|Economics is a phony science
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Dow off 20 yesterday. Gold down $6. No biggie.
On Monday and Tuesday, we visited our son, Edward, a sophomore at the University of Vermont. His roommate joined us for dinner.
"Okay...let me explain it to you," we said.
The roommate was wondering if he should switch his major to economics:
"Economics is a phony science. And the more you study it the more nonsense you know...the more you think you know...and the less you really know about how an economy actually functions...
"I'll explain why in just a few sentences.
"If you are a real scientist, you start with things you can know...and you can build on them.
"Water boils at 212 degrees Fahrenheit at sea level, for example. The molecules heat up...and then suddenly change from liquid to gas...and the pot boils, right? Happens every time. You can count on it. And with this knowledge you can build a steam engine.
"So, the simpleminded economist comes along and says: 'Hey, an economy is like a pot of water. You heat it up...you get more activity...and the economy grows.'
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"The analogy holds up superficially. You heat up the economy by putting some fire under it. If you're a central banker you lower interest rates. If you're a politician, you increase the deficit.
"You know there's a risk of overheating...or causing a bubble. But you think you understand how it works. You think you can predict and control the outcome, because you're a scientist, using your mathematical models, just like a real engineer.
"But the problem is that you don't really know anything. You don't know if an economy really is like water. You don't know where sea level is. For all you know, you're high in the Alps. And you don't know whether the fuel you're using adds to the fire...or subtracts from it. QE, for example, may help heat up the economy. Or it may not. No one knows for sure.
"And get this...all those little molecules...you know...those people in the great economic pool. As soon as they catch on to what you're doing, they will change their economic behavior. That's the big difference between water and people. Water does the same thing no matter what you say or what you think. People don't.
"We talk about the economy being like water. Well, try to imagine the contrary...imagine water as though it was like a real economy. Imagine that the water knew you were going to bring it to a boil. Then, instead of turning into vapor at 212 degrees, it might boil at 100 degrees or 170 degrees or 50 degrees - in anticipation.
"And then, after you've brought it to a boil a few times, the water gets sick of being manipulated like this...and it boils off even if it suspects you're thinking of warming it up."
The kid started to fidget and look away. He was afraid he had run into some cranky old nut-job who was going to keep talking all morning.
"Well, I guess I'll stick with engineering."
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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