wiki/Historical_school_of_economics (My Main Point Here)
http://www.newworldencyclopedia.org/entry/Historical_school_of_economics

- Where is money created, where do these funds flow to... who misses out on funding flow from debt based money?
- Where are our nations wealth from labor going as investment, hoarding, speculation, off-shore accounts, trade imbalance, to foreign jobs, foreign investment in Brock & Mortar, Factories, services... how does this strip wealth from USA, What is Wealth Extraction in terms of Money Flows or Funds Flows, or Govt Spending Flows to State-Capitalism or monopolies... or spying on our people or our corporations of all kinds...

TeethVillage, Funds Tracker, County Auditor

MortimerDuke's picture

The problem with the Historical School is a belief in determinism.  We can learn from history, yes.  But we are not determined by it.  In other words, incorporating hsitorical trends in your analysis makes you a good economist.  Using the past to determine what the future must look like is not good economics.  We can get an idea of what the future will look like, but not an exact image.  Karl Marx used his historicism to predict the worker revolution would occur first in England.  Then the bolsheviks happened, blowing that prediction up and not insignificantly, calling iinto question his method - historicism.  Historicism has been pretty thoroghly discredited.  Carl Menger and Eugen von Bohm-Bawerk were the forces behind the thrashing in an episode know as the "Methodenstriet."  Both of these economists wrote extensively about the "poverty of historicism."  That phrase was used as  a title of a book written by philosopher Karl Popper who also destroys historicism but through philosophical arguments.  That wiki page cites Max Weber and Joseph Schumpeter as historicists.  They had historicist leanings and some historicist ideas but I'd stop just short of including them in the group of major influences.  Neither were as socialist as the rest of that crowd.  All that said, one thing that crowd got right was that mathematical modeling in economics is a waste of time.  And that, in my opinion, is why mainstream economics is so lame.  They've borrowed the method of physics which is wholly inapplicable to "particles" that actually have brains, can think, can emote and can learn.