Meika commented on the previous post here about the ability of economists to predict the economic crisis – ‘he who pays the piper calls the tune’. Does this really apply to economists? Well, yes it does and here’s a little anecdotal evidence… This March the economist Peter Schiff gave a speech entitled ‘Why the economic meltdown should have surprised no-one‘. He began by asking the audience if anyone actually was surprised, then asking if anyone thought the US government’s solutions were going to help. Both questions were met with friendly laughter from the audience. Schiff then said:
I guess there’s really no reason for me to speak here – I don’t know that I’m going to tell anybody anything that they don’t know.
Nevertheless, the talk went on for another hour or so. Schiff was speaking to the annual Austrian scholars conference of the Ludwig Von Mises Institute. This is a great case of preaching to the converted. Of course, every team likes to play in front of a home crowd. To give the audience exactly what it wants must be the best feeling in the world. I saw this a while back when I walked in on a less than scintillating talk by a certain new age author. The audience – standing room only in a new age book shop – lapped it up, apparently not noticing it was boring. You need a story to tell, but you also need an audience that wants to hear it.
Paying the piper suggests there’s a tune to be heard – and there certainly is. Schiff’s investment company has as its motto: ‘because there’s always a bull market somewhere TM’. It would be problematic indeed if one day Schiff decided there actually wasn’t. Right now it’s of benefit to the wise if the US economy stagflates: they can party on and on because gold’s going stratospheric! (I might trademark that last phrase).
Economists need to go on and on telling these stories to audiences of willing and paying listeners because ultimately, stories is all they are, and all we need. Econometric economist Ed Leamer was impressed when he heard someone say ‘humans are pattern-seeking, storytelling animals’ ( it was probably king of the sceptics, Michael Shermer), because that had always been his view of his own profession.
Economists are taught that it is the function of Economic Science to test the truthfulness of the theories, when the real goal is to identify the theory’s domain of usefulness. (Theories are neither true not false. They are sometimes helpful and sometimes misleading.) When Economists “successfully” reject a theory, other Economists go on about the business of trying to understand what makes the economy tick with little [or] no interest in the formal rejection. Once indoctrinated in graduate school it takes a long time for new Ph.D.s in Economics to learn that it is only stories and patterns that we do. Until they make that discovery they waste a lot of time on “theory and evidence”, admiring their t-values.
Leamer, Edward E. 2009 Macroeconomic Patterns and Stories: A Guide for MBAs Berlin: Springer-Verlag.
Here’s the original quotation. Note that Shermer and Leamer diverge on whether or not the patterns have to be ‘true’.
Humans are pattern-seeking, storytelling animals. We look for and find patterns in our world and in our lives, then weave narratives around those patterns to bring them to life and give them meaning. Such is the stuff of which myth, religion, history, and science are made. Sometimes the patterns we find represent reality — DNA as the basis of heredity or the fossil record as the history of life. But sometimes the patters are imposed by our minds rather than discovered by them — the face on Mars (actually an eroded mountain) or the Virgin Mary’s image on the side of a glass building in Clearwater, Florida (really an oil stain from a palm tree, since removed to enable the faithful to better view their icon). The rub lies in distinguishing which patterns are true and which are false, and the essential tension (as Thomas Kuhn called it) pits skepticism against credulity as we try to decide which patterns should be rejected and which should be embraced.
Michael Shermer, 2000 Review of Non-Zero by Robert Wright
So who’s right? Do the stories economists tell have to be true? And do we really have ways of deciding this?
Read more on the financial crisis.