Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Folly of Economic Forecasting

Economics / Economic Theory Oct 11, 2011 - 01:22 PM GMT

By: Douglas_French

Economics

Best Financial Markets Analysis ArticlePresident Obama's mostly forgotten jobs package would reportedly create 1.9 million new jobs, a one-percentage-point drop in the unemployment rate, and goose GDP by two percentage points. That was the prediction of Mark Zandi, chief economist of Moody's Analytics. You see, he has a model. He did a simulation, and presto — 1.9 million jobs!


Zandi practices what one of my undergraduate economics professors told our class: "Predict often. That way, when you occasionally get lucky, you can take credit for it."

But the Moody's man is on a cold streak. Zandi has predicted the bottom of the housing market every year since 2006. And QE after QE was supposed to right the good ship USS Economy.

Zandi and Alan Blinder figure the 2009 fiscal stimulus created 2.7 million jobs and added $460 billion to gross domestic product. Unemployment would be 11 percent today if the stimulus hadn't been passed and 16.5 percent if neither the fiscal stimulus nor the banks' rescue had been enacted, according to Zandi and Blinder. "It's pretty hard to deny that it had a measurable impact," Zandi said.

What must be hard for Zandi is deciding what numbers he will pull out of the air to make such preposterous statements.

But math is the modern economist's stock in trade. Anyone wanting to be a PhD economist must endure semester after semester of high-level math. The late Larry Sechrest wrote that at the University of Texas Arlington,

There were four semesters of econometrics and two semesters of mathematical economics. Moreover, virtually every class in the Ph.D. program required that the student write an econometrically based term paper.

An economics PhD student at North Carolina State posted on reddit economics the courses in math he or she took to prepare: three semesters of calculus and differential equations, linear algebra, upper and lower real analysis, topology, optimization theory, probability theory and statistics theory.

A student needs that entire math training to build robust models that will produce quality predictions similar to those produced by those at the top of the profession, like Mr. Zandi.

Math dominates the economics field, as Murray Rothbard explains,

because of the pervading epistemology of positivism. Positivism is essentially an interpretation of the methodology of physics ballooned into a general theory of knowledge for all fields.

Physics is believed to be a real science, Rothbard continues, while

the "social sciences" are backward because they cannot measure, predict exactly, etc. Therefore, they must adopt the method of physics in order to become successful. And one of the keystones of physics, of course, is the use of mathematics.

But now physics, which is good at predicting the movements of unmotivated particles, is itself being turned upside down.

Einstein's theory of relativity claims that nothing can match the speed of light — until a couple of weeks ago in an underground laboratory in Gran Sasso, Italy. Neutrinos fired 454 miles from a super collider just outside Geneva reached the lab 60 nanoseconds faster than light.

Charles Krauthammer writes that the Gran Sasso scientists immediately put out the call for others physicists to replicate the experiment:

This is not a couple of guys in a garage peddling cold fusion. This is no crank wheeling a perpetual motion machine into the patent office. These are the best researchers in the world using the finest measuring instruments, having subjected their data to the highest levels of scrutiny, including six months of cross-checking by 160 scientists from 11 countries.

Just imagine, if Einstein's relativity — a theory on which all of physics has been built for a century — is upended! Well, a long series of theoretical dominoes get tripped. Krauthammer mentions astronomy and cosmology. But, what happens to the whole mathematical edifice that the current economics profession rests on? How will the Mark Zandis of the world offer predictions with a straight face?

Incredibly, Rothbard foresaw the prospect of speedy neutrinos many years ago:

As much as we may progress in the knowledge of the laws of physics, our knowledge is never absolute, since the laws may always be revised by more general laws and through further empirical testing.

In economics, Rothbard explains, we know that human action is motivated, while the "behavior" of stones is not. "Therefore, we may build economics on the basis of axioms — such as the existence of human action and the logical implications of action — which are originally known as true."

While from these axioms, laws can be deduced as true, there are no "facts" in human action that can be tested. Rothbard explains that mathematics is useful in physics "because of the axioms themselves, and the laws deduced from them, are unknown and in fact meaningless."

While cause is known in economics — human action using means to achieve ends — cause in physics tends to, in Rothbard's words, be "fragile." He explains that positivists replace cause with mutual determination, with mathematical equations suited for depicting "a state of mutual determination of factors, rather than singly determined cause and effect relations."

To judge the value of mathematical economics one must assess the assumptions embedded into the myriad of equations that these mainstream prognosticators manipulate to produce their forecasts.

Invariably these assumptions "are few in number, simple, and wrong," writes Rothbard.

In his 1974 Nobel Prize acceptance speech, entitled "The Pretense of Knowledge," F.A. Hayek said that monetary and fiscal policies like those championed by Mr. Zandi are the product of what he called the "scientistic attitude," but in fact is unscientific in that it "involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed."

Mises wrote in Human Action, "There is no such thing as quantitative economics" and unlike the particles in physics lab, Hayek believed,

such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable.

So neutrinos or no neutrinos, the mathematical games economists play are just so much flapdoodle being dished out to an eager audience of those craving to know the future. The future is uncertain, except for knowing that government interventions, based on some economist's modeling, will make matters worse.

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives. Comment on the blog.

© 2011 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in