Economic Stimulus: Part 1 – Economists & Witch Doctors

I am not an economist. I am also not a witch doctor. The two professions are roughly equal in usefulness. Witch doctors predict, diagnose, and treat human illness with approximately the same success economists predict, diagnose, and treat national and global economies. They are as successful as the local weatherman predicting a thunderstorm over your home for 2:00 PM six weeks from next Monday.

Macro-economics is Voodoo economics to resurrect a phrase from the 1980’s. The economics that matter are the incentives, costs, benefits, and decisions taken by individual and corporate actors. Government is just another corporate actor. Its decisions influence the incentives, costs, benefits, and decisions taken by other individual and corporate actors.

Government policies potentially affect more people than those of other actors because government is by far the largest corporate actor in the economy. But economists pretend they know what will happen as a result of government policies despite their record of being wrong 100% of the time.

They don’t know what the unemployment rate will be next month. Why do you suppose economists every month anxiously await the government published numbers? Why are they always surprised that the result is worst than or better than expected?

They don’t know what inflation will be next month.

Markets swing when almost any economic statistic is published because whatever the actual number is – it is different from what was expected. And oh, by the way, the “actual” number that was reported yesterday morning will be “revised” upward – or downward –retroactively in three months time. The current recession was officially announced last fall, in September 2008 as I recall. It was then announced that the recession began in December 2007; a surprise and a retroactive correction of the data.

Why does anyone believe professional economists? For the same reason that the tribe believes the witch doctor – they don’t know any better. The witch doctor looks really competent in his headdress, made-up face, leggings, and sheep skin cloak. He looks like he really knows what he is doing as he dances around the sick bed chanting rhyming incantations. The tribesmen don’t know those incantations. They don’t know those dances. They don’t own a sheep skin cloak.

And we don’t understand those macro-economic formulae. We don’t even understand the words uttered by professional economists, But they sure sound like they know what they are talking about. Universities even gave them all sheep skin PHD diplomas. Some of them even won Nobel Prizes. They KNOW more than we do.

For some reason – the tribesmen don’t know why – the sick person gets well, or doesn’t, whether the witch doctor is there or not. And for some reason - we don’t know why – the economists are always wrong. The world seems never to work according to their models – any of their models. Regardless of which of the many conflicting economic models you consult they are always wrong.

So is economics worthless? Not completely. If you use common sense and concentrate at the micro level where real people are making real decisions about their own real lives then you can get some insights into reality. Perhaps, if you are very careful and through, you can aggregate some of the real decisions and infer a few general principles to guide public policy but no more than that.

Warren Buffet recently said, “Beware of geeks bearing formulas.” His quip is insightful and universally applicable. All academic disciplines trend toward ever more complex mathematics in their attempt to explain data. Before any mathematical model can be relied upon for decision-making it must be rigorously tested by reality and by smell.

Correlation does not equal causation or even connection.

Links to Other Topics in the Special Report: Economic Stimulus