Posted on 01/31/2009 8:39:58 AM PST by SeekAndFind
Edited on 01/31/2009 9:11:50 AM PST by Admin Moderator. [history]
In the early 1980
(Excerpt) Read more at realclearmarkets.com ...
***Galbraith and Friedman were two of the leading late twentieth century experts in macroeconomics -— the study of the national or global economy. They applied different macroeconomic theories to make their predictions. Both predictions were completely wrong, which indicates that the theories from which the predictions were made were also wrong.***
And the Austrian school predicted the Great Depression as well as the current housing crisis.
GREAT article. And I’ve had graduate level instruction in the “science.” In many respects its like the difference between weather forecasting (accurate within a narrow time range) and climate science (great looking backward, terrible looking forward [always misses the turns]).
Got a link to back that up? Not being obstreperous, since monetarism makes some sense to me, but you’ve made a pretty big claim.
Well, in the context of “controlled experiments” the world was divided into socialist-communist nations and capitalist-market economy nations. Guess what the data showed. That the left still pushes socialism-communism as the ‘best way’ is testimony to their lack of objective thinking and their willingness to put personal dogma ahead of reason, even if it hurts lots of people.
All of the liberals that I know do not believe in economics and think that the government can do any thing it wants without any negative consequences to the economy.
Of course, all the liberals that I know do not believe in logic, a cost/benefit analysis, or reality.
” They applied different macroeconomic theories to make their predictions. Both predictions were completely wrong, which indicates that the theories from which the predictions were made were also wrong””
That is a false statement. Just because they did not achieve the prediction they had planned, that does not put into question the theories they used. One does not relate to another.
A view of economics from that perception has many different aspects to consider and one theory builds upon another. Milton Friedman did not have flawed theories. He just chose the wrong ones to apply to some particular forecasting.
There is certainly a very predictive power to understanding economics, that can be as detailed as any science. I agree with that.
In the continuing fall from conservative grace that David Brooks is earning for himself, last night on Brooks & Shields, Jim Lehrer asked both men if the Wall Street crisis was a moral crisis — asking if Wall Street fund managers “should” take huge pay and bonuses if they are also taking a taxpayer bailout. While Shields, ordinarily the apologist for the Democrats, said that of course it is a moral issue, Brooks, ostensibly the apologist for conservatives, said that it costs that much in New York to get talent, and if the big guns on Wall Street don’t get mega-millions in compensation, they will go elsewhere, such as to another country, to get it — they would not even temporarily accept the $400,000 limit proposed as an appropriate cap while using public funds.
There is something very sick about such thinking. No loyalty to America nor respect for wage-earning taxpayers whatsoever. I’m disgusted and horrified.
Huge storms of inflation will be present on Obama’s watch.
Ludwig von Mises (one of the greatest and foremost Austrian economists) predicted the Great Depression because of the credit expansion of the 20’s, which according to him and the Austrian theory of the business cycle, always leads to an inevitable credit contraction. The fact that credit expands by non market forces (i.e. a central bank) means that there will be a credit contraction which will bring about a recession which in essence corrects the malinvestments made during the boom phase. The theory is more complicated than that, so I would look it up (or I could give you a more full definition).
Basically there was nothing special initially about the Depression because it was just an inevitable recession to Mises (it was government’s response that made it a depression and later “Great”). I don’t remember which sources I’ve read this from, but I’ve seen it from several sources before (through books and the internet), I’ve just never made a point of citing it. I’ll keep looking and mail you when I find some.
As for the housing boom (and now bust), Peter Schiff was predicting it with pretty good accuracy a few years back, most notably in his August 2006 exchange with Art Laffer (http://www.youtube.com/watch?v=4zZMLrgccCY). There were also some other modern Austrian economists on the website, mises.org who had been predicting this, but I’d have to dig through a lot of articles to find them. They have daily articles on that site (http://mises.org/articles.aspx) but I’m pretty sure you’d be able to find some stuff if you went through for a few minutes. I think they have a search feature on the site too.
Numerous financial websites have sprung up, with quite a bit of acrimonious back and forth about Peter Schiff, pro and con. If you want to advocate his positions, please also acknowledge that Schiff has lost a lot of money for a lot of people. Cherry picking the housing bust, or even concentrating on just the United States, creates a false portrayal of Schiff’s own self-touted “precience.”
There were many people, myself included (no “precient” economist, I), screaming about the irrationality of residential real estate prices during the bizarre runup. It was obvious to anyone who did not have skin in the game, who was paying attention. Fed attempts to “prick” the bubble were belated and heavyhanded, to the point of having to fully reverse course to the effective 0% rate we have today.
The problem was further exacerbated by prognosticators who actually seemed to be enjoying the carnage, and cheering it on, thereby magnifying and accelerating the decline. I include Schiff in this group. He stood to benefit from being “precient,” and rode that gravy train to the mistaken pre-eminence he has today.
So, imho, follow Schiff with a grain of salt, and to the peril of your portfolio.
I have masters’ degrees in both physics and business. It is my studied opinion that macroeconomics is more difficult to master than quantum mechanics. I admire anyone who is able to even think in any clear manner about all the factors involved in a macro system, and I bear no acrimony toward any who try, but fail to correctly predict future economics. I greatly admire Greenspan, Mises, and Friedman, especially, though it is now clear that Greenspan missed in his later actions for the Fed.
You are right: it is very much like “climate science” - and for much of the same reasons. The “models” simply can not model everything in a fine enough grid to be useful over important time horizons, and not all the factors are well enough understood for correct modeling. Some factors, though, are becoming much better understood with the study and insight of some of the greats.
Economics is, among other things, the study and prediction of the behavior of aggregates of people in defined domains of activity. If a theory can be made to produce a testable prediction, then that test will be a measure of the validity of the theory. If the theory fails to predict, then confidence in that theory is reduced. Sometimes a failure can be decisive and the theory discredited.
There is always going to be a significant error term in any finding or prediction, however, because all the relevant parameters are not known and all the data is not available. So no prediction is going to be precise. In that respect it is possible for a prediction to be "off" but not invalidating. This is in fact the norm for such disciplines and the means by which they are refined.
In the case at hand the "experts" were asked to make a specific prediction of a given data point two years out. For a variety of reasons this is a feeble test of a macro theory. It is like asking what the average temperature of the earth will be in 2012.
So far the "big guns" on Wall Street haven't been worth sh*t so who needs them. Let them go. Get some small guns for a tenth the price and do just as well, maybe better. David Brooks BTW has become an official finalist in my Flaming Anus of the Month competition.
I have an MBA myself. And the points you make in your second paragraph detail the argument for not getting the government involved in “fine tuning” the economy. My position is that the gov should do the right things (keep taxes and regulations limited) and then let the economy follow whatever cycle. Central banks make this tough, but it would appear they are necessary in the modern world. That said take a good look a money supply growth (I tend to follow M2, but there are other measures) and the source of price inflation is readily apparent. Here’s my question - how the heck do you (in a fiat money economy) keep the money supply in tune with productivity?
Thanks for the thoughtful reply.
No problem. I’m pretty sure the Austrian school is the only one that doesn’t blame the business cycle on some “inherent flaw” in capitalism.
The problem, in my opinion, is that people adjust and change their behavior for every change made in the economic, social, and political environment. Friedman’s guess made sense if you continued the trajectory of the previous years. However, people adjusted their behavior when changes arrived.
Gee, it makes you just beg for Hari Seldon to show up. LOL
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