Thursday, October 20, 2011

More on the Great Conceit

I ended a recent bit with a reference to what I call "the Great Conceit" of politicians--and bureaucrats, really--especially those in the Federal Government and on the left:
...they actually believe that the economy springs from and follows the government...To be fair, it's not a nefarious conceit, at all. They truly believe that they have it right, that they can predict and control the economy via government mandate.
Under this deeply flawed rubric, decisions of policy are made by, in conjuction with, or based on the advice of ...experts. As an ideology, this view has been called the technocracy movement in the past. The driving idea behind it is that things are too complicated, too diversified when it comes to government policies and laws for typical people to understand, thus decisions should be left in the hands of the experts in a given field. As a "for instance," consider climate change and the question of what--if anything--should be done about it. For the technocrat, the answer is simple: climate scientists should decide, end of discussion.

Part of the allure of this view is that those making decisions of policy would be doing so from the outside, as impartial observers. In theory, at least. Who can forget the story of the Harvard economist employed to help Russia, who used his position to make some quick cash? Of course, that could be held up as anomaly.

Regardless, when it comes to the economy, the experts in the field would be the top tier of economists, the men and women at the top of their game, the ones that know how the economy works and how to make the correct policy choices to improve it. Right?

In that regard, I give you two recent articles.

The first is an essay from Bill Frezza at Forbes. In it, he tackles the concepts of GDP--gross domestic product--and Unemployment, as metrics for assessing the economy. For the former:
The GDP is supposed to measure “the total market value of all final goods and services produced within a country in a given period.” Only an omniscient being could possibly know this number, even if it could be precisely defined. Subjectivity abounds. (Hey bud, is that hamburger patty final or is it destined to become a Big Mac?  
So instead we rely on extremely crude estimates subject to all sorts of biases, the accuracy of which cannot possibly be better than a 10-percent margin. Yet we obsesses over whether the GDP is growing or shrinking by one or two percent, demanding legislative action to fix it. Now.
For the latter:
The broadest measure [of unemployment], U-6, purports to count “the total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.” So, if you work part time because you prefer to golf every afternoon, you’re not unemployed. But if your daily golfing partner answers “yes” to the survey question inquiring whether he would prefer a full time job, he counts as unemployed. 
And just how do you total up the civilian labor force, which is defined as the sum of civilian employment and civilian unemployment? (Pay no attention to that circularity behind the curtain.) Be careful, though, not to count discouraged workers who want and are available for work, have looked for a job in the prior 12 months, but answer “no” to the survey question “are you currently looking for a job.” And if you are discouraged and over 65, are you retired, unemployed, or none of the above?
Understand? Less-than-certain metrics are used as if they were mathematically certain. And from such metrics, predictions on the consequences of policy changes are fashioned and proclaimed to be not only meaningful, but even certain. Witness the predictions that accompanied the first "Stimulus" Bill, wherein unemployment was supposed to remain at or below 8%, according to the experts that helped to fashion it. These experts ultimately admitted that they were wrong, but not because they weren't as smart as they thought they were, not because they didn't really know what they were talking about. Rather, they just were "off" on the forecast and the measure was still a success, still "saved millions of jobs."

There's no way to prove that conclusion wrong, no way to shake people of that belief, since there is no evidence for what would have happened without the Stimulus package, only the opinions of the experts--who get things wrong all of the time, obviously--in that regard. But we should take them at their word because...why? Because they say they're right. No other reason.

The second article is Ron Paul's op-ed in the WSJ. In it, Paul argues that the Federal Reserve is to blame for all of our economic woes, that it "has caused every single boom and bust that has occurred in this country since the bank's creation in 1913." Let's be clear about this: Paul is wrong. The Federal Reserve lacks the causal efficacy to do this. It can certainly contribute to a boom or a bust, since its policies do indeed create incentives, but it's wrong to overstate reality, here. Business cycles existed before the Fed and would exist without it. Paul--like most economists--fails to account for demographics and the natural flow of the economy in his analysis, along with the myriad of outside factors that impact the open, complex system that is our economy.

That said, he's absolutely on target when he says:
In many respects the governors of the Federal Reserve System and the members of the Federal Open Market Committee are like all other high-ranking powerful officials. Because they make decisions that profoundly affect the workings of the economy and because they have hundreds of bright economists working for them doing research and collecting data, they buy into the pretense of knowledge—the illusion that because they have all these resources at their fingertips they therefore have the ability to guide the economy as they see fit.
But Paul needs to proceed more cautiously. Austrian School economics--which he is so proudly a proponent of--doesn't provide its adherents with absolute predictive powers, either.

The lesson here is that--in case there were any doubts--economics is not a hard science, despite the claims of those with Nobel prizes and pages of complicated mathematical formulas that supposedly explain the economy. What it is--as Friedrich von Hayek (and Milton Friedman) understood all too well--is a amalgamation of individual actions that will sometimes result in less-than-prosperous moments. Ups and downs will abound, but the overall trend will be positive, if people are free to choose.

Cheers, all.

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