Posted by cij on Jun 3rd, 2008

Economists are often the target of much ridicule. For example in this article,

These are not good days for the dominant “who could have known?” school of economics. First, they missed the housing bubble.

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Fortunately, the media do not hold economists responsible for their failures.

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Being off by 300 percent might be considered a serious problem in other lines of work, but apparently not for economists.

Peter Lynch, a legendary value investor was known to have said,

If you spend 15 minutes a year studying the economy, that’s 10 minutes too many.

In one of his 25 Golden Rules for investing, he said,

Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening in the companies in which you’ve invested.

This dismal state of affairs for the dismal ’science’ called “economics,” was bemoaned in one of our articles, Why is the market so easily tossed and turned by dribs and drabs of data?,

Today [January 11 2008], we can see a lot of confusion in the market. Investors are reading the tea leaves on what Ben Bernanke will do with interest rates, economists are arguing whether the US are in recession or not, the stock market are being tossed and turned by every bits and pieces of economic data and investors are confused and nervous about what is going on. Notice one thing: the market is trying to absorb every piece of economic data (e.g. unemployment level, manufacturing index, GDP, CPI, etc.) and still yet not able to make up its mind on what is happening to the US economy. Given that many highly esteemed economists and analysts have conflicting opinions, how can investors and traders make confident decisions?

No wonder economists are so much distrusted! In the financial service industry, economists are derided as people whose job is to “talk up the economy for the fund managers.” What is wrong with economics?

To answer this question, we turn to an old book written several decades ago. As we quoted Wilhelm Röpk, an economists from the Austrian School of economic thought in Why is the market so easily tossed and turned by dribs and drabs of data?,

Among these the most important and also the most controversial question is to ascertain whether the method of deductive analysis or that of empirical description offers the better chance of bringing us nearer to a solution of the problem.

As we can all observe, the discipline of economics today is largely overran by statistics and numbers (at least for the economics used by the financial markets). Röpk questioned several decades ago whether this is the right method for the study of economics:

It is easy to understand that, in this atmosphere of institutionalized science with its air of exactness and progressive technique, not many escape the temptation to look down upon old-fashioned ” theory,” with its small business unit of the private study, as something hopelessly behind the times and to claim for their descriptive and statistical method a wider field of application than is compatible with the logic of scientific methodology. Instead of confining themselves to the more modest but very meritorious task of collecting, arranging, and interpreting all the available facts and statistical data and of verifying the results of deductive reasoning, these men thought it possible to replace deductive reasoning entirely by their empirical and statistical method.

The fact that today’s economics discipline is in such a sorry state shows that Röpk reservations on such a trend of economic thinking on method was ignored.

Today, we are paying the price for such a widespread economic illiteracy even among economists. As we quoted Marc Faber in Marc Faber: Bernanke Policy Will “Destroy” U.S. Dollar, who once said of Ben Bernanke (the head of the US Federal Reserve),

… had I been the professor who had judged his thesis for his PhD, I would not have let him pass. I would have told him actually, “Mr. Bernanke, I have one condition in which I let you pass, and this is you never join a central bank, because you are a destroyer of money as store-of-value function, of the function of money being a unit of account. The only central bank that I would allow you to go to is the one under Mr. Mugabe in Zimbabwe.

In an interview, Jimmy Rogers was most unflattering of Ben Bernanke,

We know now he doesn’t even know about economics. I mean, he’s got a PhD in economics and he was a professor of economics, but he doesn’t have a clue about economics.

I will quote you – I hate to quote you, but one more time - I was watching him testify before congress and I almost fell out of my chair. He said under oath, so we presume he wasn’t lying, that he was just a fool, he said if an American only buys American products, it does not matter to him if the value of the U.S. dollar goes down. He will not be affected. I was looking at the man to see if he was lying, giving government propaganda, but then I could see he didn’t even really understand.

He didn’t understand if, you know, even if say I’m an American, Lindsay, and I only buy American tires. Well if the price of foreign tires goes up, obviously the price of American tires are going to go up too. Plus, if the dollar goes down, the price of rubber’s going to go higher, etcetera, etcetera, etcetera.

So the man doesn’t even understand economics. He’s going to print money. He’s going to throw money out the window. The dollar’s going to go down further and further and further. Inflation’s going to get worse and worse and worse throughout the world – the world, not just America - and we’re going to have a worse recession in the end.

We cannot blame economists like Ben Bernanke and Alan Greenspan (who denied inflating the housing bubble that gives rise to the credit crisis). Rather, it’s the contemporary economic schools of thought that is the problem. Indeed, mainstream economics makes our life as investors harder.