Anyone who has managed money for more than about a nanosecond recognizes that the idea that the markets are efficient is a myth, especially in times of crisis, real or perceived. Despite claims of scientific objectivity, economics is as prone to human frailty as anything else. As Seth Godin wrote this week: “Your first mistake might be assuming that people are rational.” For example, on my birthday in 2008, the S&P 500 lost over 9 percent, over a trillion dollars in value, on account of (per CNN) nothing more definitive than “recession talk.” That’s hardly evidence of rationality.
The consistently engaging 3 Quarks Daily has a new piece up this week on economics as religion rather than science. It’s hardly a novel concept, but the argument is an interesting one. However, author Ben Schreckinger missed or ignored some of the best available evidence, which I’ll get to in a bit of a roundabout way.
The above cartoon (from Abstruse Goose) riffs on a classic physics joke that goes something like this:
“Milk production at a dairy farm was low, so a farmer wrote to the local university to ask for help. A multidisciplinary team of professors was assembled, headed by a theoretical physicist, and two weeks of intensive on-site investigation took place. The scholars then returned to the university, notebooks crammed with data, where the task of writing the report was left to the team leader. Shortly thereafter the physicist returned to the farm, and advised the farmer, “I have the solution, but it only works in the case of spherical cows in a vacuum.”
Thus “spherical cow” has become a metaphor for highly (overly!) simplified scientific models of complex real life phenomena. Economists may be even worse offenders than theoretical physicists. As Hale Stewart wrote yesterday, “complex models that claim to model the entire US economy just aren’t worth the time of day no matter how good the algorithms backing it up. “That economists so frequently suffer from “physics envy” makes for a delightful bit of irony. Yet an even worse offense by economists is their all-too-frequent willingness to elevate a favored ideology ahead of the actual facts. People are routinely driven by their ideologies and their behavioral biases rather than facts and data, of course, but economists claim to be acting as scientists, with a delineated method designed to root out such things. If only. Continue reading