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Thoughts from the Frontline

The Quest for Certainty

October 29, 2012

Choose your language

“As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality.”

– Albert Einstein

“To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown – the first instinct is to eliminate these distressing states. First principle: any explanation is better than none… The cause-creating drive is thus conditioned and excited by the feeling of fear …"

– Friedrich Nietzsche

“Very few beings really seek knowledge in this world. Mortal or immortal, few really ask. On the contrary, they try to wring from the unknown the answers they have already shaped in their own minds – justifications, confirmations, forms of consolation without which they can't go on. To really ask is to open the door to the whirlwind. The answer may annihilate the question and the questioner.”

– Anne Rice, The Vampire Lestat

The last two weeks we have been looking at the problems with models. First we touched on what I called the Economic Singularity. In physics a singularity is where the mathematical models no longer work. For example, models based on the physics of relativity no longer work if one gets too close to a black hole. If we think of too much debt as a black hole of sorts, we may understand why economic models no longer work. Last week, in “The Perils of Fiscal Cliff,” we looked at the use of fiscal multipliers by economists in order to argue for or against governmental economic policies. Do you argue for austerity, or against it? There is a model that will support your case, most likely using the same data that your adversary uses.

These letters have generated a great deal of positive response and conversation. While I very rarely suggest to readers to go back and read previous letters, but reading these may help you appreciate why it is so difficult to understand what is happening in the global economy today.

This week, in a somewhat shorter letter, we once again consider the vagaries of measurements and models. Growth of the US economy, we are told, was 2% last quarter. That number will of course be revised, but what is it we are measuring? Should we attach any importance to the measurement at all? The short answer to the last question is yes, but it is important to understand that there is no certainty in that number. Or at least not any certainty according to the generally accepted meaning of that word.

The Problem with Dynamic Condition-Dependent Multipliers

I use the above subhead with a great deal of irony. I garnered that phrase from a rather insightful letter from my friend Rob Arnott (founder of Research Affiliates, whose brilliant work is used to manage over $100 billion). I am going to start this week’s Thoughts from the Frontline with his letter, with my comments inserted in brackets [and italicized]. He was responding to last…

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Comments

Howard Gannaway

Nov. 6, 2012, 7:57 a.m.

Rob Arnott’s idea about negative income tax sounds rather like the system of tax credits we have had in the UK for some years.  The system is currently in the process of being simplified from its previous many strands into one “Universal Credit” which comes into effect next year.  It is also being accompanied by wholesale welfare reform that provides real incentives for people to get into employment.

Mike Hardy

Oct. 29, 2012, 11:59 p.m.

Hi John, thanks for the letter. Mainstream economics & the associated models have been utterly discredited by the ongoing depression (take away the 10% deficits ... it’s a depression). They would be as irrelevant as steam power and Roman numerals if it weren’t for the fact that their adherents cling doggedly to power, outstaying their welcome. No, the future of economics is Steve Keen and his models. Finally, an economist who understand simultaneous partial differential equations - as per engineering & the hard sciences. The people of the world need & want a revolution in economics. Steve Keen has already done the academic legwork. It just needs pushing into the mainstream now - in the process pushing out the discredited rubbish currently there.

Paul Johnson

Oct. 29, 2012, 7:41 a.m.

what is,“This is one of Rob’s more interesting proposals and would go a long way towards alleviating youth unemployment”??

peter.weldon@gmail.com

Oct. 29, 2012, 5:08 a.m.

Regarding the unwillingness of the political class to accept uncertainty…

I recall the following from a book of humor by Woody Allen,

“When you are sure you are right you will have a moral obligation to impose your will upon those who disagree with you.”

And so goes economic freedom at the hands of the politicians and economic bureaucrats. Not so funny but then again humor is at times defined by the uncomfortable feelings we get when the whirlwind appears at the door.

Compliments to John for the Anne Rice quotation.

Henry Perry

Oct. 29, 2012, 4:16 a.m.

Dear John
In your article you say “but reading these may help you appreciate why it is so difficult to understand what is happening in the global economy today.” Perhaps the difficulty is not so complex after all. If one focuses on Economic modeling things can get complex very fast. However if one focuses on History and human behavior, we are hardly in new territory. Keynes summed it up well and describes where we are to perfection:
“By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some …. Those to whom the system brings windfalls …. become “profiteers” who are the object of the hatred … the process of wealth-getting degenerates into a gamble and a lottery .. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Your Anne Rice quote explains why no one wants to see it.
Perhaps it really is that simple?
Best H