I’m going to start with a few long words so I sound like I REALLY know all about economics and then you can tell me how impressed you are … ok, ready? Go!
Traditional economic forecasts and econometric models said it couldn’t happen. But it did happen and it might happen again.
… as a self-professed free marketeer and ‘liberal capitalist’ I guess I became a little overconfident and dare I whisper it lazy in my thinking in 2007/2008. A fairly predictably supply/demand imbalance would dictate further house price and/or rental rises; the Conservatives would eventually get elected and stop the powers that be from constantly meddling with our taxes; and The UK because of its strong property rights, focus on high-value services especially financial services and its near perfect geographic positioning as a bridge between the US and Europe was positioned to succeed.
I didn’t have the global financial meltdown in my personal business plan tho’ – missed that bit somewhere. And I wasn’t the only one. This isn’t to say all the positive things mentioned above aren’t going to happen; far from it, I for one am sure they are still going to happen again and probably to a greater extent as a result of the credit crunch … I just missed the whole damn crash bang wallop bit in the middle somehow … and ouch! it really hurt … still hurts.
Many economic commentators have analysed the factors behind the events of the last two years and of course long-term factors such as excess spending in the West and excess saving in the East is a key reason; excess and irresponsible lending by banks is one of the reasons; an asset price bubble in property is another and so too was the Lehman error (and don’t tell me it wasn’t a mistake – they had to support the bankers afterwards anyway, just on a much larger scale).
A vital factor that generally gets passed over however is the economic establishment. The strict rules around financial modelling and the confidence that comes with having been right for 20 years meant that most financial models and economic forecasts were based on 10% here, 20% there, worst case a 30% drop. Brains employed by the likes of Merrill Lynch were tutored by the finest economists on the planet and they were trained not to lose money as well as to make it. And then like a flash it was all gone.
So is it any wonder economics is set to evolve? It turns out most of the great economists of the last golden age of economics didn’t use models and mathematics to anywhere near the degree to which their findings have been subsequently applied. Could it really be that authors like Malcolm Gladwell (Tipping Point, Blink, Outliers), Stephen D. Levitt (Freakonomics, Super Freakonomics) and Tim Harford (The Undercover Economist) are more like the great economists (Smith/Keynes etc) of old?
Well the new Institute for New Economic Thought (INET) which has been backed by George Soros to the tune of $50m is going to be employing new mathematical techniques like chaos theory and will build on work by sociologists, psychiatrists etc – much as the authors above have done. They are likely to accept that the world is often unpredictable and inconsistent. We live in ‘interesting times’.
For more information I highly recommend you read and follow Anatole Kaletsky – an excellent, forward thinking economist and commentator.
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