If you have been following our blog, you’ll know that we have a few less-than-complimentary things to say about “economic science”. Our first post on this was Let’s Rescind The Nobel Prize For Economics, which tells you where we’re coming from.
Now we’ve come across Nassim Nicholas Taleb, a financial scholar and former securities trader, and his book The Black Swan: The Impact of the Highly Improbable. The Black Swan refers to a rare event. Taleb argues that economists’ current financial risk models are completely inadequate for dealing with the world’s interconnected economy in case a black swan comes along.
In an op-ed piece for FT.com, Taleb notes that the “Nobel Prize for Economics” is actually mislabeled. It was started and is funded by the Swedish central bank, and is officially the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”. But it’s not one of the awards Alfred Nobel originally created. Those Swedish bankers are a clever bunch.
Taleb also has a few choice things to say about the “science” of economics, like:
- Modern portfolio management “has the empirical and scientific validity of astrology”
- The environment in financial economics is “reminiscent of medieval medicine”
- “The (Nobel economics) prize is … an insult to science”
Gee, what do you suppose he really thinks? You can find out more at Nassim Nicholas Taleb’ home page, which is aptly named fooledbyrandomness.com.
You may have heard the news that economists are declaring that “the recession is over”. Hmm … doesn’t feel like it, does it?
Technically, meaning in the economists’ definition, a recession is a least two consecutive quarters of decline in real Gross Domestic Product (GDP). This is also known as “negative growth”, although an increase is never called “positive shrinkage”, but that’s another story. Thereafter, as soon as a quarter comes along with GDP growth at or above 0%, the recession is declared to be over. In Canada, that happened in the third quarter of 2009, when GDP growth was 0.3%. That’s not a whole lot, but it’s a positive number nevertheless.
The trouble here is that real GDP growth in Canada over the last 10 years averaged about 3.1%. The Q3 2009 gain of a mere 0.3% is positive, but still way below average. If you’re used to 3.1%, 0.3% just doesn’t cut it.
What’s worse is that it’s difficult to see when things will get back to normal, namely, something like the good old average that we’re used to. For one thing, all those government economic stimulus and bailout programs won’t be around in 2010. Governments have also run up big deficits because of those programs, which taxpayers will eventually have to pay for. Plus, unemployment remains high, so there’s fewer income earners to foot the bill.
So here’s a proposition for economists. Instead of saying “the recession is over” when GDP just limps into positive territory, change the decision point to when GDP growth returns to the 10 year average, or even gets within 50% of the 10 year average for that matter. This is a much more realistic way of describing what’s going on. It would be good for your PR, especially after having so utterly missed calling the recession in the first place.
You may have noticed that the economy has gone to hell in a handbasket, in double time. Unemployment is way up, prospects are way down, and the news seems to get worse every day. And it’s not just here, it’s all over the world.
So the question is: why didn’t the professional economists of the day see this train wreck coming? They are highly educated, well trained, and have access to teams of analysts, captains of industry, and leaders of government. They’re the ones who are supposed to be looking after these things for us. And what are they doing about it? And how can we the people ever trust them again? Perhaps the sad truth is that our modern day economists are really no better than the shamans, witch doctors, and snake oil salesmen of the past. Scary thought there. In any event, it seems clear that economists have very seriously dropped the ball on this one, and it’s going to cost us all plenty.
Economics is also called “the dismal science”. As it turns out, even that might be putting it generously. We have to ask if it’s a “science” at all, of any description, after so completely and utterly missing the mark.
Here then is a proposal: let’s rescind the Nobel Prize for economics. Just drop it, cut it out, throw it away. The main reason for this is on straight academic grounds, namely, that we can’t be sure that economics really does the job, let alone actually prove that it promotes the betterment of humankind. Secondly, let’s mete out some punishment to the experts who are supposed to watch over matters economic but failed so miserably.
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