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We continue to not like economists
Last weekend, we began with saying “no one likes economists”. Please let us continue with this topic this week. There is nothing changed: we also continue to not like economists this week.
Let us begin with summarizing what we said last week: Nowadays, no one liked economist. That was for two reasons: First, they did not notify us about the emergence of the crisis. Second, they were somehow unable to tell us how and when we will overcome the crisis. Last week, we predominantly focused on the first reason and underlined one point. It read like this: “So,. .. did economists fail to foresee this crisis? No, they did not. Numerous economists from Roubini to Brad Setser, from Eichengreen to Kenneth Rogoff addressed several times the risks the US economy had. However, as Eichengreen also says nowadays, “those seeking to seize the opportunity of the day did not give credit to the analysis frameworks that minimized those risks.” Analyses pointing out risks were disregarded in the hullabaloo of the day. And if you remember last week’s column, this behavior was quite in line with the humankind behavior. As Daniel Kahnemann and Amos Tversky told us with the “disaster myopia” concept, humankind did not act much rationally and acted like no other disaster will emerge as moved farther away the last disaster. Almost a century has passed since 1930. But, look, it happened again. But we were quite sure that it would not happen again.
First, let us make a correction paying regard to the warning of Hasan Ersel. Daniel Kahnemann and Amos Tversky, whose studies can be slavered over, won the Nobel Prize in Economics in 2002. However, they are not economists but psychologists. If you like, we can mention about their studies and contributions to behavioral economists in another weekend. In fact, it can be quite beneficial considering the discussions about where the economy will head after the crisis.
As you see, up to this point, there is no reason to not like economists. They do their part and also address the risks the economic process contains. Furthermore, they publish articles focusing on these risks. However, even if they exaggerate those risks, no one cares if the economy is on track. I believe that you would not like to be a person that talks about aforethought risks when everything is on track. Well, neither do economists. After all, existing risks are considered at the “of course, if you go out today, a brick might fall onto your head and kill you” level. In fact, this problem is neither new nor limited with economics at all. Perhaps, a person who wants to be a successful analyst must also pay attention to the risk of the “challenge in swimming against the current”.
Perhaps the person to best understand this was our father John Maynard Keynes. His study “The Economic Consequences of Peace”, first edition of which was published in 1919, explains in the introduction part how “zeitgeist” draws a constraining framework for not only economic analysis but also all types of scientific analyses:
“The power to become habituated to his surroundings is a marked characteristic of mankind. Very few of us realise with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organisation by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.”
When saying “We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly.” in particular, the master seems to talk about how poor people bought houses by means of financial innovations and how everyone lives beyond their opportunities; right? Is not that where the present crisis emerge from? Now, can you please tell us, how much the risks contained in the economic course of the time come to forefront in such an environment? Therefore, the response to be given to the first question on top is obvious: Risks contained in the economic mechanism was timely addressed by economist; however, warnings about those risks were disregarded “as everyone was trying to seize opportunities”. People must like economists; they have fulfilled their part. This is the first point.
Now, let us skip to the second point. The second reason behind the dislike toward economists is that we do not hear a certain response from them about how and when will we overcome the trouble we are living in. We educate economists; but as you see, they are useless. Take, for instance, the current question: “Did or did not the trough of the global crisis passed?” issue. There are those saying “It passed” and those taking a second look at the figures and saying “I guess it did not pass”, including me. What is going on now? Why cannot we know this? Why cannot we give a certain answer? The reason is quite simple: Another father of the economists, Karl Marx, said “all that is solid melts into air, all that is holy is profaned” to define such transition periods. In such periods of deep overturns, the mechanism economist analysis change through and through. While all that is solid melts into air, main parameters on which your analysis is based start meaning nothing. Imperfections in the course of the model in your mind make it difficult to predict the future.
How does this happen? It happens like this: Economists, when monitoring the world, see the future based on the schemes they formed in mind looking at the past, the course of the past. This means that, when looking forward, you have a sort of a map. Nonetheless, if the world has changed, if the journey suddenly jumps on lands which are not mapped, pull it off if you can. If you are now passing by unmapped lands, it is useless to pretend that you know how to arrive at the destination. Having a map does not have a meaning anymore. You cannot predict what comes next. Therefore, what economists nowadays say about 2010 growth is in fact rumor. Why is that a rumor? The current ambiguity is not one onto which you can place a probability distribution. Beyond this moment, the path is covered with fog. What must be done now is to try to grope about what is under fog.
In this case, there is a 1-1 deuce considering whether or not liking economists. Indeed, it is harder for us then the past to estimate in advance what will happen tomorrow.
So, what will we do? Are all prospective determinations senseless? No, far from it! We will touch upon this later …
This commentary was published in Referans daily on 09.05.2009