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President 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.
Article originally published on
Mises.org here
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