7 Oct 2014

The (non)sense of economic mumbo jumbo

Anneloes R writes:*

Economists try to explain why ‘things’ (trends, peaks, troughs, crises, triumphs) that are related to the way we can make a living, happen, but most of the time this is nonsense.

Based on models, graphs and incredible data-analyses they claim to predict in the short and long run what will be a good investment, what can give high returns or whether governments should save or spend money. All in all a fairly intensive and impressive job, or so it seems...

What remains problematic, is the level of complexity involved and the consequential degree of uncertainty that epitomises ‘the economy’. We, citizens, are uncertain, businesses are uncertain, governments are uncertain, even Moody’s and Standard & Poor's are uncertain. This leaves us with a perfect constant, or perhaps increasing demand for economic mumbo jumbo. Accreditations, ratings and indices merely rearrange uncertainty but do not reduce it. Yet the business of talking mumbo jumbo about uncertainty is lucrative, hence the bonuses that have been awarded have been subjected to much criticism.

What economic consultants often forget to mention is that in economics uncertainty and risk are not the same. Risk presupposes a type of probability. I can, based on the five other times I could not find my keys in 10 minutes, fairly safely state that the next time I will be searching for a quarter of an hour again. Yet in economics there is no such reliance on past events or opportunity for controlled repetition. So the consultants who charge 100$ an hour are really only meeting demand for nonsense rather than 'risk assessment' or 'predicted returns'.

There is however one important benefit to economic mumbo jumbo: innovation. Any entrepreneur, no matter how well he did his research, takes a risk. In some way he or she has over bluffed investors that the project will be a success. It is here that trial and error are possible, against their better judgement and statistics entrepreneurs continue to talk nonsense till the day their plans succeed. It is thanks to this type of nonsense that very sensible plans receive a chance and new ideas can be realised.

Bottom Line: Economics equals chaos and chaos calls for mumbo jumbo which in some instances may lead to innovative, new developments.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

1 comment:

Robert Dykstra said...

Overall interesting topic, however I think there are some assumptions made when referring to economic mumbojumbo as innovation. First of all, the innovation that you are describing seems more like a reaction to new circumstances. For example, in the 1970's during the American oil crisis came the concept of stagflation. Does this qualify as innovation or is it simply a term used to define the new circumstances at the time?

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