The Limits of Economics

Jeffry Snider makes a good point in his post at RealClearMarkets:

The media through economists has chosen to believe but not verify that QE is money printing, and no amount of market contradiction, sinking economic fortune, global “dollar” illiquidity, Donald Trump, Brexit, unexpected Japan “dollar” attention, or China will ever convince them otherwise. None other than Janet Yellen spoke last Friday where her topic was all the things that economists didn’t know – and it was a lot, all vitally important concepts. Of one very telling passage in her speech I wrote:

“The Chairman of the Federal Reserve claims that it is now necessary to study whether or not people and firms act differently. I am not in any way surprised that I just wrote that sentence, but I suspect the vast majority of people in the world would be stunned by it. Alan Greenspan’s reign was truly the dumbing-down of economics because during it these economists really believed simple, common sense ideas were immaterial. As Yellen recalls in her speech, they just assumed that they could model but one kind of ‘average household’ as sufficiently representative of all the rest.”

Though the world is blindingly complex, economists were until just recently convinced they could sidestep it all through Positive Economics in the form of econometrics. As Milton Friedman said of it, they could get away with knowing very little so long as that little explained a lot. By accident of circumstances unique in time, Alan Greenspan thought he had done just that with his “all-powerful” federal funds rate tinkering. The Fed believed fully that it didn’t need to know why minor adjustments here and there to a minor market of only one small part of the money system appeared to work, just so long as for them it did. It is a highly flawed concept even where it might even have been right once, “The fatal conceit with all of this is that it applies only to a static world; even if you could actually explain a lot knowing so very little as economists clearly do, that still doesn’t mean you can always explain a lot by knowing very little.”

The sad truth is that economists just don’t know a lot. I think I’ve mentioned it before but in my very first economics class in his very first lecture the prof lamented the limitations of his chosen field. Economists were apparently more humble then. But even more sadly, that doesn’t stop them from ignoring what little they do know and forging blindly ahead.