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On The Keynesian Lunacy Of Targeting Outcomes
The pages of the financial press overflow with opinions on what targets would make the world safer: what ratio of risk-weighted-assets banks should target, what RoE targets they would be safe at, what inflation target the central bank should aim for, or what growth target is appropriate for China. When SocGen's Dylan Grice was asked if he was a fan of the idea of nominal GDP targets! He snapped he is not and thought it "a terrible idea". As he opines, today’s various issues – the euro, China’s economy, over-indebtedness – are the cumulative unintended consequences of such past targets, and the naïve presumption that complexity can be commanded. Even mildly complex systems, any outcome is the wrong thing to target, with the process being where the focus should be. Expressing how little time he has for macroeconomics, reasoning that it’s obsessed with the targeting of interest rates, GDP, inflation, unemployment, exchange rates, et cetera, as though such a thing was possible without unintended consequences; Grice notes that Austrian economists understood this too. Ludwig von Mises distilled social phenomena to the simple observation that "man acts purposefully".
Dylan Grice - The tyranny of targets: process, outcome and the complexity of it all
The pages of the financial press overflow with opinions on what targets would make the world safer: what ratio of risk-weighted-assets banks should target, what RoE targets they would be safe at, what inflation target the central bank should aim for, or what growth target is appropriate for China. Someone even asked me if I was a fan of the idea of nominal GDP targets! I’m not. It’s a terrible idea. Today’s various issues – the euro, China’s economy, over-indebtedness – are the cumulative unintended consequences of such past targets, and the naïve presumption that complexity can be commanded.
All outcomes are caused by an underlying process.
But I’d argue that for even mildly complex systems, any outcome is the wrong thing to target. As we just saw, targeting one outcome of such a process changes that process, and changing the process subsequently changes all the other outcomes. In any kind of complex system where the underlying outcome generating processes aren’t well understood – whether a company, or a society – the effects of changing the process won’t be well understood either. Unintended consequences must ensue.
Yet even a cursory glance at the news shows ‘outcome targeting’ to be endemic: in response to the damage caused by Basle II, we’re given the ‘new and improved’ targets of Basle III (now already being traduced); the insurance industry now faces Solvency II targets; investors fret that banks won’t be able to hit their RoE targets; investors wonder if China will be able to hit its 8% GDP growth target; most major central banks target some sort of CPI inflation rate.
This is lunacy. How much damage has already been caused by banks that overreached themselves in trying to meet their RoE targets? How lopsided and capital destructive has China’s insistence on hitting its breakneck GDP growth targets at all costs been? How much of today’s painful credit deflation was caused by the credit inflation central banks pumped up while aiming for their CPI inflation target? In targeting these outcomes, underlying processes were distorted. Unforeseen outcomes resulted. But regulators continue to prescribe capital targets, banks continue to target RoE, China continues to target a growth rate, and central banks continue with ever more experimental methods in defence of their inflation targets. Indeed, today in Europe we’re seeing the unintended consequences of imposing outcomes (i.e. an exchange rate) on the eurozone economies.
Regular readers know how little time I have for macroeconomics. One reason is that it’s obsessed with the targeting of interest rates, GDP, inflation, unemployment, exchange rates, et cetera, as though such a thing was possible without unintended consequences. Since such variables are actually outcomes of a complex process, most macroeconomics seems to me to be an embarrassingly naïve study of outcomes which completely neglects process.
I’m not sure when this started. Adam Smith’s observation on the ‘invisible hand’ of selfinterested but mutually advantageous behaviour might have been our species’ first articulation of a complex adaptive process. Austrian economists understood this too. Ludwig von Mises distilled social phenomena to the simple observation that ‚man acts purposefully,? while Hayek coined the phrase ‚spontaneous order? to describe the market. And all this before complexity had been given its name by mathematicians.
The thing is, Adam Smith and the Austrians didn’t fall into the trap of focusing on outcomes. And we’re trying to avoid that trap too.
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ManBernKrugneysian!
Excellent article. Too bad those ideas will never be discussed in a serious fashion by the status quo. The closest thing we'll get will be a hatchet job by Larry "I don't drink the Kool-Aid, I mix it!" Kudlow, and his panel of bobble-head dolls.
I got $5 that says the ECB, under the guise of emergency liquidity in the wake of Greece upheaval, uses the excuse to circumvent Germany and buy Spain and Italy bonds directly.
Takers?
Make it 31.85 Yuan and you are on! That rhymes!
uhh....ECB is pretty much France + Germany banks with half of ECB funding. They also hold greek and spanish bonds. So they will be just bailing out themselves with their own money.
don't look at it as one country bailing out another.
But how can a country bail themselves out?
Toxic bonds are held by banks and retirees in Germany and France...so they are getting bailed out with taxes on their grandchildren's future productivity.
Spain and Greece are like Latin American countries for USA. They are a play thing for bankers to screw with. There is even a video game now...call Tropico.
We all know that economics is bullshit ...
The dismal science I believe it is called... but I like bullshit too
It is unfair to real sciences to call economics a "science". It belongs more in the category of alchemy.
The Author is wrong in denouncing "targeted outcomes." Of course we want a targeted outcome. We want a stable currency. The term is another piece of propanda thrown at Americans to think that the powers that run the country are doing wonderful things to make the country better. ZHers know it's a smokescreen for fraud, theft, and power grabbing.
"The term is another piece of propaganda thrown at Americans"
If that's the case, why not denounce it?
We are so far away from experiencing any form of Austrian inflation.
Might as well bring out the Bazooka and start printing checks and hand them out to the sheep.
So they can buy the Apple iPhone 5 this summer, stuff their faces with more Buffalo Wild Wings and Chipotle burritos, buy wigs and makeup and ULTA salons, and purchase cheap vacations on the new Expedia mobile app.
And don't even get me started on LULU. Went there to buy some charcoal shorts, they were over $75 so I said forget it....
LOL....
Oprintmore recently pointed to a $3,000 sheep thingamajig giveaway, so perhaps we are not too far away.
Was he just talking about the 3,000 or is he really going to give it away now? I don't care about the Deficit anymore as it wont be paid so I could buy 100OZ of silver with those Benny Bucks!
Indeed - http://www.zerohedge.com/news/obamas-latest-bailout-plan-summarized-4-words-3000-bucks-thingamajigs
Looks like I am going to buy more silver bars, hopoefully they won't get lost in another boating accident!
lol, Its like I'm taking crazy pills. In NY everyone is up in arms because Bloomberg wants to take their 32oz soda from their chubby fingers and they are calling it a war on the poor. Last time I checked a bag of rice at the super market costs way less than any meal for a family at McDonalds. It really is quite amazing how people have been trained to spend, as long as there is a means there is a way. I keep waiting for all these stores to need to do like 75% off to get rid of clothes but prices barely budge, I don't understand it. I know I'm not buying any $200 jeans but I guess someone still is...
I'd guess prices are fixed out of China. There were 38,000 price-fixing cases discovered in China last year so it seems that it is a pretty common practice.
Whats up with you RobotTrader? You seem to be switching sides or is it despair that makes you say such things?
C'mon man, we need some predictions from yesterdays good picks.
The first paper dollar was also printed, nothing new.
Oh I'm watching prices steadily move up, but people are ever willing to spend. There is always more credit somewhere. While I'm no fan of fast food I do look at the prices from time to time. Get a chuckle over how much a "Value Meal" costs now. Hell hear my old man complain "I can't go to a restaurant for lunch without paying $10 anymore!"
Hmmm,
Who's the sheep that shop at lulu?
Very good article. Have never thought about it. But, so true.
"The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."
Targeting inflation, or anything else in financial matters as outlined in this article, are kind of like the rhythm method. The ecstacy of the point of no return can result in some life changing unintended consequences - asset value crashes, wild fluctuations in valuations, inflation, CHILDREN!
Heisenberg outcomes...
Heidelberg outcomes?
Hindenburg...
Good ones...
Still looking for that one handed economist so that they can't say "...on the other hand..."
Economists just hedge their words.
Their other hand is invisible.
The system will be revised, following collapse.
(You can start now, if you know what you are doing. Expect derision.)
These marketwatch guys are fkin lunatics. They make cramer look sane.
What passes for current economic models couldn't target the broad side of a barn. It's simplistic garbage with vastly inadequate numbers of input data points, doctored input data from lying governments, the unknown variable of human nature and illogic, etc., etc. and yet they try to run the world with this crap:
http://www.youtube.com/watch?v=jIP7ES1lCGk
Whats going on right now with the miners is funny. It is all out flaunting in our face at this point.
SPX & EURUSD bullish daily charts dominate further.
As mentioned, shorts will be slaughtered next week.
Yep, I think a 20-30 point rip might do it.
After that you better get on your helmet.
Assigning and hitting targets turns men and politburo's into gods. That is the attraction. It is also the same attraction for the socialist-collectivist-welfare state. They are all about outcomes and never process which is why freedom is always sacrificed for some greater result. It would be fine except they never ever never get the desired result.
Economically an economy is like a rain forest, too complex to be managed. Central planners pour fertilizer from the sky. It kills and poisons some things and helps others. They only count the plants and animals that benefitted and tell you the rain forest would have died without them. They also say rain forests need management for a better result when it is a contradiction in and of itself. Only the botanist (Austrian economist) knows the truth.
Good thinking in this article.
++ Nice analogy
The article has it backwards: it's the continuation of the money printing/public debt as-a-stimulus process which is and has been the most important thing, regardless of the outcome.
However, the reason for the money printing and stimulus is to try to attain the objective of targeted outcomes.
The plan is to create targeted outcomes, which is a flawed plan.
The execution of the plan is issuing debt to pay off debt and to spend more than revenues to try to force growth to achieve the targeted outcome. This is also flawed.
Academic economists at least pay lip service to these ideas: http://en.wikipedia.org/wiki/Goodhart's_law
Not sure why it gets brushed under the carpet by policy makers.
Almost every stock index, international and domestic, is moving above its 21 day moving average. Another rally leg is occurring. Get long.
I'm sure Krugman favors targeting
I favor targeting Krugman --- preferably with a .44 Magnum.
LOL. But make a martyr of him?
Much better to expend that energy educating people so they can see what a fool the man is. You can slay (figuratively) a million Krugpots this way, as understanding spreads exponentially.
Austrian economics... once understood cannot be forgotten.
Allowing failure manages outcomes without micro-managing every step from start to finish.
Consequences of choices completes the loop from the end to the reason for a beginning.
Once failure and consequence are removed from decision making, failure and success along with recklessness versus responsibility lose their meaning.
Such a simple concept, but one that central planners, enablers, apologists, and outcome chasers cannot seem to grasp - or don't want to because it won't allow the outcomes that enrich them without sacrifice or effort.
managing developement of a society is very simple (but hard to find honest people to implement it) - one simply has to control and keep reducing parasitic behavior
Open season on Neo-Keynesians?
An organization that is able to gamble with huge sums of money and pay no significant penalty when it is wrong is going to be a problem no matter what it's goals are. Bring back Glass-Steagall.
We'd need TARP x 10 to recapitalise the banks if Glass-Steagal were (re)introduced. They're already practically insolvent.
Take away the FDIC's distorting effects, and the ability of banks to issue national currency as debt, and the system would sort itself out soon enough.
http://monetary.org has a plan and a House bill to return money creation to the government like the "Greenbacks" of old.
there's another fine group of folks that prefer "outcomes" to the process. they are the same folks that give/gave us affirmative action, quota-based hiring, lawsuits agaisnt fire/police departments regarding "under-representation" of certain racial groups, "fairness" in housing and taxation, etc., etc.
they want guarranteed outcomes, not equal access to opportunity.....
But the flip side of "Keynes is nuts", is that "austerity/Austrian economics is nuts, too".
We have a whole generation of recent college grads; trained, energetic, ready to work. There are plenty of people who need to buy what these grads can produce. What answer do Austrians have for them? Plenty of people who want to produce, plenty of people who want to buy...and bankers sitting in the middle, keeping it from happening.
Point is, neither Keynes or von Mises 'models' the whole of reality.
Point is, neither Keynes or von Mises 'models' the whole of reality.
No, the point is which one models reality more accurately.
"There are plenty of people who need to buy what these grads can produce. What answer do Austrians have for them? Plenty of people who want to produce, plenty of people who want to buy...and bankers sitting in the middle, keeping it from happening."
You answer your own question, Pulpcutter; the bankers, the government bureaucrat / regulators, the lying thieves and thieving liars who steal as much as possible from the productive prevent growth. Austrians would say. "reduce government to the minimum necessary, and prevent it from interfering the markets, stopping growth and business formation before it even begins".
We have a whole generation of recent college grads; trained, energetic, ready to work. There are plenty of people who need to buy what these grads can produce. What answer do Austrians have for them? Plenty of people who want to produce, plenty of people who want to buy...and bankers sitting in the middle, keeping it from happening.
No, we have a whole generation of recent college grads who i) have been educated in an environment that has almost completely destroyed genuine market-based price discovery, so that it's impossible to know how many of these grads have studied subjects that the market actually wants, and ii) are being prevented from being employed because a) various government regulations make it uneconomic to do so, and b) asset prices are being propped up, preventing the necessary liberation of capital that would arise from asset prices collapsing to their actual market price.
The Austrians have the answer - stop propping up market failures, and the market can resume its magic. Yes, that's painful. But you can't blame the Austrians for not having a 'nice' solution to a situation that arose because the idiots in charge never heeded them in the first place.
dylan is right: complexity cannot be commanded; the best i can do with it is put it on a leash called simplicity
dylan is wrong: those who generate n-layered complexities of what is basically always (not sometimes, not never) just boilerplate fuktard n-dimensional dementia must attempt to manage the complexities at least in their moolah aspects or they will go tits up in a world of saggy baggies trying at best to stay only 1 fib down with cantilevered applications
so these fuking old nannies manage by concensus around what the alpha nannies want (same as the pig-men who run theFunway on which the nannies' casinos rent commercial space)
this, as those few of us who have escaped it know, is known as: committee work. and it kills
nannies deserve more, imo; but for those who are not dead already, and must approve the decisions of the zombie alpha nanny interests in their investments, derivatives, and political buzz-word sycophants in both parties, targets are indispensable to achieving moronic agreement on the social vectors of their less-obvious freedom-hating greed
these are the very BiCheZ who were lobbied and voted to collectivize the pig-men's losses, btw; and yes, dey like dem targets...
...their propaganda is extremely important for MSM purposes
"these are the very BiCheZ who were lobbied and voted to collectivize the pig-men's losses, btw; and yes, dey like dem targets..."
Aye.
And both sides are taking big campaign contributions from the bankers they bailed out in 2008:
Looky here, over $21 million in 2010 from PACs and individuals just for the Financial Services Committee members:
http://www.opensecrets.org/cmteprofiles/overview.php?cmteid=H05&cmte=HFI...
"Conflict of Interest" seems to have no meaning in the Bubble Dome of CONgress and D.C.
it is the small price we must pay to keep receiving these checks
don't forget to vote!
One question only. Should the Tylers get the Nobel price for economics, peace, or both? Keep up the good work! Took a while reading and understanding English. But i got sick reading Dutch MSM. So i had to. No regrets, for sure!!
Neither. Since this website is essentially journalism, the most appropriate award would be the Pulitzer Prize.
There is no Nobel for Economics; there is the Swedish Banker's Association Award for Voodoo Mumbo-jumbo.
But but..
I read in msm one mr. Dimon was going to give the Nobel prize for economics to our president mr. Van Rompuy??
The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics is officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
Cut & pasted for you.
Keynesian economics fixates on "aggregartes" of broad sectors of the economy. Under Keynes, the way to fix any problem is to attempt to manipulate the appropriate aggregate. This is fundmentally inside out and upside down. It is like trying to cure a fever by immersion of the patient in an ice bath.
Such thinking leads to absurd policy by government.
This week's example comes from no less than the Bond King, Bill Gross:
Gross is a member of the periodic investment roundtable published by Barron's. Those interviews were the feature story of this week's (June 11) edition. In response to a question about the economy, Gross says the following: Q: How long will it be before the economy can stand on its own? A: A decade. We are in quicksand and the Fed is on dry land extending a hand...In the world of Keynes, The "dry land" from which help comes is the central planning agency that presumes to control the instantaneous and time value of money by printing unlimited amounts of it. The world of real economic assets and wealth creation is the world of "quicksand".
Your analogy is flawed. If the patient's fever is life threatening, cold water to lower body temperature to prevent brain damage and death may be the appropriate solution.
Gross is mistaken. He is speaking of Milton Friedman's policies, not Keynes.
“The society which scorns excellence in plumbing as a humble activity and tolerates shoddiness in philosophy because it is an exalted activity will have neither good plumbing nor good philosophy: neither its pipes nor its theories will hold water.”
- John W. Gardner
You ... have ... to ... know ... that ... I ... do ... not ... want ... you ... too ..
It's not as if ...
People like to think that they understand things so when things become difficult or impossible to understand people take mental shortcuts. These mental shortcuts or rules of thumb they are called by some are almost always incomplete and even disastrously wrong under certain conditions. True experts in a field understand that conditons have changed and that the rule of thumb (ROT) no longer works. Those with less understanding just whine that ROT always worked before.
The current crisis was not caused by "focusing on outcomes" but the opposite!
What if the desired outcome was more people owning homes? It certainly worked until it didn't.
Trust me hardcore’s, I am a Hayek Austrian 100%, however I think Keynes gets a bad rap when you really think about, and here is the simple reason why.
The global statist cartels of economic power players (the imperial corporatists and their puppet politicians of global monopolized trade, oops, I meant to say free trade) have never applied Keynes prescriptions in the way that many argue he intended.
Yes, the statists most certainly intervene in extreme crisis as prescribed; however, they do so as well even at the mere hint of a minor downturn or the least bit of economic pain or natural readjustment.
Now, apart from trying to micro-manage economic signals of the smallest size and shape, which is absurd and ultimately distorts the entire rational of all economic agents, one-off minimal interventions in the exceptionally extreme outlier event is not out of the realm of reason once every 100-years or so. Constant one-directional simulative interventions are not how Keynes intended his prescriptions be administered.
The problem is that Keynes prescription to tighten and conserve (to promote real savings in order to rebuild true capital investment structures) during the periods of stable growth has never been part of statist equation. They just kept printing and spending their way to fiat oblivion amid the excessive booms and busts such folly creates.
It is kind of like blaming the founding fathers for what America has become. Despite the foresight to anticipate the possibility of our current predicament if not properly managed, and without the necessary intermittent revolutions that Jefferson so highly thought prudent, I trust that anyone with half a brain is quite aware that what America has become today is NOT what the founding documents and the revolution that preceded intended to produce.
Today, I have posted a challenge to the Austrian School and to all persons of intellect and reason. Since I am so fond of the ZH community and its diverse array of contributors and commenter’s, I thought I would present it to each of you as well.
You may find the challenge here. It is titled: The Greek Elections and the Quandary of Finite Resources
http://www.elliottwavetechnology.com/2012/06/quandary-of-finite-resources.html
Go easy on the bitchez okay, but otherwise, let em have it…
Thanks
Just like Marx, the theory would work fine if men, all of them and each generation, could overcome their self-interests.
In practice, I prefer not to be part of such an exercise in futility.
As you wish malek - at least here at ZH there is some semblance of a free market however mono-minded it may be.
Keynes #1 rule was to never, ever, ever run a trade deficit especially not a $600 billion a year one and he surely wouldn't agree with moving most of our non-food consumer manufacturing to communist/socialist(by their constitution) China, firing their US workers then importing the products.
http://www.thenation.com/article/163673/what-would-keynes-do
All of our major wars since 1950 have been with friends or proxies of China(Korea, Vietnam, Iraq, Afghanistan, Libya) and now our mass production factories are on their soil. That doesn't seem good.
The communists said years ago that "they would use capitalism to defear the capitalists."
Excellent piece!
It reminds me of a class I took years ago in systems theory. I'll spare the details, but the bottom line is that control systems have two properties, controllability and observability, and in general, variables that are observable are not controllable, and vice-versa. I know TPTB have the belief that they can have complete control (and complete observation), but even from a theoretical perspective, such a thing is simply not possible. Even for very simple systems, the mathematics are difficult, and beyond say a dozen nodes, closed-form analysis is all but impossible without symbolic editors.
Obviously they are using empirical computer models, but the problem with empirical models is that they are phenomenological, a fancy word meaning that the variables that go into the model have no theoretical underpinnings, but are simply observations, and most importantly, are things that can actually be measured. This is a key point, because things that are difficult or impossible to measure never end up in the model. My opinion is that phenomenological models are inherently weak, as the modelers have little understanding why the variables have the effects they do. I've seen all sorts of hand-waving ridiculous arguments as to why a phenomenological model should be believed, and this is hard science I'm taking about, solid state physics.
Dylan Grice is absolutely correct in saying that the process is more important than the outcome, and maybe that's where we've really gone wrong as a culture. Very thought-provoking. Thanks Tyler.
we are complex systems of symbolic editors trying to discuss complex systems
matrix of matrices
and hermeneutics in that the assumptions we make will bound the outcomes of our thought
good thing clothing is optional...
GDP is a process, not an outcome. So is inflation.
TPTB will focus attention on 2 or 3 targeted outcomes, like U3 headline UR, 'core inflation', and the DJIA, disregarding the 17 to 20 other prints that provide some kind of context to the tomfoolery. This is what shadowstats.com is so important - but it's hard to deliver that truth to the sheeple.
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