Economist reacts to people bashing economic science

Macroeconomics has not been successful for 200 years. It’s been a failure for 200 years. No progress.

I think most economic ideas are bad ideas

If there is a group of people that I can’t stand is these f**ing economists driving me up the f**ing wall

I’d say don’t study an economics degree

Bashing economics, especially on popular podcasts like Lex Fridman or Tucker Carlson, can get you hundreds of thousands, if not millions of views.

But, are these criticisms fair? Or are they just sensationalist nonsense used to get views?

Hey, I’m Joeri.. I have a PhD in economics.. and I used to teach economics at several universities.. and today my employee Alejandro.. who is also an economist has selected several popular video clips with people, ranging from professors to YouTubers, to investors, bashing economics, for me to react to. And, as I understood it, these criticisms essentially come in three flavors

Economics is not a real science..
economic models are terribly outdated … and
Don’t study economics.. It’s a waste of time.

This is how Alejandro ordered the clips for me. So, let’s get into criticism type number one

Economic make bad predictions, it is not a ‘real’ science

Gary: And, economics is not physical science. There’s no way for me to go and do an experiment and, say, here, let’s run the COVID economy again, but with taxation on the rich and show how living standards do better. We can’t do that physical experiment. All we can do is predict. And that is why banks pay f***ing millions of puonds a year to good predictors, because that’s the best way to tell who is a good economist, because we can’t be physical experimenters. And it drives me mad that these economists who make policy and protect policy that protects them, don’t even accept when somebody consistetly outpredicts them. They won’t even listen to them. It drives me nuts.

Response Joeri

Okay… so popular YouTuber Gary, an ex-trader essentially makes two claims here… (1) Economics is not as good as a physical science.. and (2) Gary was paid a lot by a banks to make financial market predictions… therefore, he is actually a really good economist… and… yet economists do not listen to him.

Okay. I see variants of these two claims a lot actually in the comment section on this channel. Economics is not a very good science, and you should really listen to rich investors rather than economists. So, let me just address both of these once and for all.

For the first claim… I actually HALF agree with Gary. Economics is a social science, which is less ‘good’ than a physical or ‘hard’ science. Let’s play a part of this clip again.

There’s no way for me to go and do an experiment and, say, here, let’s run the COVID economy again

Here he gets to an absolutely crucial point about why economists —and especially macro-economists— can NEVER get to the scientific gold standard of doing controlled experiments in a laboratory. Yeah. That’s the half that I that I agree with. I’m pretty envious that, for example, chemists can do super controlled experiments in a lab. While this is indeed much harder for social scientists like economists, sociologists, or political scientists.

But, I would argue that not being able to do laboratory experiments is actually a problem for many many natural systems as well IF THEY GET BIG ENOUGH.

Gary’s Covid economy is a macroeconomic phenomena. Even if we just look at the UK, like Gary tends to do, that means we are talking about millions of individuals, millions of firms, hundreds of banks, interacting with a government, and a central bank, as well as —of course— other countries. You cannot put the entire UK inside a laboratory to do a controlled experiment to compare the difference between doing Covid stimulus and not doing Covid stimulus, like how medical scientists compare a placebo group to a treatment group.

But, this is true for big physical systems as well. You cannot put the earth in a laboratory to study the impact of greenhouse gasses on global warming. You cannot put stars in a laboratory to study how black holes are formed. Therefore, you see in all of science that the bigger the systems get, the more difficult science becomes and the easier it is to criticize the results of studies that use mathematical or statistical models, or quasi-experimental methods… rather than ‘REAL’ controlled experiments.

However, even though natural scientists struggle with this same problem, I do agree with Gary, that even for these big systems, social systems on average are EVEN MORE difficult to study than big natural systems for two reasons.

The first reason is that social systems simply tend to be to be more complex than physical systems. Atoms or chemicals do not have a brain that can plan ahead, learn, and react to its environment like humans do. Therefore, while economists may do experiments in a laboratory, just as chemists or biologists do, the results from small scale controlled human experiments are far less likely to hold up in a real world setting than those from a small scale chemical experiment. Similarly, on the big scale, while macroeconomists are using more and more experiments or so-called quasi experimental methods—that mimick experiments— they still have to deal with the fact that humans are inherently less predictable than atoms or even animals.

To make matters worse, there’s the second reason why social scientists struggle, which is that unlike natural scientists, social scientists are part of the system they study. For example, about Gary’s Covid economy, most economists predicted that the world would face a big recession or depression… with deflation, rather than inflation. However, because governments actually LISTENED to these predictions, they started massive stimulus programs… that averted a recession with deflation… but created an economic boom with lots of inflation.

This is a problem that natural scientists do not have to deal with. For example, an asteroid does not change it’s course because some physicist predicts it will crash into a planet.

So, Gary is right. Economics is not a physical science, making it harder to do experiments that then help generate reliable predictions. This is why on this channel, I often try to stress that while I do make some macroeconomic predictions, they will typically NOT be very reliable.

This brings us to Gary’s second claim in that clip

banks pay f***ing millions of puonds a year to good predictors, because that’s the best way to tell who is a good economist, because we can’t be physical experimenters. And it drives me mad that these economists who make policy and protect policy that protects them, don’t even accept when somebody consistetly outpredicts them. They won’t even listen to them. It drives me nuts.

This is where Gary and I truly disagree. I say NOBODY can make really good macroeconomic predictions because the system is so complex and we can’t study it’s dynamics in a laboratory. But, Gary says, hold on… banks paid people like me a lot of money to make these predictions and I got rich… and you —economists— did not. So, why don’t economists listen to people like Gary?

The reason is going to sound really brutal… but actually, it’s because economists have found that they cannot actually distinguish professional traders like Gary from … monkeys throwing darts at a financial newspaper.

Okay, let me explain. And, please don’t take this personal Gary. I personally believe you were a skilled trader. And, I had a look at your predictions on YouTube and they were pretty good, top of my head 6 or 7 out of 9 or so were correct. Gary tends to tell you about the ones that were correct a lot on his channel. But, he did get some stuff wrong as well like saying house prices would go up quite a bit further than they actually did and that Covid would massively increase inequality, while the data says it didn’t.

Still 6-7 out of 9 that is actually really good! I said the system cannot be predicted. So, you’d maybe expect Gary would get 50% or so of his predictions right, while he clearly got more right than 50%. Just being a bit more right than wrong. That’s enough to make you a millionaire in financial markets.

However, the problem is simply that —if enough people bet on markets everyday— some people will inevitably, statistically, always do well for a couple of years. This is why there are actual serious experiments where professional traders like Gary get beaten by animals. For example, there’s a famous Wall Street Journal supervised experiment where a blindfolded monkey beat professional traders. To make matters worse, in 2012, professional traders like Gary were defeated by a cat dropping a mouse toy on stock market suggestions in an experiment that lasted a full year. And, in more scientific experiments with hundreds of simulated monkeys, selecting random stocks, about 10% of monkeys outperformed the market by over 940%, while professional traders are famously struggling to outperform the market at all.

So, sure, Gary’s prediction track record may SEEM impressive… and it may be his impressive skills.. absolutely… But, at the end of the day, there will always be some monkeys that are better at predicting than professional traders like Gary, or Ray Dalio, or Cathie Woods for that matter.

So, this is why economists

don’t even accept when somebody consistently outpredicts them. They won’t even listen to them.

Instead, economic theories need to be able to predict the future.. AND explain hundreds of years of economic history AND be confirmed in quasi-experimental studies. That is a much higher standard than just betting money on financial markets going up or down for a couple of years, which, as we have seen, can be done by a lucky money as well.

Yes, some rich traders make good predictions for years… and YES, it could be because they are just really good. But, for us economists, we cannot distinguish them from monkeys throwing darts at a financial newspaper. So, therefore, economic theories have to explain the future AND past, and be confirmed in experiments… which economists are doing more and more.

Use scientific-progress.png in visual-assets folder

Which is good… but of course, there’s still plenty that economists can be criticized about…

Criticism 2: Economic models are terribly outdated

Okay.. Alejandro told me this was a clip from Famous Bitcoin investor Michael Saylor on the Lex Fridman podcast. Let’s have a look.

Saylor: I think if we wanna really make any scientific progress in economics we are going to have to apply much more computationally intensive and richer forms of mathematics. 3:51 So, if you want to describe how anything works in the real world you have to start with the concept of feedback. If I double the price of something, demand will fall and attemps to create supply will increase and there will be a delay before the capacity increases and there will be ripple effects through every other segment of the economy. So it’s kind of common sense, but most economics, most classical economics, is always taught with linear models. Fairly simplistic linear models.

Response Joeri

Richer form of mathematics… no
concept of feedback… this is a really strange critique to me… general equilibrium..
supply and demand .. basics every model has it…
linear models! No DSGE Dynamic Stochastic General Equilibrium models… they are non-linear…
next clip Richard Werner

Werner: Well the reason is that the the economists follow this theory that banks are just financial intermediaries. They just you know gather deposits here do their analysis credit uh you know analysis analysis you know risk assessment and and all that and then they allocate the funds and invest. Okay. They just take a percentage. They’re a pass. So, so they’re intermediaries. Yes. But that’s wrong. That’s not what they are. That’s is one theory of banking and it’s still the one that’s still dominant. All the textbooks and the leading journals, they still use that. But actually, if you look into it, you realize there’s three theories of banking. A second theory slightly older that was dominant until the 1960s, so-called fractional reserve theory. And you you may have heard this fractional reserve uh banking. What is that? Well, this theory says and this part is similar. Each bank is a financial intermediary. It just collects deposits and then does the analysis, lends out the money. But in aggregate as banks interact, there’s money creation. Oh, and that’s where students should have picked up money creation. They even talk about a money multiplier. What? That’s the second theory. Now there’s a third theory and that one had been made out to be a wacky conspiracy theory. Oh, but it is the one that was more or less quite widely known until about a century ago. And that’s the credit creation theory of banking. And this one says banks are not financial intermediaries. Banks are special. They have a unique power that no other player in the economy has and that is the power to create money.

Response Joeri

In dsge models banks are often assumed to create money as a function of interest rates
There are DSGE models that include bank money creation
Central banks are open about this now
Still, these are often specialized models…
And, that’s not all that is wrong with standard macroeconomic models… I’ve been told this next clip is from Gary again.

Gary: Representative agent models ignore inequality

Gary: the models which we study at universities nowadays, one of the big simplifications is that there is no inequality in the model. In fact, it’s more than just that there is no inequality in the model. There is only one person in the model. So these models are what they call representative agent models. So rather than looking at 6 or 7 billion people in the world, or like 66 million people in the UK, or 300 million people in the US, they say to make the model simpler, we are just going to look at one representative person. So the average person in the whole economy.

So all you care about is averages, right? You’re just looking at one average person. And of course if we change the distribution, if I take some wealth from you and give it to Bill Gates, or if I take some wealth from Rishi Sunak and give it to you, that changes the distribution but doesn’t change the average.

Which is why when modern economists you’ve been to these elite universities think about the economy, they tend to think about them in terms of averages or aggregates, so that they’re obsessed with the big aggregate measurements of the economy. For example, GDP is, of course, the classic one, unemployment, inflation, central bank interest rates, level of government spending, level of government taxation. These are things which you can measure on an aggregate economy. But they’re nothing to do with how is one person affected versus another person.

Response Joeri

So, okay, again we see this critique… standard simplified models don’t have a realistic feature like inequality. The model I previously made.. did inherently model inequality.. as well as bank money creation. However, my model was actually really hard to study precisely because it had so many features.
Therefore, most economists make specialized variations of the models based on what they study.
For example, economists like Chicago professor Greg Kaplan DO study inequality by creating a variation on the standard simple models, that do model wealth inequality between households.
Also, there is a lot of highly ranked “mainstream” economists trying to rise attention to the effects of both wealth and income inequality (Angus Deaton, Joseph Stiglitz, Amartya Sen, Tony Atkinson, Thomas Piketty…)
In fact, the literature on income inequality has grown exponentially over the past 60 years.

Still, a standard model does not have these features. Gary views inequality as arguably the most important thing in the entire economy. Professor Werner sees bank credit creation as the most important thing. Macroeconomists in general do not agree with them. So, they don’t model these features as a standard… unless they built giant models like I did… but these have their own problems..

So, overall, I my general reaction to these two clips is that they are half wrong… They are wrong to say economists do not model these features at all. There are clearly wrong that economists do not study these features. But, they are right that many standard models do not have these features.

And, if you are going to study econonomics in university… this is very important, because, unless you go into a PhD program, then YES you will likely only see the most simple models there are, which gets us to the third type of criticism I’m going to react to today, which is that

Conclusion

So, yeah.. that was my response to these 3 types of critiques.

Economics is not a real science..

It is a real science. But, it’s a social science. Social systems are more complex than natural systems because humans are more complex. On top of that social scientists may influence the system they are in. And, On top of that, just as with climate science, or studying planets, the bigger the economic system gets, the less easy it is to study them through the gold-standard of science, controlled experiments. That being said, economists are trying to do more and more experiments. I even featured a proper macroeconomic experiment on this channel last year. So I’m very excited for the future of economics. Even if critique

economic models are terribly outdated … has some truth to it

I somewhat I agree with. YES standard economic models are oversimplified. But, we don’t have a great alternative yet. I have actually programmed some of these some super advanced simulation models myself people like Michael Saylor talk about. Yes, these are . But, these have their own problems: they It’s actually very tricky to track what’s going on with them, and, tare difficult to understand. hey are also really difficult to teach so… When Keen says

Don’t study economics.. It’s a waste of time.

I really disagree. Yes, be careful where you study economics, I recommend you pick a scientifically progressive department, where they teach multiple schools of thought, teach some economic history, and focus on empirical economics, alongside standard mathematical models and of course, watch this channel every week!

But, yeah that, is my take. Do you agree? Let me know in the comments. And, if you liked these nice products from Ekster, consider ordering them via our link below. This gets you a really nice discount, and it indirectly supports the channel.