Sniping at economists from both ends of the spectrum.
Pure logic, and pure emotion calling itself pure logic, meet economics. Both walk away shaking their heads.
It was pure serendipity: there I was, in a doctor's waiting room, reading a two-month old BusinessWeek whose cover demanded "What Good Are Economists Anyway?", a question I've asked on this site a few times myself, while at home was George P. Brockway's The End of Economic Man: Principals of Any Future Economics (1991) which, in its own tirelessly logical and intellectual and therefore largely unintelligible way, asks much the same question. And the cherry on the topping was this quote, in the first paragraph of the cover article, taken from the blog of Silicon Valley's own Sage, America's Number One Bubble Blogger:
If you are an economist and did not see this [the subprime crisis, the real estate bust, a global credit crisis and oh, heck, let's throw in global warming] coming, you should seriously reconsider the value of your education and maybe do something with a tangible value to society, like picking vegetables.
No, this isn't one of Sage's pearls, just some close reasoning by one of his bubblehead fans, and what I find so ironic about this unabashed economist-bashing is that so much of bubblehead dogma is borrowed from the typical economist's attitude toward real estate. The bubblehead and the typical economist (or at least the typical economist I've read) share the same dim, ironic view of the real estate marketplace and its fumbling bumbling participants, with the former often using the latter's "facts and figures" to throw the cold water of logic and the piercing light of science on a marketplace run amok with emotion. So when a bubblehead starts throwing rotten vegetables at economists, it's apostasy. Doesn't anybody screen these calls?
But even the most fervent economist-idolater must silently wonder why so much of that distinguished profession didn't see it coming. After all, these superbly educated, modern-day oracles know everything. Just ask them. As BusinessWeek says, "Take that, you pointy-headed failures! Go jump off a supply curve!". "Economists' models are just awful," wails one quantitative finance expert. "They completely forget how important the human element is." Something I've said on this site a few times myself. But at least I know why they "forget...the human element": because it won't fit their models.
But to be fair, no one could reasonably expect economists to predict the collapse of the housing and credit markets and its impact, not just on the national economy, but on the global economy. Even I, not a huge fan of economists, at least when they wander into the thorny thicket of real estate, am willing to concede that no one not directly involved knew how far the envelope had been pushed. The smart money boys on Wall Street were, as they always have been and will be, one step ahead of the Ph.D. economists and the ever-vigilant regulators, the latter fighting the last economic war, the former reporting on it from a safe distance and through a thick fog. And besides, "the world is simply too complicated", as BusinessWeek says, "...to predict...with any kind of exactitude". Which hasn't stopped economists from trying and then, apparently, hoping we forget when they get it wrong.
Even so, you can understand where a bubblehead comes from when he challenges economists to "do something with a tangible value" with their grad school educations. Because the bubbleheads very much know that they did see the crisis coming. Certainly no one can take that away from them. The only skepticism the fair-minded observer is allowed is to ask, "How?" Even "huh?" qualifies as a pertinent question in this case.
Because as anyone familiar with the real estate marketplace will attest, the bubble blogs almost always get it laughably wrong. Their insights are invariably a pastiche of naiveté and old wives' tales and, in more thoughtful moments, selective borrowings from the literature of economics. In Sage's forty-nine point manifesto, his damning indictment of homeownership, that snare and delusion to the unwary, twenty-five points are either irrelevant, wishful thinking, bloody obvious or impossible to respond to (Wife bugging you to buy a house? Buy her off with a trip to Paris.) while a further twenty are demonstrably wrong, leaving just four he gets right, a batting average that won't qualify anyone as a heavy hitter in any league except the blogs. So again, the question: "How?"
If we surmise that it wasn't a working familiarity with, let alone a comprehensive knowledge of, real estate and the financial world that had bubbleheads correctly predicting disaster, then it's plain that this insight didn't come from the intellect—didn't come from the head. And if it didn't come from the head, it had to come from the gut: the emotions. Certainly the bubble blogs have plenty of emotion—back in the boom, they boiled over with anger and resentment—so much so that I wondered then if their real function was more social safety valve than mutual (un)enlightenment. But what emotion lay behind such anger and resentment? And what made homeownership, usually right up there with mom and apple pie in the public esteem, such a lightening rod for the disaffected?
I still can't tell you. I can guess: maybe these are the same people who fifty years ago would have been building bomb shelters in their back yards, but I'm no sociologist, and this is clearly a job for the experts—not that I'm looking forward to another "soft" science tramping about real estate in its great muddy boots. But I'm convinced—the evidence seems compelling—that some great epochal emotion, some further flowering of gut-level social fragmentation and they're-lying-to-us-again alienation, awaits the scholars' discovery.
And when they do, I'd like the customary 25 percent referral fee.
Now let's move from gut-level folk wisdom to the other end of the scholarly spectrum. Meet George P. Brockway, frequent economics writer, former editor and CEO of the publisher W.W. Norton & Company and president of the board of governors of Yale University Press, and father of seven children. Established, accomplished, apparently mainstream and, with seven kids, probably an optimist. That's all the book jacket announces or implies about our author, but from slogging through The End of Economic Man I can tell you that Brockway is also an avid tennis player and a trained, and even avid, logician. So Brockway's approach to exposing the foibles of the dismal science is, to use a word announcer Frank Gifford used often way back in the early pre-Madden days of "Monday Night Football", cer-é-bral, as opposed to gut-level, knee-jerk and punchy. Brockway doesn't just throw his readers a hunk of red meat and back away. So his audience, needless to say, is, and always will be, microscopic compared to that of the pundits'. In fact, I got maybe one-tenth of Economic Man, but I kept on keeping on because no one, outside the blogs, says this stuff is easy.
What kept me going? First, Brockway takes on all the golden calves of the economist: perfect competition, utility, the margin, the money supply, and international trade. He then demolishes the economist's favorite theories on market psychology, mathematics, people, money, price, labor, goods, capital, speculation, property, productivity, interest, inflation and international trade. He even repudiates the idea that "rational economic man", that cornerstone of economics, exists or even should. At least I think he does all this. It's kind of hard to tell. But if all he's really saying is that economists look like they make it up as they go along, I get the gist.
Brockway doesn't challenge economists to roll up their sleeves and get their hands dirty, but he does throw a well-reasoned rock or two at the profession. I'll give you an example, relevant and, I hope, more understandable than most in the book.
According to Brockway, Ricardo's Law of Comparative Advantage, published in 1817, "purports to demonstrate that international trade is mutually profitable even when one country is absolutely more productive in terms of every commodity traded". In demonstrating his Law nearly two hundred years ago, Ricardo used his native England and its long-time trading partner, Portugal, and the trade goods he used were wine and cloth, so let's bring his example into the 21st century. Brockway: "Suppose that a certain amount of [premium sport sedans] exchanges for a certain amount of [information technology services]. Suppose that in [the United States] it would take a year's labor of 100 men to make the [information technology services] and of 120 men to make the [premium sport sedans], while in [Germany] the man-years required are 90 and 80, respectively. In these circumstances, it would be to [Germany's] advantage to make only [premium sport sedans] and to [the United States'] to make only [information technology services], with the countries then exchanging the surpluses. [Germany] would multiply its [premium sport sedan] output 2.125 times [(90+80)/80], and [the United States] its [information technology services] production 2.2 times, and since the [information technology services] and the [premium sport sedans] are equal in value, both countries would come out ahead."
Apparently this is how economists help sell free-trade agreements. But not so fast, says George.
He points out that in Ricardo's perfect world, "the [United States' auto workers] are immediately to become [information technology consultants] and the [German information technology consultants auto workers]. The [United States' auto assembly lines] are immediately changed into [cubicles], and the [German cubicles] into [auto assembly lines]." Presto! No "unemployed workers and underutilized factories, as well as shortages of both [information technology services] and [premium sport sedans]", at least not in the ideal text-book world of the economist. But out in the pokey ol' real world, George claims, "the resulting suffering and waste would more than offset the promised 6 or 10 percent increase in output."
So how can this fallacious "Law" be so widely accepted in economics? "Like so much of classical economics, the Law of Comparative Advantage is suited to a world without time [in other words, an ideal text-book world], where everything happens all at once, or not at all. Also like so much of classical economics, it assumes full employment. If either [the United States] or [Germany] has substantial numbers of unemployed workers, it would be more advantageous to train them as [consultants] or [auto workers], as the case may be, than to keep them on the dole while importing [information technology services] or [premium sport sedans]."
Next Brockway calculates "eight different possible cases" or potential outcomes of the above example, and discovers that only one outcome works to the mutual benefit of both countries. Not only that, "only half the cases are in any respect better than autarky [no trade at all between the two countries] for even one of the partners." But this trifling drawback hasn't kept Ricardo's Law from getting economics' Good Housekeeping Seal of Approval. For instance, says Brockway, "this law...has seemed to Professor Paul Samuelson an example, perhaps the only example, of 'a proposition in all the social sciences which is both true and nontrivial'".
It says much about the rigor of the profession that no economist bothered to try to confirm this immutable "Law" until 1951 and even then, according to Brockway, the study "did not test the Ricardian theory at all". "Though understood by the profession to be a scientific proposition, Ricardo's law had to wait one hundred thirty-four years for an extensive test. [However], this test was, in fact, a test of a quite different proposition, and in the forty years since...no one seems to have bothered to redo the test or undertake another as ambitious."
Now here's the part I really like: "This is odd behavior for a discipline that claims to be a science. One can scarcely imagine a proposition in physics being taught as a law for 134 years before anyone seriously tried to test it. Nor can one imagine it still taught as a law when the test was of an only superficially similar proposition. Nor in one's wildest nightmare can one imagine this still untested proposition used to design a structure [international trade] on which the livelihoods of literally billions of people may depend."
"Scarcely imagine"? George, I guess you've never had a horde of economists descend on your own profession, poke and prod it from a safe distance and cobble together a publishing industry so eerily Twilight Zone you couldn't recognize it. So I guess you'll just have to take my word for it, George, that, yes, I can "scarcely imagine" the behavior you describe.
So if I follow you, George, what you're saying is that economics might be only a pale imitation of the science it claims to be. And if we concede that so much of the "advanced" amateur criticism of the real estate marketplace and industry found on the Internet—"advanced" only in the sense that doesn't routinely stoop to name-calling to make its case—is based on an imperfect understanding of economics, that pale imitation of science with itself so imperfect an understanding of the real estate marketplace and industry, then I think we can agree that we end up with a pale imitation of a pale imitation, and a twice imperfect one at that.