After an early morning run in bitterly cold rainy weather and prior to continuing the pruning of my undergrad thesis, I read over an excellent post on Zero Hedge this morning called “On The Failure Of Inflation Targeting, The Hubris Of Central Planning, The “Lost Pilot” Effect, And Economist Idiocy.”
The post highlights a brief letter from Dylan Grice of Société Générale, where he in extremely accessible terms discusses the perils faced by the global economy as a result of leaving the steering wheel of the financial system to a select group who use “knowledge” within which they have vested interests. It is the Ivy League professors who teach neoclassical economic theory and modern financial theory, they who write the textbooks that everyone who wants to earn any sort of status must (and does) read, and it is they who are called upon as economic advisers to top policymakers.
This monopoly on “knowledge” would not be so dangerous were it to be genuine quotation-free knowledge. That is to say, a general body of observed phenomena, subsequent analytic interpretations and predictive statements which reflect what has been empirically observed as well as explicitly recognizes exactly where such predictive statements can and cannot be applied. That said, there is no knowing of capital markets. There are too many moving parts in the massive machine that looking at the data we have available (and there is mountains of it), it is clear that making predictions as to what sort of impact government/central bank intervention will have is not possible.
Yet, the wonderful models the ruling elite use apparently allow them to be confident that maintaining consumer price stability has a good effect on the economy – though I’m not sure what that can possibly mean. As Grice’s letter mentions, in 1920s USA and late 1980s Japan, CPI was kept beautifully in check – while behind the curtain the economic puppeteers saw asset prices outside of consumer goods blow up in their face. This in the end had a real effect on the real economy, wiping out countless jobs lost and entire firms as astronomic amounts of debt-borne “wealth” vanished.
My chief area of interest academically these days has been that of model risk and toxic information, looking at how humans’ propensity to believe and adhere to that which is most easily understood, as well as how the dangerous tendency in many fields of research to consider only results supportive of a predetermined objective can wreak havoc when applied in the real world. Unfortunately, the ones in power are the ones whose interests are tied to the widespread social recognition of the “knowledge” they peddle as infallible – presenting a challenge for those who want to see a change in what drives economic/financial decision-making, particularly with regard to public policy.
The main challenge is that in order to dismantle and repair the current broken system, it is fundamentally necessary to understand that malfunctioning system and get a hold of the relevant jargon and mathematical models so that you can express issues with it in words that those who understand said system as infallible can understand. Fortunately, and also very expectedly, since they apply only in an imaginary theoretical space, the models work together seamlessly, which makes understanding them not an overly arduous task assuming you take a systematic approach to it.
That’s exactly what I’m in the middle of now, loading up on rations of verbal, mathematical, and statistical supplies in order to fund the critical analysis war effort against a frighteningly flawed system.