larus
Well-known member
Interesting article from the Allister Heath - Telegraph (non political). Maybe some should consider this when quoting economic predictions from various bodies etc.
http://www.telegraph.co.uk/business...-not-the-economists-for-the-effects-of-the-b/
One of the greatest problems for business, investors and anybody seeking to understand the world is distinguishing real, relevant events from useless, misleading background noise. This is especially true in an age of costless digital publishing and social media.
Anybody who manages to do this successfully more often than not gains a dramatic advantage: it’s a version of what hedge funders call alpha – the ability to generate a return in excess of a benchmark without having to take on additional risk. Some investors possess alpha-qualities – but so do some economists and political analysts.
The Brexit debate is one area that is replete with worthless noise – in the jargon favoured of economists, the noise-to-signal ratio is appalling. This is not a partisan point: all sides are at it. Most pronouncements and warnings are little better than spam, but it is essential for those trying to decipher trends to wade through it all.
What value should we place on the CBI’s Industrial Trends survey, which was good (but is quite volatile)? Or on Lloyd’s of London warning that Brexit could hurt it (even though the market has traded with Europe for centuries, derives 11pc of its gross premia from the EU and would lose just 4pc of revenues in a worst-case scenario, less than the 4.7pc year-on-year increase in premiums as reported in converted sterling recorded in 2015)? Or that UK car production is at a 14-year high and booming? Or that 5,500 UK companies use financial services passports to sell their wares to the EU?
As it turns out, I think all of these facts are worthy of consideration; all help paint a picture of the health of the economy and the challenges and trade-offs that our Brexit negotiators will need to address.
Paradoxically, the biggest source of white noise are economists. Much of modern macroeconomics is bunkum, which means that its findings and predictions contribute negatively to the sum total of human knowledge. Paul Romer, one of the world’s preeminent macroeconomists and a professor at the Stern School of Business at New York University, has made his own inflammatory contribution to this debate, and many are now being forced to address this critical problem.
In The Trouble with Macroeconomics, a working paper, he argues: “For more than three decades, macroeconomics has gone backwards.” The emperor is stark naked. He claims that “post-real macroeconomics illustrate a general failure mode of a scientific field that relies on mathematical theory.”
It’s devastating stuff, but Romer is right. Academic macroeconomic theory is broken – but so are the models used by central banks and the spreadsheet forecasting in the City. It’s an intellectual catastrophe. Thousands of intelligent, well-meaning economists are at best contributing noise to the debate and at worst leading governments, companies and investors down the wrong paths.
Romer’s attack on macroeconomics , if anything, doesn’t go far enough.
Progress had indeed been made by the 1970s, in particular as a result of Milton Friedman and Anna J Schwartz’s Monetary History of the United States, a book that Romer agreed was a scientific triumph. But the economic consensus – the majority view – keeps calling the big macroeconomic questions wrong. It failed to see the boom of the 1920s, it didn’t predict the Great Depression (those such as Ludwig von Mises or FA Hayek, who did, were ignored), it messed up disastrously during the 1930s on everything from the gold standard to the reaction to the Depression, before catching the pernicious Keynesian virus.
It wrongly fell in love with central planning in the Second World War and in the 1960s Paul Samuelson’s best-selling economic textbooks were happily predicting that Soviet per capita income would soon catch up with America.
On the greatest question ever – is capitalism or communism best – the economic establishment got it wrong. Not content with that, the consensus failed to see the stagflation of the 1970s coming (it was deemed impossible by simplistic Keynesians); 364 economists campaigned against Margaret Thatcher’s macroeconomic policies of the early 1980s (most still don’t get it); they didn’t spot the bubble of the 1980s or the subsequent housing crash and they backed the disastrous European Exchange Rate mechanism.
It’s almost a case of take your pick – choose a disastrous policy and you can be sure that most economists backed it. In a poll in 1979, 65 per cent of economists said joining the euro would have been in the UK’s interest; that number rose to 73 per cent of among those specialising in the economics of the EU and of monetary union. Then they all missed the financial crisis, and they missed the recovery.
More recently, the economic consensus (as against a few brilliant exceptions) also failed to predict everything from the collapse of inflation, the UK jobs boom to the productivity slowdown, not forgetting that many saw a non-existent double or even triple dip recession coming a few years ago.
A month or two ago, the consensus was predicting immediate Armageddon, a Lehman-style freezing of markets, and in many cases a recession or numerous negative quarters of growth if we voted Brexit. It’s a woeful, abysmal record, one for which the very concept of “rewards for failure” was invented.
So yes, Romer is right – and if anything, he doesn’t go far enough. So those seeking out alpha – when it comes to Brexit or anything else – need to tread carefully. They must weigh up the evidence, the claims and counter-claims on all issues. But the fact that 90pc of economic forecasters agree with something should be no more relevant than the latest phase of the moon.
http://www.telegraph.co.uk/business...-not-the-economists-for-the-effects-of-the-b/
One of the greatest problems for business, investors and anybody seeking to understand the world is distinguishing real, relevant events from useless, misleading background noise. This is especially true in an age of costless digital publishing and social media.
Anybody who manages to do this successfully more often than not gains a dramatic advantage: it’s a version of what hedge funders call alpha – the ability to generate a return in excess of a benchmark without having to take on additional risk. Some investors possess alpha-qualities – but so do some economists and political analysts.
The Brexit debate is one area that is replete with worthless noise – in the jargon favoured of economists, the noise-to-signal ratio is appalling. This is not a partisan point: all sides are at it. Most pronouncements and warnings are little better than spam, but it is essential for those trying to decipher trends to wade through it all.
What value should we place on the CBI’s Industrial Trends survey, which was good (but is quite volatile)? Or on Lloyd’s of London warning that Brexit could hurt it (even though the market has traded with Europe for centuries, derives 11pc of its gross premia from the EU and would lose just 4pc of revenues in a worst-case scenario, less than the 4.7pc year-on-year increase in premiums as reported in converted sterling recorded in 2015)? Or that UK car production is at a 14-year high and booming? Or that 5,500 UK companies use financial services passports to sell their wares to the EU?
As it turns out, I think all of these facts are worthy of consideration; all help paint a picture of the health of the economy and the challenges and trade-offs that our Brexit negotiators will need to address.
Paradoxically, the biggest source of white noise are economists. Much of modern macroeconomics is bunkum, which means that its findings and predictions contribute negatively to the sum total of human knowledge. Paul Romer, one of the world’s preeminent macroeconomists and a professor at the Stern School of Business at New York University, has made his own inflammatory contribution to this debate, and many are now being forced to address this critical problem.
In The Trouble with Macroeconomics, a working paper, he argues: “For more than three decades, macroeconomics has gone backwards.” The emperor is stark naked. He claims that “post-real macroeconomics illustrate a general failure mode of a scientific field that relies on mathematical theory.”
It’s devastating stuff, but Romer is right. Academic macroeconomic theory is broken – but so are the models used by central banks and the spreadsheet forecasting in the City. It’s an intellectual catastrophe. Thousands of intelligent, well-meaning economists are at best contributing noise to the debate and at worst leading governments, companies and investors down the wrong paths.
Romer’s attack on macroeconomics , if anything, doesn’t go far enough.
Progress had indeed been made by the 1970s, in particular as a result of Milton Friedman and Anna J Schwartz’s Monetary History of the United States, a book that Romer agreed was a scientific triumph. But the economic consensus – the majority view – keeps calling the big macroeconomic questions wrong. It failed to see the boom of the 1920s, it didn’t predict the Great Depression (those such as Ludwig von Mises or FA Hayek, who did, were ignored), it messed up disastrously during the 1930s on everything from the gold standard to the reaction to the Depression, before catching the pernicious Keynesian virus.
It wrongly fell in love with central planning in the Second World War and in the 1960s Paul Samuelson’s best-selling economic textbooks were happily predicting that Soviet per capita income would soon catch up with America.
On the greatest question ever – is capitalism or communism best – the economic establishment got it wrong. Not content with that, the consensus failed to see the stagflation of the 1970s coming (it was deemed impossible by simplistic Keynesians); 364 economists campaigned against Margaret Thatcher’s macroeconomic policies of the early 1980s (most still don’t get it); they didn’t spot the bubble of the 1980s or the subsequent housing crash and they backed the disastrous European Exchange Rate mechanism.
It’s almost a case of take your pick – choose a disastrous policy and you can be sure that most economists backed it. In a poll in 1979, 65 per cent of economists said joining the euro would have been in the UK’s interest; that number rose to 73 per cent of among those specialising in the economics of the EU and of monetary union. Then they all missed the financial crisis, and they missed the recovery.
More recently, the economic consensus (as against a few brilliant exceptions) also failed to predict everything from the collapse of inflation, the UK jobs boom to the productivity slowdown, not forgetting that many saw a non-existent double or even triple dip recession coming a few years ago.
A month or two ago, the consensus was predicting immediate Armageddon, a Lehman-style freezing of markets, and in many cases a recession or numerous negative quarters of growth if we voted Brexit. It’s a woeful, abysmal record, one for which the very concept of “rewards for failure” was invented.
So yes, Romer is right – and if anything, he doesn’t go far enough. So those seeking out alpha – when it comes to Brexit or anything else – need to tread carefully. They must weigh up the evidence, the claims and counter-claims on all issues. But the fact that 90pc of economic forecasters agree with something should be no more relevant than the latest phase of the moon.
