Economists have been stumped by the past dozen years.

The Dotcom collapse was an early warning that economists, as a class, were not clued in. Sure a handful recognized that there were budding problems — think Bob Shiller — but he was notable as an exception.

Then we had the entire debacles of 2000s – derivative implosion, housing collapse, credit crisis, market crash — and we found that the vast majority of economists are academic theorists who were completely blindsided by events in the real world. And those were the good ones, as opposed to the biased hacks whose goals have nothing to do with discerning objective reality.

We need to admit that Economists, as a profession, are stumbling around in the dark.

To quote  Edward Hadas, “Policymakers and pundits still make confident pronouncements, but the conclusions are radically different. The expert disagreements give away the truth: ignorance reigns.”

Hadas identifies six questions which professionals should stop pretending they can answer:

1) What creates retail inflation?
2) How do financial asset prices affect the real economy?
3) Do big fiscal deficits damage the economy?
4) What does quantitative easing actually do?
5) How much leverage is too much?
6) How to deleverage without damaging the economy?

If economists cannot explain the basic workings of the economy, perhaps we should be relying on them much less for policy advice . . .


Admit economic ignorance
By Edward Hadas
Reuters, October 31, 2012

To Find the Answers, Look Beyond Economics . . . (May 8th, 2011)

Letter from Chicago: F  (January 5th, 2010)

How Economists Got It Wrong (September 6th, 2009)

Read It Here First: “What Good Are Economists?” (April 25th, 2009)

RIP Chicago School of Economics: 1976-2008 (December 23rd, 2008)

The Illusory World of Economic Forecasting (September 19th, 2006)

Mystery of the Awful Economists, part 2 (April 2005)

Mystery of the Awful Economists (Part III) (April 2005)

2004: A test of Supply Side economics (December 27th, 2003)

Category: Economy, Really, really bad calls, Rules

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

18 Responses to “Economists: Things We Are Ignorant About

  1. Orange14 says:

    Economics has done a very poor job as a predictive science but an OK job as a retrospective science. Developed models cannot adequate deal with Black Swan events which as we are coming to find out occur with a greater frequency than expected. Billy Beane (and others) has much more success in mining baseball data than do economists yet we probably spend much more on economic predictions than baseball ones.

  2. Marc P says:

    The saying is “you get what you manage for.” Everyone talks a good game, but in America fiscal and macroeconomic policy is really directed at managing for two things: the GDP number and the Dow number. GDP is merely a measure of macro activity, not of macro wealth. The best recent example is that Superstorm Sandy will cause a bump in GDP. Insurance companies will liquidate assets to pay claims, and the government will go further in debt to pay claims. This decreases aggregate wealth, yet GDP will indicate that the economy is better. Many economists (even good ones) have been giving quotes over the last week that the silver lining to the storm is that it will help the economy. That nonsense is no different than a sales manager wanting a bonus because sales are up when the there are losses on each of those sales.

    The general public and mainstream economists have distinctly different goals. Both say they want an economy with lots of good jobs, opportunity, high employment levels and stability. Economists have evolved their profession to the point where they are no longer actually managing for that. Their views spill into the press, and even formerly well-regarded institutions. Just last week the NYT had an article about how the recent increase in consumer borrowing was good for the economy. (Really, NYT? Effectively selling assets through debt to purchase consumer trinkets is good?). For years the Federal Reserve has written about the need to get America borrowing again. Never mind that aggregate wealth goes down, they say, we gotta get that GDP number up.

    Economists aren’t ignorant. Most of them simply focus on the wrong things.

  3. S Brennan says:

    Got to disagree with

    “Economics has done…an OK job as a retrospective science”

    First of all it’s not a science, the degree is a Bachelor of Arts…not of Science.

    Secondly, somebody’s predictive ability is largely based on an accurate database. In Science, theory, which is a rule on how things will work at some future moment in time, hence it logically follows that theory is in fact, a prediction. For theory to become a theorem, it requires repetition by others with consistent results AT SOME FUTURE DATE. Theories require empirical data sets upon which constructs are imposed to find a fit, for present data…AND FUTURE DATA.

    You can’t predict with bad data…and economics is a profession that regularly throws out data points that disagree with the pet “theorems” constructed from myths that allow for the merciless exploitation of humans and the planet they live on.

    Personally, I would like to see some serious revision of the myths perpetrated of the inflation numbers of the 70′s…that was the time period in which 19th century economics [now called NeoLiberalism, which is neither new..nor liberal], was resurrected and given a new coat of paint, sans mercantilism. Yes Volker seems to have ended it, tossing millions out of work by raising interest rates through the roof…but at the same time the oil shocks of the 70′s ended as if on cue. The oil shocks of the 70′s were not demand related, they were political actions in response to US policy. Also we changed the way we count inflation under Reagan.

    ” CPI, can be found on the official website of the Bureau of Labor and Statistics as pointed out by Walter “John” Williams; Shadow Governemnt Statistics, where there is a great deal of documentation explaining what they do and how they do it. You will find there, many discussions of some seemingly harmless data manipulations that have been incorporated into the calculation of the Consumer Price Index (CPI) over the years. The CPI is advertised to track the cost of a fixed “market basket” of items that people consume and report the change in the price of those items from year to year. It is commonly referred to as the Inflation Index.

    As it turns out, the harmless data manipulations are the problem. The “market basket” is not fixed and does not contain the same items over time. In 1982, during the Reagan administration, things weren’t going too well as far as economic data was concerned. It was decided that things could be made to look better if inflation appeared to be more under control. So the things that were included in the calculation of the CPI were changed. Notably, the cost of renting a home replaced the cost of buying a home in the CPI. This is just the start of something larger. Since the Gross Domestic Product calculations are based, in part, on the CPI calculation, lower CPI resulting in a higher GDP, Reagan’s reformulation of the CPI resulted in a falsely high report on GDP. The great Reagan economic expansion was based on cooking the books. Just like Enron.

    It does not end with Reagan.

    It gets worse. Under the G.H.W. Bush administration, Michael Boskin, chief economic advisor, and Alan Greenspan, Chairman of the Federal Reserve System, argued that the CPI overstated inflation. They argued three major things. One is that if an item becomes too expensive, people stop buying it and substitute something cheaper. Say if shoes got too expensive and you started wearing clogs, the price of shoes would be replaced in the CPI by the price of clogs. The Second is that if there is a lower priced outlet for goods and services, everyone will use it. So, everyone is assumed to shop at Wal-Mart and so the Wall-Mart price is what is in the CPI. Third, they argued that quality improvements should offset price increases. This means that if you pay more for a car with airbags, this is an improvement in quality and is worth more so should not be counted as inflation. Their thinking has incorporated into the CPI calculations over time. Each time the CPI comes out, it represents a different cheaper market basket.

    But wait, there’s more, to complement the theory that permanently substitutes items in the market basket when they become unaffordable, there is a system of weighting. Weighting means that the actual percentage that the price of an item has changed is not reported. Instead price changes are adjusted to have more or less impact on the total calculation of the price of the market basket. When prices of an item are going up, the weight of that item in the basket is decreased, on the theory that people will buy less of a thing that is becoming more expensive. And even more clever, the weight of items that are going down in price is increased to supposedly reflect that people will buy more of something that is going down in price. So if things that are increasing in price are discounted and the things that are going down are emphasized you can see that it is very hard to get the CPI to go up.

    What we are measuring and publishing as if it were a Consumer Price Index is in fact better characterized as a measure of how people are currently spending money. If that is what you are measuring it is hard to see how the CPI will ever be a statistic that will alarm anyone because people will always be able to spend on something, even if they are living on dog food. I suppose if dog food gets to be too expensive they can live on air. Inflation problem solved at last.

    So no wonder I can’t afford steak. The CPI is telling me I should be eating hamburger and that a new car costs $5,200 at Wall-Mart.

    By their own admission, Boskin and Greenspan proposed this only in order to reduce the cost of government. If the CPI reported were less, never mind not accurate, it would allow the government to stiff variable price contractors and labor whose contracts were pegged to the CPI. It would also significantly reduce Social Security payments over time. By some estimates, Social Security payments are 40% lower than they would have been had the CPI not been “fine tuned“. Even more sinister is the fact that many companies use CPI data to calculate cost of living increases for employees. So, your paycheck might have been 40% more than it is now. You may thank Reagan, Bush, Clinton, Bush, Boskin and Greenspan.” link to follow post

  4. giacman says:

    After a Master of Sciences in Economics from a top european university I decided not to do a PhD.
    This article summarizes why, and I didn’t even know it precisely. I became gradually skeptical with the subjects I was studying. I started to ask myself, why is Keynes not taught in most of the main stream Universities? It is not a matter of believing in Keynesian policies or not.

    In my opinion we should start back from Marx, and not because I am a communist or anything like that but because we are so IGNORANT that any past analysis and different approach should be explored and discussed. If you are confident you shouldn’t ban an author from a course of study. This shows by itself the terrible state of the art.

    The easiest questions are always the tougher in economics, which means that we should start again from the very beginning.

    What do you think?

  5. S Brennan says:

    Should have plugged this into my previous post S Brennan Says: November 4th, 2012 at 3:24 pm

  6. The Pale Scot says:

    The truth is that economics as practiced today isn’t science, it isn’t even a form of social studies, it is akin to astrology. There are I’m sure exceptions, but economic theory is like political opinion, it is generated from the “gut”. There is no economist equivalent to the old joke “Applied physicists are from Venus; Theoretical physicists wonder why it spins in the other direction. ” The attempts to use higher mathematics is just camouflage. I’ve have never seen an economist’s equivalent of the Eco101 exercise of how to price a widget. the moron party insists that tax cuts always generate more revenue, the other just side disagrees, the concept that there is a “sweet spot” that would generate the optimal revenue stream is never explored, at least not in the MSM. The former CIA director called the Hollywood actor’s advocacy of supply side economics “voodoo”; the actor was the one elected. The USA has gotten progressively stupider ever since.

  7. The Pale Scot says:

    CorrectionZ: “I’ve have never seen an economist’s equivalent of the Eco101 exercise of how to price a widget” as it would apply to tax policy

  8. ToNYC says:

    Asking more ignorant people who claim they are not but act like they are, or vice versa it seems, does lead to the thought that asking more questions to those who don’t know, is not so helpful and perhaps a closed loop until the hammer blows and then, the abstraction remains that makes the iDeal, natural result.

  9. OscarWildeDog says:

    Very simply, people in a position to challenge economists should do so, go on the record, then hold themselves (as well as the economists) accountable when the votes are in or when the situation allows. Economists are part of that vast academic undertaking that have no real use in real world business. Think of it: does any company – besides financial or banking firms – regularly employ economists? I don’t know of any. If there are, they would be a notable exception. Economists advance nothing within a company – not profits, not margins, not cost controls, not process enhancements…nothing. Oh, they could function as the guy who sits in the corner during board or proxy meetings, just to high five or mouth aphorisms to those whose minds are already made up.

    More to the point: I’m sure people are noticing the increasing antipathy (if not acrimony) between Steve Liesman and Rick Santelli over on CNBC. I find it unfathomable that a so-called “news source” has two of its more visible pundits disagreeing incessantly (and loudly, at that) about the state of the economy, what the Fed’s role is, and many other topics. One comes away from these dustups just shaking their head, no wiser for having listened to these two fools. Rick’s a trader – he’s paid to have opinions. Steve is an, er, uh, economist, so he should be telling us what is going on, and what we should be watching out for. Oh, uh, my producer just whispered in my ear that Steve Liesman doesn’t know what’s going on, didn’t warn us of the 2008 crisis and, well, you get the picture.

  10. gkm says:

    This is what I wrote for answers on my blog this past week:

    “Thursday, November 1, 2012
    Economic Ignorance: Physician Heal Thyself

    This is from a Reuters article. This gentleman writes on economic thought and yet he doesn’t have the answers nor does he believe economics has the answers to his questions. I’ve included how I believe Adam Smith would have responded.

    1) The money isn’t circulating in the US. It isn’t needed in the US so that’s why the excess reserves sit at the Federal Reserve. The money has instead gone out into other markets. Smith explained this is what happens when too much paper circulates. Prices may rise or fall depending if they are real or money value depending on the situation of the economy.

    2) Low or falling real asset prices encourage economic activity. High or rising real asset prices discourage economic activity. This is because the return from the employment is low when the price is high and visa versa.

    3) I believe that Smith would have said some budget deficits are necessary at the time to support the interests of a country. He would have also felt it was natural and maleficent for budget deficits to grow as large as they are in the US and other countries, and that ultimately they are unsustainable. Governments tend to expand to their limit.

    4) The additional money does not circulate, as explained above, but instead ends up back at the Federal Reserve as it is not needed. The equivalent of the money is taken out and circulates in another economy better situated to provide a return on that money.

    5) Debt is capital and capital should be left to the market to find it’s best employment. Failures will happen and are a natural occurrence.

    6) Smith recounts a story of Scottish banks that went wild with profligate banking practices. When those banks started to fail from all the bad debts they created a “bad debts bank” to get them out of their jam. It worked well – for awhile. Then the bad debts bank also used its new found freedom to continue the practices and ultimately it failed. The Fed will therefore fail. The ECB may also fail. ”

    While you may find this is all fairly rudimentary in the response, I think it would be advisable to read/re-read Wealth of Nations before you judge too quickly in this limited context.

  11. favjr says:

    Economics as discussed in the popular domain is a religion. That is why people profess “belief” in their favorite economic theory when most don’t even know what the assumptions are that underlie their favorite brand. Then they go around cherry-picking facts that support their beliefs and ignore ones that don’t. It’s just human nature.

    Economics in the academic domain is strictly a theoretical construct (like some forms of mathematics) with little or no predictive value, because it’s foundations only exists in an idealized world that does not exist.

    When people can build on assumptions based on the observations of Kahneman and Tversky, they may be able to create something of practical value. Until then, we’d be much better off heeding historical facts and empirical studies like “This Time It’s Different” than trying to build theories on foundations of sand. BTW, this is why Ray Dalio is so successful.

    gkm, Adam Smith felt that his “Theory of Moral Sentiments” was as or more important than “The Wealth of Nations.” In it you will find an assumption about human nature — sympathy for others — that is completely at odds with the foundations of most of today’s economic theories.

    Brennan, you can get science degrees in economics if you go to a science school like a Caltech or MIT. But its more of a math game than science.

  12. This is how I’m seeing it these days (happy to hear rebuttal):

    (Contemporary) Economists will never understand a fundamental problem with money in a scaled society.

    And that is that while we rely on accounts ‘balancing’… and we should on the micro-scale!

    (I lend you a dollar I expect the dollar back with whatever interest was agreed to.)

    On the macro-scale it doesn’t work out so well.

    In other words… the pattern of debts exceeding the ability to pay across a nation or civilization has been repeated throughout history.

    This is a product of many factors but the bias in appraisal… and the natural desire to receive ‘labor-free’ interest on the one hand by the lender…

    And the natural desire of the borrower to increase ‘decision-capability’ with an easy optimism about a future ability to repay…

    (both borrower and lander want appraisals on collateralized debt to be high)

    Inevitably leads to…


    Wise ancient politicians understood this…

    Stupid ones ended-up with some form of collapse when the old money regime fails.

    The current lot… with economics and politics now firmly separated… Are naturally confused and stupid.

    Its really about decision and actions. Money is a tool to co-ordinate these in groups where people don’t know each other.

    This is not about shortages of resources or labor… its a failure to understand money’s true nature.

    Decision Technologies: Currencies and the Social Contract

    These scaling problems are connected to the altruism dilemma which cannot be completely resolved no matter how noble we think we can become.

    Issues in Scaling Civilization: The Altruism Dilemma

  13. ToNYC says:

    “But its more of a math game than science.”

    How can you deny that math is the language of science?
    Beyond that, all the math in the world will not make economics a science.

  14. gkm says:

    favjr, while I can’t say I have read his “Theory of Moral Sentiments” I really do have to contest that he would consider it more important than his later work in the Wealth of Nations. If he had chosen not to release the WON given his conviction to the earlier released Theory of Moral Sentiments, then that would have been conclusive. That is not the case. In fact, it appears he makes it pretty plain in the foreword to the last edition of TMS that the WON was completed in perfect reconciliation with the earlier produced TMS.

    Nevertheless, since Theory of Moral Sentiments is not apropos of economic theory, and the vast majority of the WON has been, at it’s most basic, the fundamental tenants of economic theory and proven out over time, I don’t see it’s merit here.

  15. S Brennan says:

    They may call this a “science degree”, but one year of engineering has 4X what this economics degree has in a four year course work. Source Radcliff

    Requirements for the BS degree in economics are outlined below.

    Core Curriculum 43-44
    (see undergraduate catalog for core curriculum requirements)

    Required Courses 12-13
    COMS 114. Public Speaking. 3
    ITEC 100. Information Technology or
    ITEC 120. Principles of Computer Science I. 4
    *MATH 126. Business Calculus.
    *MATH 151. Calculus and Analytic Geometry. 3
    *STAT 200. Introduction to Statistics. 3

    Economics Core 18
    *ECON 105. Principles of Macroeconomics. 3
    *ECON 106. Principles of Microeconomics. 3
    ECON 305. Intermediate Macroeconomic Theory. 3
    ECON 306. Intermediate Microeconomic Theory. 3
    ECON 330. Money and Banking. 3
    ECON 495. Current Topics in Economics. 3
    *May also be used to satisfy Core Curriculum requirements.
    (ECON majors cannot take both ECON 106 and ECON 105 to satisfy core requirements.)

    B.S. Requirements 6-8
    The Bachelor of Science degree requires six to eight semester hours of courses in specified areas outside the major, which the department chairperson must approve.

    Concentration 18
    (Majors must choose one of the two concentrations listed below.)

    Electives 23-29
    Total Credits Needed for Degree 120

    Basic Concentration 18
    This concentration requires additional 18 semester hours in economics electives.

    International Concentration 18
    This concentration prepares students for careers in international business or finance and careers
    with firms having international operations.

    Required Courses 18
    ECON 309. Comparative Economic Systems. 3
    ECON 311. Economic Development. 3
    ECON 442. International Trade Theory and Policy. 3
    ECON 443. International Monetary Theory and Policy. 3
    ECON Electives 6

  16. Greg0658 says:

    SBrennan’s list brings to mind a question I have ..
    do you think that school texts and curriculum keeps up with the very fast paced developments in the real world .. developments that are pigeon holed internally for trade secrets thus guarded to the outside world too
    they share just enough to allow new interns with the base knowledge needed to jump in running

    because that question opens – just how far of an education should an individual be required to payup for on their own – before being taken in by the super-orgs with the wealth of info


    CultEng .. ‘accounts balancing … should on the micro-scale’ .. and .. ‘Inevitably leads to – ACCOUNTS THAT CAN’T BALANCE! – Wise ancient politicians understood this’

    do you hear those 2 statements in this one
    “its a big club and you ain’t in it”
    and this one
    “important rectangle uranium-platinum card – you stick it in that ATM and it spits cash”

    Lynn Anderson – Rose Garden

    and here said before:
    “the drive of our United States structure TOO .. perform for US or starve”
    04/15/12 – 10:09am
    “my turn cheek hat – I see tycoons pushing towards what must happen in this out of balance machine ie: drive wages down to match other world economies : hense hoard to push/pull on the string”

  17. Low Budget Dave says:

    Here are the answers I have decided on based on my reading of TBP. I refer to this as my “BR Degree”

    1) What creates retail inflation?
    – Excess Demand in relation to money

    2) How do financial asset prices affect the real economy?
    – Indirectly. When people feel their retirement is safe, they spend more.

    3) Do big fiscal deficits damage the economy?
    – Yes. Indirectly, (again,) but yes.

    4) What does quantitative easing actually do?
    – Changes the supply curve for money.

    5) How much leverage is too much?
    – Anything over 1. If you borrow $100K to buy a stock, or a house, or a car,
    it needs to be worth more than $100K. If you borrow $100K to pay for a vacation,
    you are over-leveraged. (It is a personal and ethical decision, unless you are a bank.)

    6) How to deleverage without damaging the economy?
    – De-leveraging can’t be controlled. The best you can do is keep the lights on and keep
    the music playing. There is no need to hand out money to keep people at the party.
    Some people will leave the party, but others will stick it out and wait for the next one.

    This is a quick back-of-the-envelope answer, but it seems that there are answers. We are just asking the wrong people. Instead of asking hedge fund managers and economics professors, we should be asking people with a track record of being correct.

    That is the problem with elections. Obama quotes people like Krugman, but then hires people like Geithner. Romney quotes people like Mankiw, but you just know he will hire people like Laffer.

  18. AHodge says:

    90% of the academic macro “economists” are worth less than zero
    that part of the profession is a complete do over
    hadas is part of the problem
    listening to these guys soul search without a shred of good direction 5 years later?

    there are academics with some grasp of banking derivatives debt cycle and how to do macro modeling
    there are dozens of good model based economists around
    it started in academia 50 years ago with folkslike larry klein otto eckstein martin feldstein ray Fair
    and even earlier in the 30s with the BEA and the formation of the complete GDP spending =income =putput accounts that all good big macro models are based on
    even though whose skills have been mostly run out of academia now
    there are also one variable estimator skills–calendar work on wall st
    like what unemployment # will be announced next
    mostly on wall st

    unfortunately you would not trust most of those worth a dam on system reform
    because of their self interest
    there are good academics who get banking rogoff calomiris a few others
    others like Shiller assorted minskyites , and followers of the investment cycle
    have a rich well developed cycle theory
    at least they accept there are observable cycles with drivers

    ray dalio is a genius on the credit cycle, all the minskyites offer something
    something is deeply wrong with the US university system
    that has allowed this anti science to perpetuate and keeps paying for it and stuffing students into it
    does virtually nothing to fix so far 5 years later
    its mostly a US problem–over half