Economists as Fortune Tellers

Economists as Fortune Tellers

“Behind every great fortune there is a crime.”

Honore de Balzac (1799-1850), French novelist.

Prof. Luis Garicano, Director of Research at the London School of Economics, was explaining to Queen Elizabeth on 05 November, 2008, the origins and effects of the current financial crisis, during her first visit to the world famous academic institution to open a new building, when the old queen asked the simple question:

“If these things are so large, how come everyone missed it? Why did nobody notice it?”

The baffled professor’s explanation is very revealing: “At this stage, someone was relying on somebody else and everyone thought they were doing the right thing.” The Queen, one of the richest people in the world, had lost 25% of the value of her blue chip stocks in the London Stock Market[1]. Around the European Union and the USA, hundreds of millions of ordinary citizens would lose their life savings, their homes or their jobs.

A rational public may then well ask: “If that is the state of your knowledge, why do we need economists to help national policy decisions, and even our private investment decisions?” It is not true that everyone was unaware of the impending crisis caused by an out of control unregulated Western financial system. Many US economists who were not in the mainstream had been warning that stock markets and speculation through derivatives had created a casino financial market resembling Las Vegas style gambling. They warned for two decades that the system was unsustainable and a crash was inevitable. But with top financiers in New York and London making personal fortunes of billions of dollars and buying governments in the West, the truth was the last thing politicians wanted to hear.

People paid $10,000 for a seat at one time to listen to the pontifications of Alan Greenspan, Chairman of the US Federal Reserve, revered for two decades as the wizard of economic development. By persuading governments under Presidents Ronald Reagan, Bill Clinton and George Bush that de-regulation of the financial markets would create an efficient system of resource allocation and at the same time creating immense amounts of new money for the financiers and bankers to speculate, he presided over a gigantic national Ponzi scheme that created a false prosperity for two decades. New borrowings and new money was created to pay interest on existing debts and spend lavishly for expensive military adventures around the world. When asked at a Congressional hearing why he did not anticipate the crash, he blithely replied: “If we had known then what we know now, we would have acted differently.”

Prof. Luis Garicano, in response to the Queen’s question, explained: “There are billions of people in the world making their own decisions so it is difficult to predict market movements.” That is the trouble with modern economics which is based hugely on complex mathematical formulae based on unverifiable assumptions. It makes the economists and academics seem very clever when they use complex software to work huge mathematical equations and arrive at certainties when a perceptive non-academic could use common sense to see a more realistic picture. In no branch of science would practitioners come to firm conclusions on the basis of unverifiable data. At least they would qualify the result with a caveat: “Conclusions subject to error because of unverified data inputs.” And these predictions are not dealing with private decisions: they involve policies governing the health of the national economy and the livelihoods and fortunes of hundreds of millions of citizens.

At a hearing of the Financial Crisis Inquiry Commission appointed by President Obama, on 07 April 2010, Alan Greenspan admitted making mistakes but defended himself saying “One cannot always be right. I was right 70% of the time, I was wrong 30%.” The Chairman, Phil Angelides, a former State Treasurer of California, shot back at him: “The Captain of the Titanic was 99% right and 1% wrong. It is the size of the mistake that matters, not the numbers.” The 70/30 formula has a historic background which Mr. Greenspan may not have been aware of. When Mao Zedong was asked about the many crimes of the Soviet dictator, Joseph Stalin, he defended him saying “Stalin was 70% good and 30% bad.” Now modern capitalist China defends Mao Zedong using the same 70/30 formula.

So what is the difference between mainstream Western economists and Gypsy fortune tellers? They both make a living by using mumbo-jumbo to please their clients by telling them what they want to hear.

Kenneth Abeywickrama

15 October, 2011.