Breaking the Guild of Macroeconomists

Economic Entertainment

In an entertaining piece Economics is Hard. Don't Let Bloggers Tell You Otherwise Kartik Athreya of the Fed in Richmond has suggested that financial bloggers are a mentally incontinent bunch, pathologically incapable of stopping themselves from opining on financial matters on which they actually offer no insight. Now, leaving aside the question of whether we want our professional economists to be entertaining, this opens up the question of whether untrained commentators can provide any useful insight into matters financial.

The answer, speaking as an economically untrained scribbler, is almost certainly no: the vast majority of financial blogging opinion on any matter of prediction is worthless and that which isn't is indistinguishable from the rest. Unfortunately this is a conclusion of limited usefulness, because most trained economists can't actually offer any useful predictions either and following Athreya's prescription would almost certain deny us any opportunity for useful advances in the world of macroeconomics.

Dissonance in Economics

Athreya's article has, unsurprisingly, attracted a lot of commentary from financial bloggers, most of whom wonder whether the Fed should be worrying more about managing the current crisis and rather less about harassing them. However, he has a point: mainly you'd be better off throwing chicken entrails at a blindfolded soothsayer than taking the word of anyone making predictions about macroeconomics. As the article puts it:

"The real issue is that there is an extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover there is a substantial likelihood that it will offer something incoherent and misleading".

With which we would agree. In fact this site is riddled with articles saying so in a less direct fashion, on the sound psychological grounds that you'll never convince a believer head-on, but you might succeed in getting them to think for themselves if you manage to create enough cognitive dissonance.

Problematic Theories

However, Athreya goes on to argue that the only people who can hope to provide genuine macroeconomic insight are those students subject to proper training, armed with carefully designed models and subservient to the careful control of scientific peer review: aka macroeconomists. Given that the Richmond Fed itself, based on this article, doesn’t know whether the Efficient Market Hypothesis is a scientific fact, an irrefutable - and therefore unscientific - premise or simply a hopeful approximation to something that looks likes reality this seems to be an optimistic conclusion.

Indeed, as we’ve shown that most of the "irrefutable" foundations of economics are shaky - everything from the law of supply and demand, through the Law of One Price to the mathematical models that the discipline prides itself on, this implies something akin to faith rather than scientific rationality. Even behavioral finance, the application of psychology to economics, is not without criticism.

Guilded Economists

Part of the problem is that the whole idea that economics is a scientific subject as currently practiced is a total nonsense. You don’t get to be a science simply by mimicking the processes of science - if that worked then cargo cults would regularly manage to coax planes from the clouds. What economists actually practice, once you delve beneath the surface, doesn’t look much like science at all. In fact, if it looks like anything it resembles the form and function of a medieval guild.

The guilds were, in effect, a closed-shop - they had the ability to stop others practicing the craft in question, although often provided high quality services and an apprenticeship system that guaranteed the creation of future masters. For real crafts, like goldsmiths, this at least ensured a high standard of workmanship, but where the state of human knowledge was weak it simply led to a group of highly-trained know-nothings monopolising the profession.

Medical Dogma

When the guild in question was something we might today regard as within the purview of science this created real problems. Medicine, for instance, was guided by the insights of the Ancient Greek Galen, whose prognostications on anatomy were taken as literal dogma. As most physicians refused to go near a human body for religious reasons the fact that he was often completely wrong was entirely missed by them, even as they prevented people with different ideas from entering their guilds and practicing medicine.

As the Renaissance flowered, however, more and more people began to notice that the guild's medics weren't particularly good at anything useful, like actually curing people. Others began to question the profession's dogmas: Andreas Vesalius had the bright idea of doing dissection himself and discovered that Galen was wrong - so the guilds ignored him. The semi-mystical, half-mad Paracelcus introduced the twin concepts of observation and experimentation into medical treatment, doing away with leaches and introducing medicines. The guilds ignored him, too. Well, actually they didn't really ignore him. They accused him of heresy instead.

Breaking the Guild

The point was, of course, that the entire superstructure of the medical profession upon which the medieval guilds rested was wrong. Outside the guilds there were a whirlwind of alternative views, the majority of which could, at best, be characterised as "crackpot". However, these views proliferated for one very good reason: the treatments of the establishment didn't work.

A world in which the trained professionals don’t provide solutions which solve real problems will inevitably lead to people seeking alternative approaches. And this is right, because somewhere in the vortex of mad, crazy and utterly preposterous ideas will be a few that have real value and add to the sum of human understanding. Of course, a guild of highly trained professionals will turn its face from such amateur speculations, but a better approach might be to understand why this is happening and to try and identify any genuinely useful ideas.

Bridging the Gap

The gap between science and macroeconomics can be deduced from Athreya’s comments on the difference in the public response to the financial crash of 2008 and the East Asian Tsunami and the Haitian earthquake:

"Neither of these events was met by (i) widespread condemnation of seismology, the organized scientific endeavor most closely "responsible" for our understanding of these event or (ii) a flurry of auto-didacts rushing to offer their own diagnosis for what had happened, and advice for how to avoid the next big one."

It's an interesting analogy, because seismology is based on plate tectonics, the mechanism behind continental drift, which was the brainchild of Alfred Wegener, who was basically dismissed as a fool by serried ranks of trained, peer-reviewed scientists armed with their own preconceived models of geological equilibrium. In fact it took fifty years before Wegener, posthumously, got the recognition he deserved when science finally caught up.

Of course, no one expects seismologists to be able to prevent earthquakes. These are Black Swan events: unpredictable in timing and consequence, yet predictable in terms of general knowledge that they're inevitable. And because this is what the science claims society understands generally that the deaths in South East Asia and Haiti were failures of economics and politics, not science.

Deluded Modellers

Economists, meanwhile, don't help themselves by developing models which make it more likely that financial crises will occur without even bothering to point out their flaws. Many see themselves as scientists engaged in a process of research with all the paraphernalia of a scientific profession, detailed training, peer reviews and all. Yet the vast majority of economic ideas and models fail under the feedback mechanisms of human psychology. This is not a good place from which to be lecturing maven amateur macroeconomists.

It's an unpalatable fact for economists who've spent their lives serving their apprenticeship in the Guild of Macroeconomics that they're simply worshipping a false god. Macroeconomics is not a science. Indeed, as it stands, it's hardly even a social science. If history is any guide the only way the guild will fall is when it's broken by outside forces and while the vast majority of macroeconomic mavens are simply spouting hot air it's more likely that insight will come from somewhere within this group than from the highly trained economists following the guidance of the dogma of their masters.


Related articles: Black Swans, Tsunamis and Cardiac Arrests, The Special Theory of Behavioral Finance, Lies, Damned Lies and Economists