The world of economics and finance doesn’t work like the world of physics and chemistry. Von Mises’s phrase “Human Action” captures the difference. Events that happen in the economic and financial world do not occur in a “rigid” fashion according to a predictable time table. Although we may be able to state a “law” or make a prediction, it doesn’t work itself out in a predictable way because human behavior and psychology suffuses the processes.
The economic-financial world has events that are all behavioral. They all involve expectations, signals, people learning, making up their minds, choosing according to changing scales of value, limited and changing knowledge, etc. Even if we can make a prediction according to some law, the actual triggering causative events are always changing and not what any theory says they are.
Something like Fukushima could cause economic and financial events at an unpredictable time because of some news that hits people long after the event, such as the birth of deformed babies. Conversely, something that an economist may think has little impact on an economy such as a Congressional squabble over the debt limit may have a large impact, or something that an economist thinks may have a large impact may have a small immediate impact or a long-delayed impact.
It is because the economic-financial world doesn’t work according to a physics-type scenario that economic forecasters who are always looking for this or that to happen are disappointed and so far off. Besides, they all use surrogates for human welfare anyway.
Given this reality, it is a huge social error to invest people with power over “economic policy” such as are in Congress and on the Federal Reserve Board. Their thinking is fundamentally flawed and grounded in an erroneous view of how the economic-financial world works. It is actually delusional. One day it will be viewed as as hopelessly wrong as the idea that witches cause disease.
Here is a very recent example of such mechanistically-flawed thought from Chicago Federal Reserve President Charles Evans (interviewed by CNBC’s Steve Liesman):
“I favor being much clearer and specific about the economic markers that it would take to alter [the course of policy making]…In fact, I argued for something like this just recently…We could allow rates to remain low until the unemployment rate fell to a certain level or if inflation became tremendously unacceptable at a higher rate.”
He believes in the central bank’s powers and in making “policy” at a centralized national level. That goes without saying. But those beliefs depend on the erroneous idea that the economic-financial world is mechanistic, like the planets rotating and revolving around the sun. Here we have Evans reducing the mechanism to two numbers: the unemployment rate and inflation. These numbers are tremendously flawed even as measurements of the foggy concepts that they are supposed to measure. But they are also hopelessly flawed as they relate to human action in the economic-financial realm and, of course, hugely distant from the welfare or well-offness of individual persons in our 300 million person plus economy. To reduce everything to numbers is a gross error. The economy cannot be reduced to numbers of any dimensionality. To reduce policy-making to two numbers borders on outright lunacy!
I put it to the reader that virtually all such commentary about policies coming out of the mouths of economists who have status in our society is garbage. The media demand endless talk to fill the time. They invariably find some persons who are willing to talk about economic and financial matters in order to build up their reputations and gain exposure to potential clients. Very few of them say what I am saying here, which is that the government should totally refrain from attempting to treat human action in the economic-financial sphere as if it were some sort of machine that could be operated by stepping on the gas pedal or stepping on the brakes. They don’t say this because they have been taught to believe that economic and financial actions undertaken by human beings are some sort of mechanism that is subject to control. Plus, they believe that these actions should be controlled by government. This is the same abysmally low level of thought that makes mechanistic judgments about drugs and who uses them, and then seeks to control that use by prohibition, punishments, cops, jail sentences, guns, battering down doors, seizing goods, and so on.
