Throwing Down the Gauntlet
Nicholas Taleb is making waves again – and in a good way, as we will explain below. It began with an altercation between him and a few mainstream economists on Twitter (what is apparently called a 'Twitter brawl'). Here is an post from Taleb's Facebook page that he put up in the wake of said brawl – Taleb announced that he will go with a fine comb through the papers of one Karl Whelan, one of the countless 'monetary economists' who are writing papers for the Fed and are thereby providing justifications for its meddling with the markets. Here is his post:
“We Can Start Exposing Economists:
I just finished a very rough draft of (~100 pages).
PART I provides a mathematical toolkit to detect anything that is bullshit in economic modeling (particularly macroeconomics), figure out which papers are flawed from a scientific standpoint, etc. When I mean flawed, it is on the basis that the math used impresses nonmathematicians but does not support the stated policy conclusions.
So I start by putting one Karl Whelan "scientific" work under severe mathematical scrutiny. I select him to start as he worked with central banks, the perfect profile of
the person supported by the taxpayer against the taxpayer's own interests. I also had a disgraceful encounter with him and his macro peers on twitter. Mr Whelan's papers can be found here: http://ideas.repec.org/e/pwh23.html We can progressively expose mathematized social science that way, as I am refining the text, adding words and examples.”
Then Taleb followed that up with a tweet that makes abundantly clear what he sees as his mission:
Moral courage doesn't reside in "doing good" so much as in fighting the bad. My moral obligation is to destroy econ estblshmnt, and I will.
— Nassim N. Taleb (@nntaleb)
Mr. Taleb of course needs to continually market himself, since he is a book author and economic and financial pundit on television and various financial media. Courting controversy is a good way of staying in the limelight. In this case though, we think he has picked an excellent fight. We will explain below why that is so and why we wish him success.
Maverick economist Nicholas Taleb – challenging the establishment
(Photo via Bloomberg)
Modern-Day Macro-Economists – Who Needs Them?
We are certainly not against people trying to advance economic science. We are also vehemently disagreeing with those who assert that 'there are no economic laws' or that economics is somehow not a science. What these people fail to grasp is that economics – a branch of the larger science of praxeology (the science of human action) – is a social science, not a natural science. It therefore requires a methodological approach that is different from that employed in the natural sciences. It therefore is also different in terms of what we can and what we cannot know. We will return to this point further below.
What once used to be a field in which men of towering intellect tried to establish, discuss and lay down the tenets of what was widely considered an entirely new science as recently as the late 19th century, has become a field in which a great many rather mediocre intellectuals are mainly serving the interests of the State. The classical economists such as Ricardo, for all their flaws, did humanity an invaluable service by showing that there are in fact economic laws and that a ruler cannot suspend them, just as he cannot suspend gravity. The era during which the classical economists dominated the new science was one that saw the implementation of a fairly enlightened economic policy – as close to 'laissez faire' as we ever got – which led to an enormous spurt in the growth of real wealth and prosperity between the late 19th and early 20th century. We owe a huge debt to this era of capital accumulation and the men who made it possible – without it, the world may be a lot poorer than it actually is.
Economic science advanced in great strides with the independent discovery of the principle of marginal utility by Carl Menger, William Stanley Jevons and Leon Walras in the 1870s. The Austrian subjectivist school which Carl Menger founded, advanced value theory, price theory, capital theory and monetary theory enormously. However, as many of the most important works were originally published in German language and not translated into English in a timely fashion, it never gained the influence in the English-speaking world it would actually have deserved (ironically, today the Austrian School enjoys far greater support and popularity in the US than in the German-speaking world).
One 'problem' is of course that the Austrians advocate the adoption of an unhampered free market economy. This is not based on 'right wing ideology', but on a value-free assessment of economic laws. It is a 'problem' only because there would be fairly little, if anything, to do for macro-economists in a truly free market economy. Only exceptional men of great intellect could hope to get enough support to be able to pursue their scientific interest in economics as their main job. In today's era of unbridled statism, a great mass of people are by contrast employed by the State in one form or another, and their output is therefore, as Hans-Hermann Hoppe points out, as a rule both mediocre and “viciously statist”. To :
“Intellectuals are now typically public employees, even if they work for nominally private institutions or foundations. Almost completely protected from the vagaries of consumer demand ("tenured"), their number has dramatically increased and their compensation is on average far above their genuine market value. At the same time the quality of their intellectual output has constantly fallen.
What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today's intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the state, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.”
To put some numbers on this by way of an example: The Fed's board of governors in Washington employed a staff of 220 economists and the 12 regional banks employed another 171 as of 2004 (the most recent number that could be ascertained). The Fed doles out several hundred million dollars every year in research grants and for statistics gathering, so that at any given time, an estimated 500 economists are working on the Fed's behalf in addition to its staff. Some 1,600 economists across the US had listed "domestic monetary and financial theory and institutions" as either their primary (968) or secondary field (717) of study as of 1992. The most influential editors of prominent academic journals are as a rule on the Fed's payroll and provide a 'gate-keeper' function as to what does and what doesn't get published. An article that describes in detail how the economics profession was 'bought by the Fed' can be found here.
This is why most economists, who otherwise largely agree that monopolies and price controls are a bad thing, somehow all seem to support the idea that an exception to this rule should be made in the case of money. They simply won't bite the hand that feeds them so generously.
Of course, if an economist rejects interventionism and supports the establishment of an unhampered free market, then there is obviously no role for him as an 'economic planner' and 'adviser to policymakers' (except for advising them to stay the hell out of the economy and stop meddling with it).
Economics and Mathematics
As Ludwig von Mises pointed out, there is no statement in economic science that can be made only by mathematical means and cannot be stated quite clearly in verbal form as well. In his early years, Mises' criticism of mathematical economists was still confined to such fairly innocuous and polite statements. His position on the topic hardened later, and he eventually called the use of mathematics in economic science utterly 'barren' and a 'vicious method'. We have often pointed out that the econometric approach of gathering statistics, torturing them with mathematical formulas and then deriving hypotheses from them that form the basis for 'economic predictions' and 'policy advice' is as erroneous as it is dangerous (these predictions have a record of constant abysmal failure, and in light of the economic and market upheaval of recent years it should be obvious to all that the same holds for the policy advice given to the 'planners').
For one thing, as Oskar Morgenstern and many others have pointed out, the measurement of the data themselves is fraught with insuperable difficulties. In fact, in most cases there is actually nothing to 'measure', at least not anything that it would be sensible to measure. Economics is not physics, even though modern-day economists are beset by 'physics envy' and are trying to make it more akin to physics by couching their theories in mathematical gobbledegook. That may make many otherwise quite nonsensical papers appropriately incomprehensible to the layman, something that is probably held to imbue them with the necessary 'scientific gloss', but it represents mainly a case of 'garbage in, garbage out'.
Economics deals with purposeful, goal-oriented human action – with human beings who possess volition. It analyzes the means to achieve these goals. It is not a science studying inanimate objects. One would think that it should therefore be rather obvious that there must be a clearly delimited methodological difference between economic theory and the natural sciences. As Murray Rothbard writes on this in the foreword to Ludwig von Mises' work 'Theory and History':
“At the heart of Mises and praxeology is the concept with which he appropriately begins Theory and History, methodological dualism, the crucial insight that human beings must be considered and analyzed in a way and with a methodology that differs
radically from the analysis of stones, planets, atoms, or molecules.
Why? Because, quite simply, it is the essence of human beings that they act, that they
have goals and purposes, and that they try to achieve those goals. Stones, atoms, planets, have no goals or preferences; hence, they do not choose among alternative courses of action. Atoms and planets move, or are moved; they cannot choose, select paths of action, or change their minds. Men and women can and do.
Therefore, atoms and stones can be investigated, their courses charted, and their paths plotted and predicted, at least in principle, to the minutest quantitative detail. People cannot; every day, people learn, adopt new values and goals, and change their
minds; people cannot be slotted and predicted as can objects without minds or without the capacity to learn and choose.”
As Rothbard explains further:
“Mises saw that students of human action are at once in better and in worse, and certainly in different, shape from students of natural science. The physical scientist looks at homogenous bits of events, and gropes his way toward finding and testing explanatory or causal theories for those empirical events. But in human history, we, as human beings ourselves, are in a position to know the cause of events already; namely, the primordial fact that human beings have goals and purposes and act to attain them. And this fact is known not tentatively and hesitantly, but absolutely and apodictically.”
“Is the fact of human purposive action "verifiable"? Is it "empirical"? Yes, but certainly not in the precise, or quantitative way that the imitators of physics are used to. The empiricism is broad and qualitative, stemming from the essence of human experience; it has nothing to do with statistics or historical events.
Furthermore, it is dependent on the fact that we are all human beings and can therefore use this knowledge to apply it to others of the same species. Still less is the axiom of purposive action "falsifiable." It is so evident, once mentioned and considered, that it clearly forms the very marrow of our experience in the world.”
This is in a nutshell why economic statistics and mathematics should have no place in economic science. It is of course different in the field of business economics and entrepreneurial activity, where economic calculation, even though it lacks precision, is an indispensable tool.
Ludwig von Mises, the father of 'praxeology'; his thoughts on the methodological and epistemological problems of economics remain a bone of contention – however, he was and remains right.
(Photo via Wikimedia Commons)
Nicholas Taleb is himself a trained mathematician and statistician, so he may well tackle the papers he intends to critically examine by employing his knowledge in these fields (at least that is what it sounds like in his Facebook announcement). That is certainly a legitimate approach, on account of the above mentioned 'garbage in, garbage out' phenomenon. Most of the models used to support specific policy conclusions are constructed in a manner that ensures that they will spit out the desired results. They simply employ certain assumptions as 'given' and beyond debate, when those assumptions can by no means be considered indisputable facts (as a good example for this 'GIGO' phenomenon, consider this critique of the infamous Blinder-Zandi 'stimulus study').
Presumably it is this aspect that Taleb will focus his critique on. However, it should be noted that in spite of his employment of 'mathematical tool kits', Taleb is mainly known for his 'black swan' theory, which states that in financial markets, events that are considered extremely rare from a purely statistical standpoint (so called 'fat tails'), are in fact anything but rare.
In our opinion this is so because in the course of boom-bust cycles there is always a threshold, a 'tipping point' if you will, where the boom turns into bust. It is the point at which a critical mass of investors realizes that the boom is no longer sustainable. By acting in concert on this recognition, they tend to produce rather outsized market moves, such as for instance the stock market crash of 1929.
Anyway, even if Taleb is not an 'Austrian' – at least he has to our knowledge never declared himself to be one – his assessment and analysis of the flaws of modern policy-making and central economic planning as well as the fractionally reserved banking system is quite often spot on. We therefore wish him success in tackling the handmaidens of statism and their pseudo-scientific output. Anyone criticizing the producers of fig leaves for interventionism deserves our support.
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
6 Responses to “Nicholas Taleb Against Establishment Economists”
Most read in the last 20 days:
- Gold Price Skyrockets in India after Currency Ban – Part III
When Money Dies In part-I of the dispatch we talked about what happened during the first two days after Indian Prime Minister, Narendra Modi banned Rs 500 and Rs 1000 banknotes, comprising of 88% of the monetary value of cash in circulation. In part-II, we talked about the scenes, chaos, desperation, and massive loss of productive capacity that this ban had led to over the next few days. Indian prime minister Narendra Modi – another finger-wagger, as can be seen in this...
- Gold Price Skyrockets in India after Currency Ban – Part II
Chaos in the Wake of the Ban Here is a link to Part 1, about what happened in the first two days after India's government made Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes illegal. They can now only be converted to Rs 100 (~$1.50) or lower denomination notes, at bank branches or post offices. Banks were closed the first day after the decision. What follows is the crux of what has happened over the subsequent four days. India's prime minister Nahendra Modi, author of the...
- Gold Price Skyrockets in India after Currency Ban – Part IV
A Market Gripped by Fear The Indian Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes would no longer be legal tender. Linked are Part-I, Part-II and Part-III updates on the rapidly encroaching police state. The economic and social mess that Modi has created is unprecedented. It will go down in history as an epitome of naivety and arrogance due to Modi’s self-centered desire to increase tax-collection at any cost. Indian jewelry...
- A Note on Gold and India – What is Driving the Gold Price?
Hidden Motives It is well-known that India's government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption. Obviously, this very bad Indian has way too much cash. Just look at him, he looks suspicious! Photo via thenewsminute.com In fact, as our friend Jayant Bhandari has pointed out, fresh avenues for corruption ...
- India's Currency Debacle – An Interview with Jayant Bhandari
A Major Crisis Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of “stamping out corruption” (see Gold Price Skyrockets In India after Currency Ban Part 1 and Part 2 for the details). Banned 500 rupee banknotes The problem is inter alia that the sudden ban of these banknotes has hit the Indian economy quite hard, given that 97% of all transactions in the country are cash-based. Not only that, it has...
- Will the Swamp Swallow Trump?
Permanently Skewed TRUMP HOTEL, New York – Trump’s rambling army – professionals, amateurs, camp followers, and profiteers – is marching south, down the I-95 corridor. There, on the banks of the Potomac, it will fight its next big battle. Lieutenants in Trump's army: Bannon, Flynn & Sessions Photo credit: Drew Angerer / AFP Here at the Diary, we do not like to get involved in politics. But this is a special time in the history of our planet – a...
- There Are Two Types of Credit — One of Them Leads to Booms and Busts
Stumped by the Bust In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs. What has caused the bust? The modern-day economic orthodoxy continues to be unable to provide...
- All Aboard! Trump’s Express Train to the Future
Free Money! BALTIMORE – Last week, the Dow punched up above 19,000 – a new all-time record. And on Monday, the Dow, the S&P 500, the Nasdaq, and the small-cap Russell 2000 each hit new all-time highs. The last time that happened was on the last day of December 1999. Ironically, two events that were almost universally expected to trigger large stock market declines were followed by quite rapid and strong gains. Would the market have fallen if Hillary Clinton had won...
- Attaining Self-Destruct Velocity
Bad Monday Some Monday mornings are better than others. Others are worse than some. For one Amazon employee, this past Monday morning was particularly bad. No doubt, the poor fellow would have been better off he’d called in sick to work. Such a simple decision would have saved him from extreme agony. But, unfortunately, he showed up at Amazon’s Seattle headquarters and put on a public and painful display of madness. Good-bye cruel world! On this our planet,...
- Gold Bull Market Remains Intact – Long Term Fundamentals Outweigh Short Term Market Gyrations
A Strong First Half of the Year, Followed by Another Retreat In early 2016 gold had a big bull run. The precious metal rose close to 25% this year, pushed higher in a summer rally that peaked on July 10th. Gold experienced a bumpy ride over the remainder of the summer though, as investors became increasingly concerned about a potential rate hike by the Federal Reserve. Uncertainty returned to gold market and has intensified further since then. Initially, gold rallied sharply...
- Too Early for “Inflation Bets”?
The Trump Trade After 35 years of waiting... so many false signals... so often deceived... so often disappointed... bond bears gathered on rooftops as though awaiting the Second Coming. Many times, investors have said to themselves, “This is it! This is the end of the Great Bull Market in Bonds!” The long bond's long cycle – red rectangles indicate when the post 1980 bull market was held to be “over” or “over for sure” or “100% over”, etc. We have...
- About that Economic Inequality
Illusory Riches, Obvious Impoverishment I address this essay to two groups. One group is those among the liberty movement, who believe that there’s nothing wrong with inequality. These are often Objectivists, who unknowingly defend a regime that artificially suppresses working people. And suddenly, you feel much lighter... The other group is those among the Left who still call themselves liberals. They say they don’t like inequality, but nevertheless...