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:
- Ganging Up on Gold
So Far a Normal Correction In last week's update on the gold sector, we mentioned that there was a lot of negative sentiment detectable on an anecdotal basis. From a positioning perspective only the commitments of traders still appeared a bit stretched though, while from a technical perspective we felt that a pullback to the 200-day moving average in both gold and gold stocks shouldn't be regarded as anything but a normal - and in this case actually long overdue -...
- Gold Sector Correction – Where Do Things Stand?
Sentiment and Positioning When we last discussed the gold sector correction (which had only just begun at the time), we mentioned we would update sentiment and positioning data on occasion. For a while, not much changed in these indicators, but as one would expect, last week's sharp sell-off did in fact move the needle a bit. Gold - just as nice to look at as it always is, but slightly cheaper since last week. Photo via The Times Of India The commitments of...
- Australian property bubble on a scale like no other
Australian property bubble on a scale like no other Yesterday Citi produced a new index which pinned the Australian property bubble at 16 year highs: Bubble trouble. Whether we label them bubbles, the Australian economy has experienced a series of developments that potentially could have the economy lurching from boom to bust and back. In recent years these have included: the record run up in commodity prices and subsequent correction; the associated...
- Prepare for the Unthinkable
Red Ink Growth and profits mask a variety of problems. They hide business inefficiencies and the money suck of corporate adminis-trivia. They also conceal unproductive staff. The final career leap But most of all growth and profits obscure the extreme value subtracting forces of bloated management teams. During good times it is unclear what these smug fellows do. During bad times it is lucidly clear that most of them ain’t worth a darn. When the...
- A Looming Banking Crisis – Is a Perfect Storm About to Hit?
Andy Duncan Interviews Claudio Grass Andy Duncan of FinLingo.com has interviewed our friend Claudio Grass, managing director of Global Gold in Switzerland. Below is a transcript excerpting the main parts of the first section of the interview on the problems in the European banking system and what measures might be taken if push were to come to shove. Andy Duncan of FinLingo.com (left) and Claudio Grass of Global Gold (right) Andy Duncan: How do you see the...
- Pope Francis: Traitor to Western Civilization
Disqualified There has been no greater advocate of mass Muslim migration into Europe than the purported head of the Catholic Church, Pope Francis. At a recent conference, he urged that “asylum seekers” be accepted, “through the acts of mercy that promote their integration into the European context and beyond.”* Before we let Antonius continue with his refreshingly politically incorrect disquisition, we want to remind readers of two previous articles that have...
- US Stock Market - a Spanking May be on its Way
Iffy Looking Charts The stock market has held up quite well this year in the face of numerous developments that are usually regarded as negative (from declining earnings, to the Brexit, to a US presidential election that leaves a lot to be desired, to put it mildly). Of course, the market is never driven by the news – it is exactly the other way around. It is the market that actually writes the news. It may finally be time for a spanking though. Time for some old-fashioned...
- Doomed to Failure
Larded Up and Larded Over We’ve been waiting for the U.S. economy to reach escape velocity for the last six years. What we mean is we’ve been waiting for the economy to finally become self-stimulating and no longer require monetary or fiscal stimulus to keep it from stalling out. Unfortunately, this may not be possible the way things are going. As Milton Jones once revealed: “A month before he died, my grandfather covered his back in lard. After that, he went...
- Meet Your New Stimulus Allocation Czar
March Towards Midnight The march towards midnight is both stirring and foreboding. Like a death row inmate sitting down to savor his last meal, a grim excitement greets the reality of impending doom. Thoughts of imminent mortality haunt each bite. Tic-toc, tic-toc... As far as the economy’s concerned, there’s no stopping its march towards midnight. The witching hour’s rapidly approaching. We intend to savor each moment and make the best of...
- Are the Deep State’s Drones Coming for You?
What’s Aleppo? Look out kid Don’t matter what you did Walk on your tip toes Don’t try "No Doz" Better stay away from those That carry around a fire hose Keep a clean nose Watch the plain clothes You don’t need a weather man To know which way the wind blows – “Subterranean Homesick Blues,” Bob Dylan The entrance to Baghdad's “Green Zone”. Photo credit: Karim Kadim / AP DELRAY BEACH, Florida – Biggest foreign policy blunder...
- Interview with Doug Casey
Natalie Vein of BFI speaks with Doug Casey Our friend Natalie Vein recently had the opportunity to conduct an extensive interview with Doug Casey for BFI, the parent company of Global Gold. Based on his decades-long experience in investing and his many travels, he shares his views on the state of the world economy, his outlook on critical political developments in the US and in Europe, as well as his investment insights and his approach to gold, as part of a viable strategy for...
- Donald is Right – The System is Rigged
Scams and Flimflams BALTIMORE – For weeks, the top news headlines have been about politics. And politics has been all about the Republican Party candidate for president of the United States, Donald Trump. Two very different elections... The Establishment, the media, and most right-thinking people look around and sniff the air. Something stinks. And the smell, they say, is coming from that skunk, Trump. Meanwhile, Hillary, all greased up with expensive...