The new voodoo economics
Some of my best friends are economists, but let’s face it: Economics is truly a dismal science, a daily grind of big media news and micro bits of incremental data, endless speculations, forecasts, analyses, grand theories, monumental ideological battles and shortterm market forecasts, all signifying nothing, or almost nothing.
As recently as last month, the following news story appeared. “The Canadian dollar is expected to dip in the short term but stabilize in 12 months, a Reuters poll showed.” Bearish bets on the dollar were at a new high, the story said, with some forecasters expecting the dollar to trail down to 73 or even 71 U. S. cents within a month or two.
This week, in defiance of the June economic consensus, the Canadian dollar traded at 80 cents. The explanations for this surprise turn in the loonie and its implications are a complex conceptual house of mirrors. It goes something like this: Economists at the International Monetary Fund produced a new forecast Monday that downgraded U.S. growth and set Canada’s GDP growth rate as the fastest among G7 nations amid speculation oil prices might rise and interest rates are going up, even though inflation is flat but manufacturing seems to be picking up, and even with lower U. S. growth Canada could still do well even if rates go up to cool inflation that may or may not be happening and will likely not happen all that much if the dollar stays at 80 cents and helps lower Canadian prices for imports and slows demand for Canadian exports.
No wonder a recent com- mentary by a U. S. academic called economics The New Astrology. Alan Jay Levinovitz, an assistant professor of philosophy and religion at James Madison University in Virginia, said economists wangled their way to power and prestige by building castles around mathematics. “By fetishizing mathematical models, economists turned economics into a highly paid pseudoscience,” says Levinovitz.
Economists are among the highest-profile and best-remunerated social science professionals, despite their dismal track record at predictions, long and short term. Levinovitz cites a typical example similar to the Reuters June survey on the Canadian dollar. “In April, 2014, a survey of 67 economists yielded a 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.”
By now almost everybody knows forecasts manufactured by economists wielding computer models and mathematics are not dependable. The consensus of economists in 2006 failed to predict the 2008 financial crisis. The record of economic forecasting is a real world history of “mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy.” Levinovitz cites World Bank Chief Economist Paul Romer’s complaints about the growth of “mathiness” in economics.
More than economic forecasting is at stake. What Levinovitz calls the pseudoscience of math- driven economics is a companion to all manner of economic theorizing that shapes policies. The ideological flexibility of economic theory, coupled with its math culture, generates endless rationales for government interventions, taxation levels, directives and regulation.
Here, briefly, are three recent examples of economics at work as a generator of state economic activism:
❚ The Google/Amazon/ Facebook monopoly scares, described on this page recently by Kevin Libin, are the product of warped economic theorizing accompanied by fear mongering.
Jonathan Taplin, author of a new book called Move Fast and Break Things: How Facebook, Google and Amazon Cornered Culture and Undermined Democracy, plays to such fears. He portrays the three tech firms as giant monopolists that will inevitably move in on the whole economy — unless they are stopped.
The evidence is thin, and the theory thinner. Taplin, in a recent article, cites Amazon’s control of 65 per cent of the online book market. But online sales are only part of the book business. Recent data are sketchy, but as of 2015 Amazon had less than 20 per cent of the overall book market. It may have grown since, but it is not con- trolling the industry.
Amazon — and Google and Facebook — are classic innovators. The fastest to properly serve a market with products and services wins temporary monopoly power, but such power does not last. Classical economist Joseph Schumpeter (who popularized the concept of creative destruction in economics) wrote that “Every successful corner may spell monopoly for the moment.” The question is not when Amazon will take over the world, but how soon competition will take down Amazon.
❚ Artificial Intelligence: Economic fear mongering surrounds AI. Robots, we are warned, will kill millions of jobs and create a generation of unemployables who must now be protected against the threat. But the economic alarms are likely false. Jerry Kaplan, an adjunct professor at Stanford University, discounts such fears. Kaplan, the author of Artificial Intelligence: What Everyone Needs to Know, said in a recent commentary that “if history is a guide, this remarkable technology won’t spell the end of work.” Instead, AI will change work habits and patterns and improve living standards “in the familiar capitalist cycle of creation and destruction.”
❚ Innovation and inequality: A recent paper from Ontario’s Institute for Competitiveness and Prosperity hailed government attempts to boost innovation, but warned that recent research “has established a link between increased innovation and higher inequality.” It called for redistribution of wealth from innovators, although the link between innovation and inequality turns out to be a 2016 paper filled with partial causality and positive associations based on a lot of what Paul Romer would call “mathiness.”
ECONOMISTS WANGLED THEIR WAY TO POWER AND PRESTIGE BY BUILDING CASTLES AROUND MATHEMATICS.