What’s an Economy? | Markets Are Dumb 1

I feel like markets and economics have been an underpinning of what I’ve been talking about for quite some time now. It’s been a troubling thing for me. There’s always a lot of certainty when these issues come up in political discussions, but usually almost nothing backing up that certainty. The conditions we’re looking at are always changing, and the theories that people gravitate to are some of the least proven imaginable. Economics has pretensions to being a science. But the variables are immense, and there’s really only one result.

We have one world economy, and its performance at any given time is the only thing that we have to point to, to see whether our theories are working. There is no control group. Most of the figures we rely on to measure what’s going on are little better than rough estimates, and the political consensus rarely lasts a decade. I have high hopes for the profession of economics. People are doing amazing work in the field, and the move onto the internet that our species is currently undergoing provides the possibility of real measurement (and Orwellian nightmares). I’m confident that the future is bright, but I think we all need a lot more humility in talking about the economy. Which is why I made today’s video, and why I’ll be adding to the series in the coming weeks…

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Video Transcript after the jump…

Hey There. Today I’d like to talk about economics. Specifically I’d like to talk about what the study of markets and the economy can do today, and what it can’t do. Everything in our daily life relies on the economy. It’s not just about where we buy the food we eat, the jobs we do, and the shelter we live in, the economy determines a whole bunch of other stuff too. Society, culture and politics all interact with the economy in ways we don’t fully understand. There are plenty of people who claim that they understand what’s going on though. They’re largely full of it.

From the business news channels to the professors at our most prestigious universities, to newspaper columnists, legislators and government bureaucrats, everybody’s got a theory. People make an extraordinary amount of money telling us what the economy is all about, with great confidence.

But honestly these people have no idea what’s going on. Nobody does. Least of all me. I spent a couple summers on Wall Street back around the turn of the century and it’s amazing. Brokers and analysts manage other people’s money, and they’re more familiar with the mechanics of things, but they don’t really understand anything either. There are a very few people at a few institutions who’ve managed to consistently beat the market, and make tons of money over the course of decades. I know some people who consistently win in Las Vegas too. There are plenty of hedge funds who fail, and the geniuses who get one market turn right, usually miss the next one. I’m not saying you shouldn’t invest in the stock market, you absolutely should, but when somebody tells you they know exactly what’s going to happen, I assure you they do not.

I’m not saying the study of economics is useless. Exactly the opposite in fact. There are thousands of researchers doing valuable work, and adding to our understanding of this most important of subjects. The problem is that we trust them too much. We tend to take a limited understanding of one economist’s theories and make it the conventional wisdom for a couple decades. Our policy makers tend leave out all the nuance and doubt in what economists like Adam Smith or John Maynard Keynes actually said. This inevitably leads to disaster, and sends everybody back to the drawing board.

People are also too reliant on the numbers we use to describe our economies. I’m guilty of this in my videos as well. Things like Gross Domestic Product, or consumer confidence, figures that can move markets in massive ways, are all just estimates. In 2014, the country of Nigeria famously re-did the way it calculated GDP, resulting in the figure almost doubling in a single year. More developed countries may have better estimates, but they’re still just estimates. Consumer confidence, one of the most important figures for the stock market, is based on phone surveys of a few thousand people.

I think the right model for where we’re at with economics right now is probably Medicine about 250 years ago. People were doing important work, and we knew a few things that worked really well. But most medical experts believed theories that now look ridiculous, and did more harm than good. The point I’m trying to make here isn’t that economics is bad or wrong, just that it’s very, very new, and we don’t really have any idea what we’re doing.

There’s an interesting problem here though. One thing we do know for sure about economies is that confidence is really important. If people think things are going well, things tend to go well. So maybe all those bullshitters on cable news perform a function. Next time we’re going to dive in on this issue of confidence, and take a look at what’s really behind the “Trump Bump” that the stock market has experienced since November 2016.