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Submitted by Charles Hugh-Smith of OfTwoMinds blog,

"If we expect an economic theory to behave like a theory of physics, with non-trivial predictions about the future, we're never going to get one."

Back in August I explored Why Isn't There a Demonstrably Correct Economic Theory?. Many commentators have noted the obvious, that economics is a pseudo-science rather than a real science: beneath the fancy quantification and math, economics is fundamentally the study of human behavior, and that complex mix of dynamics cannot be reduced to a tidy econometric model that spits out accurate predictions.

One key element of science is that the results must be reproducible, that is, the same experiment/conditions should yield the same results time and again. I suspect that economic models are not applicable across all times and situations; a model might "work" in one era and in a very specific set of circumstances, but fail in another era or in a similar set of circumstances.

Since human behavior is based in culture as well as in naturally selected (genetically driven) behavior, then cultural milieus and values obviously play critical roles in shaping economic behaviors.

So presenting an economic model as "scientific" and quantifiable is in effect claiming that the bubbling stew of human culture can be reduced to quantifiable models that will yield predictions that are accurate in the real world. This is clearly false, as culture is not a static set of objects, it is a constantly shifting interplay of feedback loops.

This helps explain why human behavior is so unpredictable. Virtually no one successfully predicted World War I in 1909, and no one predicted the collapse of the U.S.S.R. in 1985.

Another reason all economic theories fail as scientifically verifiable models is that economics boils down to a very simple dynamic: those in power issue financial claims on resources as a "shortcut" way of gaining control of the resources without actually having to produce the resources or earn the wealth via labor and innovation.

I think this is the one fundamental dynamic of economics, and it does not lend itself to reductionist models.

Longtime correspondent Chuck D. recently explained why economics will never be predictive (i.e. a real science) like physics:

If we expect an economic theory to behave like a theory of physics, with non-trivial predictions about the future, we're never going to get one. If, on the other hand, we accept economic theories which explain why we'll never get the kind of economic theory we'd like to have, the kind that would support investment decisions and government policy formulation, we can formulate THAT kind of theory. (If you want a physicist to decide whether light is a stream of particles or a pattern of waves, you're not going to get an answer.)

Von Neumann and Morgenstern came pretty close when they applied mathematical game theory to economic behavior. In game theory terms, if there existed an economic theory which provided any kind of advantage to those who understood it, either it would be kept a secret (so as not to give up the advantage), or the "game" itself would adapt to invalidate the theory.

The reason for the failure of economics to produce "the theory we'd like to have" is not merely that people are complex, just as modern physics doesn't say that "electrons are really hard to locate;" the problem is that any conceivable process for observing the electron disturbs its position and/or momentum, invalidating the observation. A theory of economics cannot be both useful and well-known. (Can we call this a statement of "meta-theory"?)

So, the competitive (game-like) nature of economics means that the usual incremental accumulation of knowledge that applies in natural science is impossible. To succeed in the market, I need to have better information and/or interpretation than at least one other trading opponent (oops, I almost said "trading partner"!) There are two ways for me to have better knowledge than you do: either I think hard about the data I gather (and keep the results to myself), or I promulgate disinformation and misinterpretation (see "talking my book").

In other words, I don't need to be smart if I can make you stupid. It's just the opposite of science. It's not even necessary for everyone to proliferate misinformation, as long as there's enough of it around to create uncertainty about the truth. (You and I, for example, can see things quite clearly, and still not turn the tide of madness around us.)

Thank you, Chuck, for an insightful, thought-provoking commentary.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/fu3ezmah7pU/story01.htm Tyler Durden

All one can say following the latest New Home Sales data release is that “baffle with BS” mode is fully engaged. First, following the release of the “revised” seasonally adjusted New Home Sales data, we learned that homebuilders somehow sold an extra 88 thousand annualized homes in the months of September, October and November: the same months when the sellside and economist crew was screaming home sales would plunge due to the government shutdown…  just so there is a buffer when sales dropped and/or disappointed (because apparently nobody buys houses when the government isn’t around). Instead what happened was a massive 18% jump in New Home Sales in the month of October, when the US government was shut down for over half the month, and the final print was 474K sales, the highest since July 2007. So much for that particular red herring.

 

But where things get outright bizarre, is when one looks at the series showing the average sales price for New Homes. Keep in mind that an hour ago we showed that mortgage applications have tumbled to a fresh 13 year low, while refi apps slid to the lowest in 5 years. So what happened to the average new home sales price in the month of November? Well, it just hit a new all time high! Why, because why it can.

And… #Ref!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WteT6U5Khao/story01.htm Tyler Durden

As the non-government worker ‘slaves’ away, working 80 hours straight at Toys’r’Us, or earning an ‘unlivable’ wage at McDonalds, President Obama as used an executive order to activate a 1% pay raise for all government workers. As the WSJ reports, the 4.4 milion federal employees are receiving their first across-the-board pay bump since a 2% increase in January 2010 (though notably agency directors must meet this cost within their existing budgets – not collecting any new funds to pay for it). Of course, even by government statistical standards, this is still not keeping up with inflation, but hey, it’s better than nothing.

 

Via WSJ,

Federal employees in January will get their first across-the-board pay raise in several years, as President Barack Obama moved Monday to activate a 1% increase for all government workers.

 

The increase came by an executive order and was expected. The raise was requested by the White House earlier in the year and Congress didn’t take the necessary steps to prevent it from taking place.

 

…

 

The Obama administration in previous years agreed to freeze the pay of federal employees as part of the ongoing deficit-reduction fights in Congress.

 

It’s the first across-the-board pay bump for federal employees since federal employees received a 2% increase in January 2010. Federal employees were able to collect bonuses, overtime and promotion pay raises.

 

Federal agencies must accommodate the pay increases within their budgets and they do not collect additional funds because of Mr. Obama’s order.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/KHLyGZ3tSO4/story01.htm Tyler Durden

As the non-government worker ‘slaves’ away, working 80 hours straight at Toys’r’Us, or earning an ‘unlivable’ wage at McDonalds, President Obama as used an executive order to activate a 1% pay raise for all government workers. As the WSJ reports, the 4.4 milion federal employees are receiving their first across-the-board pay bump since a 2% increase in January 2010 (though notably agency directors must meet this cost within their existing budgets – not collecting any new funds to pay for it). Of course, even by government statistical standards, this is still not keeping up with inflation, but hey, it’s better than nothing.

 

Via WSJ,

Federal employees in January will get their first across-the-board pay raise in several years, as President Barack Obama moved Monday to activate a 1% increase for all government workers.

 

The increase came by an executive order and was expected. The raise was requested by the White House earlier in the year and Congress didn’t take the necessary steps to prevent it from taking place.

 

…

 

The Obama administration in previous years agreed to freeze the pay of federal employees as part of the ongoing deficit-reduction fights in Congress.

 

It’s the first across-the-board pay bump for federal employees since federal employees received a 2% increase in January 2010. Federal employees were able to collect bonuses, overtime and promotion pay raises.

 

Federal agencies must accommodate the pay increases within their budgets and they do not collect additional funds because of Mr. Obama’s order.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/KHLyGZ3tSO4/story01.htm Tyler Durden