Video: Economics is Fun: Why Economics Isn't (Natural) Science

Dr Madsen Pirie of Adam Smith Institute does a great job in explaining vivaciously why economics isn't (natural) science, which conventional practitioners try to mold them into--through statistical or econometric models.

Here's a good quote [1:07]

When an economist tries to simplify it by leaving out stuff by, so that a small model can be created you have assumed away the real world.

(hat tip Greg Ransom)



Economics is the youngest of all sciences to quote the great Ludwig von Mises.

And it is important to note that the science of economics represents a subdiscipline to the science of human action. Again Professor Mises in his magnum opus Human Action,

The scope of praxeology is the explication of the category of human action. All that is needed for the deduction of all praxeological theorems is knowledge of the essence of human action. It is a knowledge that is our own because we are men; no being of human descent that pathological conditions have not reduced to a merely vegetative existence lacks it. No special experience is needed in order to comprehend these theorems, and no experience, however rich, could disclose them to a being who did not know a priori what human action is. The only way to a cognition of these theorems is logical analysis of our inherent knowledge of the category of action. We must bethink ourselves and reflect upon the structure of human action. Like logic and mathematics, praxeological knowledge is in us; it does not come from without.

All the concepts and theorems of praxeology are implied in the category of human action. The first task is to extract and to deduce them, to expound their implications and to define the universal conditions of acting as such.

And the difference between the science of human action from natural science in the words of Mises (emphasis added)

WHAT differentiates the realm of the natural sciences from that of the sciences of human action is the categorical system resorted to in each in interpreting phenomena and constructing theories. The natural sciences do not know anything about final causes; inquiry and theorizing are entirely guided by the category of causality. The field of the sciences of human action is the orbit of purpose and of conscious aiming at ends; it is teleological.

Both categories were resorted to by primitive man and are resorted to today by everybody in daily thinking and acting. The most simple skills and techniques imply knowledge gathered by rudimentary research into causality. Where people did not know how to seek the relation of cause and effect, they looked for a teleological interpretation.

Video: How to silence a Nobel Prize winning economist: Ask him about the economy.

This video from Peter Schiff is a must watch. (hat tip Justin Ptak Mises Blog)

The current Nobel Prize winners, whom are economic modelers or supposed technical experts on the economy, can't seem to defend their work, or much less explain their perspective of the US or European economy, in public.

Incredibly or even embarrassingly, both opted to take a silent stance in a news conference.

Watch the Princeton news conference video through this link

Another vindication of the great Ludwig von Mises who once wrote,

There is no such thing as quantitative economics. All economic quantities we know about are data of economic history. No reasonable man can contend that the relations between price and supply is, in general or in respect of certain commodities, constant. We know, on the contrary, that external phenomena affect different people in different ways, that the reactions of the same people to the same external events vary, and that it is not possible to assign individuals to classes of men reacting in the same way. This insight is a product of our aprioristic theory.

Ben Bernanke Admits to the Knowledge Problem

“We don’t have a precise read on why this slower pace of growth is persisting,” the Fed chairman, Ben S. Bernanke, said Wednesday at a news conference. “Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought.”

That’s from the New York Times.

US Federal Reserve Ben Bernanke finally acknowledges to the “knowledge problem”, which again validates the knowledge theory of the great F.A. Hayek.

Of course, we’ve been saying that Ben Bernanke has had a string of inaccurate predictions.

Remember, Mr. Bernanke is backed by about 450 Federal Reserve economists, half of which are PhDs.

In essence, this is an admission of the grand failure of macroeconomics founded on econometrics.

Now for QE 3.0

Back to the same article, (bold highlights added)

Mr. Bernanke dismissed for now any possibility that the Fed would extend its efforts to stimulate growth, saying that the economy was moving in the right direction. The slow pace of the recovery justified the Fed in continuing its existing efforts, he said, but not more.

The Fed’s policy board, the Federal Open Market Committee, voted unanimously to maintain its two-year-old commitment to hold a benchmark interest rate near zero “for an extended period.” Mr. Bernanke said the language meant it would not raise interest rates for “at least two or three meetings,” pushing back to November the earliest moment rates could rise. Economists consider it likely that the central bank will hold interest rates near zero well into next year.

The board also voted to maintain the Fed’s portfolio of more than $2 trillion in Treasuries and mortgage-backed securities by reinvesting principal payments. The board did not indicate how long this policy would continue, a decision that Mr. Bernanke described as intentional. Fed officials have said that allowing the portfolio to dwindle is likely to be the first step when the central bank decides to begin the withdrawal of its aid programs.

Action speaks louder than words.

True, QE may not be immediate, as QE 2.0 has been activated five months after the completion of QE 1.0, but to maintain the $2 trillion balance sheet by ‘reinvesting’ principal payment for an indefinite period signifies transitional QE.

Given the current political institutional framework, QEs signifies a strong force in keeping this arrangement intact.

Besides for an economy that has been artificially propped up by a tsunami of liquidity, obviously a withdrawal or non addition would trigger a meaningful regression—the risk prospect of which, based on their guiding ideology, should be sternly avoided.

This means that the door for QE is wide open, (which I think is part of the mind ‘conditioning’ communication tools applied by the FED)...

Now the Fed is standing back again to see if the economy can grow without constant prodding. “A little bit of time to see what’s going to happen is useful in making policy decisions,” Mr. Bernanke said. He allowed, however, that the Fed could take additional steps, from declaring a longer period of near-zero interest rates to buying even more assets.

Ben Bernanke admits that the he and the rest of US Federal Reserve can’t read the economy, but then he believes that his set of tools works.

What a contradiction.

Finally because of some political backlash on the Fed’s polices, the asset purchasing (money printing) program may come in a different form and or under a name.

Video: Why Keynesian Economics Is Wrong

Here is an instructive video, from Center For Freedom and Prosperity, on why Keynesian economics is flawed... (Thanks to Professor Dan Mitchell)

The video mainly focuses on the misleading segments of the widely used statistical construct from which most policies have been premised.

The essence here is that the major flaw in the theory is the focus on aggregate demand, as reflected on consumption spending, as the principal driver of economic growth.

There are other flaws in Keynesian economics not included in the video:

-fixation on "full employment"

-"countercyclical policies" via deficit spending or inflationism

-"animal spirits"

-money is "neutral"

Understanding the flaws is important because the gist of mainstream politics have been shaped from the assumption of the validity of these models. Thus, knowledge thereof represents as emancipation from the delusion of the messianic virtues or the infallibility of government. At the end of the day the law of scarcity prevails.

Why Mainstream Economists Are Mostly Wrong

How could economists/experts get it (forecasting, policy prescriptions) so wrong?

This from Janus Lim of the World Bank (hat tip: Prof Antony Mueller) [bold emphasis mine, italics his]

It would seem that the current crop of modern macro models are not only ill-suited for prime-time policymaking in the developed world, they are also inadequate for the developing-country context. At some level, this is ironic. Developed economies are typically far more complex, with larger and more sophisticated product, financial, and labor markets. If anything, the relatively simple structure of DSGE models should be attractive to developing countries, since they are more likely to be successful in capturing the primary features of these economies.

Of course, it may well be the case that developing country policymakers are not quite ready for such sophisticated, state-of-the-art macro modeling tools. Perhaps so, but this seems to me to be a red herring. While ease of use is certainly relevant for capacity-constrained LDCs, the more important question to ask is whether such models can answer the questions foremost on the minds of developing country policymakers. If they can't, it matters much less that the developing world is not ready for them. It would be more that these models are not ready for the developing world.

For simplicity sake, the answer is because they substitute models for human action.

Prof Richard Ebeling writes,

The inability of the economics profession to grasp the mainsprings of human action has resulted from the adoption of economic models totally outside of reality. In the models put forth as explanations of market phenomena, equilibrium — that point at which all market activities come to rest and all market participants possess perfect knowledge with unchanging tastes and preferences — has become the cornerstone of most economic theory.