Thursday, 10 July 2008

What if what the economists taught us was wrong?

Contrary to what you might believe if you look at the few comments posted on this site, I do get loads of comments ‘off-the-record’ and ‘not-for-publication’ from readers.

One of the more interesting arrived today. A reader chided me for taking what economists and so-called ‘city expert’s’ said seriously and suggested I read “What if what the economists taught us was wrong? from SeekingAlpha which was itself occasioned by an article in FT on 6th July The villains are not the bankers but the economists.

I must admit it started to resonate with me when I read. “Some U.S.-based financial advisers might be asking themselves today, eight years into a secular bear market in stocks where "stocks for the long run" may not make a whole lot of sense for someone whose "long run" is only 15 years or so and happened to begin around 2000”. I’m always being told that equity investment always beats a building society – but it has never worked for me! Even over the ‘long-term’ it is all about when you get in and when you get out. Something I always get wrong.

But the reader really wanted me to read the last bit from Andrew Mellon, Herbert Hoover’s Treasury Secretary, describing his solution to the 1929 downturn:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate... It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”.

In other words, let 'em all go bust and start again. Seems a bit extreme to me! As he mused “Are there enough ‘Enterprising people’ around anyway?”. Problem is that when you are "an IT veteran" (as I was called in several newspapers this week) maybe you haven't got the time to do it all over again either.


paul rayner said...


Re your point about "what is the long term" (What if what the economists taught us is wrong).

I always understood that Keynes was quoted as saying "In the long run, we are all dead". More relevantly, Berstein, in "Against the Gods - the Remarkable History of Risk" points out that proving many economic theories, such as the value of spreading investment risk, have never been proven in real life since it needs a many years of economic stability (like 100 years without any World Wars, Great Depressions, etc) to do so - something that has never happened. So much economic theory has never actually been proven.

This suggest that the key quality required to be a top banker or economic advisor is the same quality that Winston Churchill said that politicians needed - "the ability to predict exactly what will happen next week, next month and next year, coupled with the ability to explain it all away when none of your predictions actually materialise".

Richard Holway said...

IT analysts need the same qualities...