Monday, November 18, 2013

Bill Bonner: "Repeat After Me: Economics Is NOT a Science"


[Financial Safety Services commentary: more accurately economics is a science, however, it is strictly a social science, not a physical science like chemistry or physics, as the Austrian economist Ludwig Von Mises clearly and succinctly explained in his classic "The Ultimate Foundation of Economic Science". I personally feel that for savers, investors and speculators, the most important  ramification of this particular realization is that because economics was not, is not and can never be included in the "hard science" category along with physics and chemistry, it can in no way be a reliably predictive "science", as are those "hard sciences". Which means that the social science of economics can in no way accurately, consistently predict the economic future, as many economists, and many "investment  advisors" would have you believe it can. This great article by Bill Bonner goes a long way towards explaining, in simple, none-technical terms for you, the realities of this economic "science". Regards, Onebornfree & Financial Safety Services.]
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                                                                    Bill Bonner

"On Monday and Tuesday, we visited our youngest son, Edward, a sophomore at the University of Vermont. His roommate joined us for dinner.

“Okay, let me explain it to you,” we said.

The roommate was wondering if he should switch his major to economics.

“Economics is a phony science. The more you study it, the more you think you know… and the less you really know about how an economy actually functions.

“I’ll explain why in just a few sentences.

“If you are a real scientist, you start with things you can know… and you can build on them.

“Water boils at 212 degrees Fahrenheit at sea level, for example. The molecules heat up… then suddenly change from liquid to gas… and the pot boils. Right? Happens every time. You can count on it. And with this knowledge, you can build a steam engine.

“So, the simpleminded economist comes along and says, ‘Hey, an economy is like a pot of water! You heat it up… you get more activity… and GDP grows.’

“The analogy holds up superficially. You heat up the economy by putting some fire under it. If you’re a central banker, you lower interest rates. If you’re a politician, you increase the deficit.

“You know there’s a risk of overheating… or causing a bubble. But you think you understand how it works. You think you can predict and control the outcome because you’re a scientist who uses mathematical models, just like a real engineer.

Nobody Knows Anything

“But the problem is you don’t know anything. You don’t know if an economy really is like water. You don’t know where sea level is. For all you know, you’re high in the Alps. And you don’t know whether the fuel you’re using adds to the fire… or subtracts from it. QE, for example, may help heat up the economy. Or it may not. No one knows for sure.

“And get this. All those little molecules, you know – those individuals in the great economic pool? As soon as they catch on to what you’re doing, they will change their behavior. That’s the big difference between water and people. Water does the same thing no matter what you say or what you think. People don’t.

“We talk about the economy being like water. Well, try to imagine the contrary. Imagine water as though it was like a real economy. Imagine that the water knew you were going to bring it to a boil. Then instead of turning into vapor at 212 degrees, it might boil at 100 degrees or 170 degrees or 50 degrees in anticipation.

“And then, after you’ve brought it to a boil a few times, the water gets sick of being manipulated like this… and it boils off if it even suspects you’re thinking of warming it up.”

The kid started to fidget and look away. He was afraid he had run into some cranky old nut job who was going to keep talking all morning.

“Well, I guess I’ll stick with engineering.”

“Good idea.”

Regards, Bill 
Original article source
                     
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