A reminder that economics and accountancy are not the same thing

Too much of the debate about economics - particularly macroeconomics - is nothing of the sort. I've described it as 'national accounts arithmetic' - a form of accountancy rather than the application, assessment and testing of economic theory.

Here's Don Boudreax quoting Fritz Machlup from back in 1964:

Definitely “out,” relegated to the scrap heap, is the notion that there is such a thing as “the” balance of payments. Even if full and accurate information were available about each and every transaction, “the” balance would always be an arbitrary number. There are many ways of entering the many items into the various accounts, of organizing the accounts, of interpreting the resulting figures; and there is no way of arranging the data so that they can tell a true story of the causal interrelations.

This doesn't stop people doing just what Fritz rails against. Indeed some economists and most pundits routinely confuse accountancy with economics. But as Don points out:

Most people who fret over, say, the U.S. trade deficit don’t know what it is – and far too many of the few who do know what it is treat the conventional manner in which various economic transactions are recorded in international accounts as possessing an economic significance that they simply do not possess.

The thing is that, if we didn't spend millions gathering incomplete data, loading it into inaccurate models of the economy and claiming the resulting answer is 'truth', then the economy would poddle along just fine. What all this modelling, the act of national accountancy, is perpetuate the lie that government can "run the economy". This is the worst sort of lie - the lie of those taking on the mantle of gods, hubris.


But then, as Longfellow said - "those whom the gods wish to destroy, they first make mad."
....

The Econocracy (and the hubris of economics)

I suspect the writers have a book to plug but the thrust of their argument is pretty sound - and needs to be said:

Secondly, by implying that those who voted leave did so based on emotion and identity, it denies the possibility that Leave voters did so based on different economic logic or arguments. In short it represents the idea that if Leave voters had based their decision on economics they would have come to the same conclusion experts did which. This belief precludes the possibility of legitimate political debate about economic issues and reinforces econocracy.

From here, the academic discipline of economics and our economic institutions have two choices. Either they frame Leave voters as emotional and irrational and thus carry on with the status quo of econocracy: continuing to lock people out of economic discussion. Or they can take seriously the ways in which econocracy undermines democracy and fails to give people a voice to express their economic grievances.

This is set in the context of Brexit but isn't actually about that vote. Rather it's a recognition that economics - and especially macroeconomic modelling and forecasting - suffers from hubris. As I wrote a while back:

Every now and then – more by luck than through skill and knowledge – one or other set of economists gets something right. For a moment it appears that a particular combination of lever-pulling and knot-tying is the way to run the economy. The leaders of the team receive great prizes, backs are slapped and the Kings and Princes grant the machine-minders money. And all the other teams, for a short while, shuffle into line by using the specified combination of levers and knots.

All this is just a combination of hubris and sympathetic magic. We witness the combining of the false belief that the economy can be “managed” with the misplaced view that because when we pulled lever seven last Wednesday and the ‘right’ result ensued, this will happen every time we pull lever seven. The truth, of course, is that the pulling of lever seven and that ‘right’ result coincided because of mere happenstance.

....

Hubris and sympathetic magic - the essence of macroeconomics

The model is broken. So therefore we have to understand how the (broken) model really works and then everything will be fine. In essence this is the nature of the current debate about the economy – no-one really understands how the thing works and so, as we usually do when faced with something large and inexplicable, we behave like the blind men and the elephant.

And so these men of Indostan
Disputed loud and long,
Each in his own opinion
Exceeding stiff and strong,
Though each was partly in the right,
And all were in the wrong!

So it is with macroeconomics. Different sets of economists stand over their models of the economy – each one more Heath Robinson than the next – and argue that the results tickering out from the machine tell us the right things to do. Raise interest rates here, increase money supply there says one set of machine-minders.

Nooo! We hear another crew scream – more taxes, public investment and perhaps a little dose of inflation. That will do the job. All the while, over the wall the third crew say their combination of levers and pulleys provides the only proven and correct system of economic management. And so on along the line from Central Bank to International Body, from think tank to accountancy firm and from college to university – each set of overlookers, underlookers and sagger-maker’s bottom knockers proclaims that their results are proof of how we can make the economy work better.

Every now and then – more by luck than through skill and knowledge – one or other set of economists gets something right. For a moment it appears that a particular combination of lever-pulling and knot-tying is the way to run the economy. The leaders of the team receive great prizes, backs are slapped and the Kings and Princes grant the machine-minders money. And all the other teams, for a short while, shuffle into line by using the specified combination of levers and knots.

All this is just a combination of hubris and sympathetic magic. We witness the combining of the false belief that the economy can be “managed” with the misplaced view that because when we pulled lever seven last Wednesday and the ‘right’ result ensued, this will happen every time we pull lever seven. The truth, of course, is that the pulling of lever seven and that ‘right’ result coincided because of mere happenstance.

There is an old shopkeeper saying – ‘look after the pennies and the pounds will look after themselves’. It is the very antithesis of all this self-confident macroeconomic legerdemain. Rather than trying to design a great unifying theory of the economy (one of those Heath Robinson machines), we might be better looking at the simple process by which value is created. This has nothing to do with money, with central banks or with government but everything to do with providing other people with benefits.

No, not the benefits that are cash entitlements paid by government but the benefits that us advertising folk talk about. You know, the ‘sizzle not the sausage’. We don’t buy things just because they are things, we want them because of what they do for us – feed us, clothe us, shelter us, entertain us, please us.  There are no macroeconomic policy levers here just people adding value by offering others benefits and in doing so giving themselves the means to secure the value – the benefits – they want.

All those economic model minders, all those predictors of the economy, all those lever pullers seem oblivious to this simple idea of value. They have become obsessed with money and the meaning of money, convinced that if only the correct dragon’s teeth are sown takes the economy will thrive and value will spring fully armed from out the ground. It seems to me that these people are the inheritors of those priests and wizards who call on the gods and magic to ensure that the sun rose in the morning and the crops grew in the spring.

The economists and policymongers inhabit grand temples, are granted the ear of kings and princes and are looked on in awe by lesser folk. But their ideas contain only a little more truth or hope of future goodness than did those of the old priest who said the corn must be planted on a full moon or that the rains will come if the right dance was danced.

....

Hubris, "Big Data" and the new totalitarianism

****

As you know, Vince-Wayne Mitchell debunked 'Big Data' ages ago when he showed how data-mining big data sets revealed the value of horoscopes as a targeting guide. But we're still expected to believe that the ever more sophisticated manipulation of parge data sets with an ever more bewildering array of clever software tools is a good thing.

More worryingly some people believe their own hype:

“This is the first time in human history that we have the ability to see enough about ourselves that we can hope to actually build social systems that work qualitatively better than the systems we've always had,” says Pentland.  “That’s a remarkable change.  It’s like the phase transition that happened when writing was developed or when education became ubiquitous, or perhaps when people began being tied together via the Internet.” 

Read that carefully folk. What he's saying is that these ever-so-clever computers will, through the magic of poking at  "Big Data" reveal how society should be organised. And we can "build social systems" that are better! I don't know about you but this is both hubris and also extremely scary. Just look at what Pentland concludes:

To be able to see the details of variations in the market and the beginnings of political revolutions, to predict them, and even control them, is definitely a case of Promethean fire. . . We’re going to reinvent what it means to have a human society.

A new totalitarianism is being born. We should worry.

....

In which an ex-central banker inadvertently explains what's wrong...

****

John Gieve, opining in the Financial Times, manages to capture what's wrong in his headline:

Who is in charge of the British economy?

This is a revealing question since it assumes that Mr Gieve and his ilk were - indeed are - somehow "in charge" of the economy. Think for a second what we mean by "the economy" and the sheer hubris of this man's belief becomes apparent. The British economy consists of the choices made by nearly seventy million people and millions of business. It's the sales made by the corner shop, the decision we make about this year's holidays or whether to go to B&Q or IKEA.

Yet this ex-central banker, undaunted by the scorching of his feathers as he flies ever closer to the sun, says stuff like this:
 

...the UK is now pursuing three macroeconomic objectives – steady growth, low inflation, and a stable supply of credit – with three sets of policy instruments. In the long term, the goals are compatible. But in the medium term there may be trade-offs. A new framework should explain how and by whom those trade-offs will be made and how the three sets of policy tools will be combined to best effect.

Impressive stuff I'm sure you'll agree. But it's wrong and not just because it's barely comprehensible. It's wrong because only a deranged idiot would think he (or a claque of him and his pals) can run the economy. It is this outlook that is causing all the damage - this stupid belief that there are a set of levers in the Bank of England that if pulled in the correct order will usher in an era of growth, prosperity and prizes for all.

All the rest of us going about our lives buying, selling, sleeping, eating and dreaming, we didn't cause the problem. It was caused by people like John Gieve who, despite all the evidence, still believe they know better. They don't know better and no one is in charge of the economy (unless you're in North Korea).

....

The Storm

The storm swept in from the North, cloud boiling in the sky, the dark band of lashing rain visible as it soaked the hills below. The wind, at first just a cold squall,  built up  - all howling and moaning - until its strength broke branches, raised the grit from the track and blew slates from the sheep pen.

The two men stood on the crest - one short, one tall. Boots firmly placed in the mud of a soil bank.

"We can control this storm," said the taller man, "it need not damage us, we have the tools."

The shorter man pulled his coat a little more tightly around him, raised an eyebrow and shrugged.

"We can," repeated the taller man, "we can divert the winds, capture the rain and guide the storm to benefit our lives. Great scholars have shown that this is so - we cannot waver from this path."

The shorter man smiled to himself and turned to face the storm.

"These powers to direct the wind, to catch the rain and to calm the storm," he mused, "did they not make the storm worse when last we tried to use them?"

The tall man snapped back; "that was 80 years ago! We have learned from the mistakes made then - we can turn this storm away."

The small man raised his hands, "if you are so sure then let it be - but might it be better to let the storm pass and repair the damage it does than risk it doing more damage because we intervened?"

The storm swept in the the North. The spells of control were cast.

And the wind ripped slates from the farm roofs, livestock were killed by falling walls and the floods swept through the town. People's lives were ruined and they turned to the two men accusing them of failing.

"It would have been worse if we'd done nothing," came the response from the tall man.

The small man stamped his feet to keep his feet warm, rubbed his hands together. And spoke:

"Did you really think men could stop the storm? We rage at the storm, throwing spells and curses its way because then we're seen to do something. Nothing changes. The storm still comes, the damage is still done. But we clever fools persuade ourselves - and you - that our actions will help."

"We are wrong. We cannot control the storm."

....

The Force of Nature - a meditation on hubris

We think it can be controlled, directed, bent to our purposes. We believe we are above it - better, stronger, in control, responsible. We blindly - gleefully even - lay claim to being responsible for all of nature's ills. It must be man we cry!

Yea, even when disaster strikes, we still want the crisis to be of man not of nature. We have turned our backs on the force of nature, waved away the truth that we are but scurvy ants scurrying on the surface of a small planet in a small solar system - a place governed by nature's power not the power of man.

Sometimes nature reminds us - in the most terrible, terrifying of ways - of her power. She says to mankind - I am in charge not you. You are nothing.

But we don't listen choosing instead to find reasons in the actions of men to explain the majesty of nature. Instead of recognising the sovereignty of nature, we look instead for man-made disaster.

Our breath is taken away when nature visits us with terror - we cannot explain, we cannot comprehend, we just have to cope. And to cope we must make our own, self-built disaster from the ruins of nature's act.

That, my friends, is hubris.

....

A thought about nature...

Yesterday, my son got on a plane headed for Christchurch, New Zealand - to do a university research project and follow that with a tour round the country doing those dangerous sports parents would rather not know about.

And between setting off from Heathrow and arriving for a refuelling stop in LA, Christchuch suffered a massive earthquake - its second such occurance in six months. And this time at least 65 people were killed alongside destroyed buildings and burst pipes.

After a couple of hours parental panic, it struck me that yet again nature reminds us of how little we control the planet. Reminds us of our hubris. And reminds us of our capacity to respond to these events with compassion, support and love.

....