Tuesday, April 21, 2009

Against Empirical Analysis

My writing is often criticized for not being empirical enough. That is intentional.

Although I will often use statistics and charts to affirm my opinions, my opinions are not originated from statistics and charts. This is a fundamental departure from neoclassical economic analytics that suggest economics is a science that can be modeled with a complex equation, and is more compatible with Austrian Theories that argue economics is an art which is based on the ever changing preferences of individual actors.

This is why I have zero hesitation in labeling people with years of formal education, PhD's, Nobel Prizes and other such qualifications as "incompetent." If someone were to critique a painting for not conforming to a certain set of quantified consumer colour, shape or texture tastes, they would be quickly banished for uttering such blasphemy. But the art of economics has been hijacked by people who believe there is such a "perfect painting." There is not. And the events of the past two years demonstrate this better than ever before. If a person with little more than an internet connection and a library card can massively outperform people with Harvard educations and "predictive models" that cost millions of dollars to create, how can one conclude otherwise?

By the time this crisis has run it's course, the notion of economics as a science will be turned on it's head. The General Equilibrium Theory, The Efficient Market Hypothesis, Game Theory and many others will be resigned to the trash heap of history where they belong.

It is for this reason specifically that I seek out opinions of people who have no formal education in economics. People who have no preconceived notions of what "should" result from a combination of certain actions. People who instead look first at the underlying changes in society and then share their analysis of whether a certain influence will result in any number of potential outcomes. I suspect that readers of this blog seek out the same analysis and that is why a steadily increasing number of readers are willing to devote their attention to a 26 year old with little more than an internet connection, a library card and a dash of humility (on occasion).

Nobody attempts to debate the existence of substantial changes in social action over the decades. Anyone who was around in the 60's saw this with their own eyes. Those who weren't don't need to go far for evidence. Simply look at archive photos of pop icons like The Beatles.

This photo was taken in 1965, following the release of "Help!" Notice the clean cut, preppy style of dress, and "moptop" hairdoo.

Now look at the same kids less than two years later following the release of "Sgt. Pepper's Lonely Hearts Club Band" in 1967. Multi-cloured suits, scruffy hair, and mustaches.

What happened? Social change happened. A new generation grew out of their over-protective WWII parents and began to rebel against anything that resembled the values of old. A world of technological advancement and rising standards of living was not compatible with racial or gender inequality. It just did not make any sense to the younger generation. So they fought to change it. The economy struggled for 16 years to adjust to the demands of adding women to the workforce and to provide a new array of goods and services for a generation with different values and demands than those previous.

People have no problem understanding these types of historical changes. Yet when confronted with the excessive problems we face today, academics and average folks alike cannot envision a period of similar change. They cling to what they know; to what is comfortable. They cannot comprehend what a recovery would look like without rising debt levels, a revival of the housing market, busy shopping malls and a new consumer fad. All they know is a steady progression towards bigger, louder, shinier. The trend has become a defining characteristic of their very existence.

Even when the evidence is staring them in the face, they refuse to believe it is over; that it is not coming back. Take for example this article from USA Today that has garnered quite a bit of attention:

When the economy started to squeeze the Wojtowicz family, they gave up vacation cruises, restaurant meals, new clothes and high-tech toys to become 21st-century homesteaders.

Now Patrick Wojtowicz, 36, his wife Melissa, 37, and daughter Gabrielle, 15, raise pigs and chickens for food on 40 acres near Alma, Mich. They're planning a garden and installing a wood furnace. They disconnected the satellite TV and radio, ditched their dishwasher and a big truck and started buying clothes at resale shops.

"As long as we can keep decreasing our bills, we can keep making less money," Patrick says. "We're not saying this is right for everybody, but it's right for us."

(emphasis mine)

Two years ago people would have thought this family is from another planet. Today, the comments section of the article is full of people who claim to be considering such changes for their own families. And that is just a story of people who have elected to make those changes. There are an equal or greater group of people who are being forced to make them because of job loss, rising debt burdens or falling net worths.

I've been doing google news searches periodically for the world "frugality." The use of the word in news publications has been rising exponentially. This article from a midwest newspaper is one of dozens yielded on a search today.

Frugality is the new black. Throw in the terms "eco-friendly" and "healthier," and the result is a trifecta of hip.
Who knew packing a lunch could symbolize so much?

"It's every penny counts," says Kevin Wehr, an assistant professor of sociology at California State University, Sacramento. "It's expensive to go out to eat, and when people have fewer dollars in their pockets, it's a cheap and easy way to reduce expenses."


Carrie Person of Roseville, Calif., packs a thermal-insulated case of food for her husband, a software salesman, every night before going to bed.

"He leaves for work really early," she explains.

Person, 33, varies yogurt flavors, sandwich meats, breads, even mustards, she says. Her husband used to be chastised for being a frugal foodie in the office, but he now looks like something of a trendsetter.

"His co-workers used to tease him about bringing his lunch," Person says. "Now, a lot of them are starting to do it as well."

Everywhere one looks, one can see signs of current and impending societal change. Even in popular culture. Surely most of my readers have been made aware of Susan Boyle's performance of "Dreamed a Dream" on the reality show Britain's Got Talent. Boyle is a 47 year old frumpy Scottish woman who's previous life achievements include caring for her aging mother and church volunteering. She has never held a serious job. One fairly mean-spirited summation of her appearance I saw was that "she appears to have fallen out of the ugly tree and hit every branch on the way down."

John Xenaxis at Generational Dynamics had a very interesting review of her performance, but his site is having difficulties at the moment. As John pointed out, it is not really the performance that is significant. It is the reaction to the performance. The online video I linked above is one of many whose total views have set new internet records and tally in the 100's of millions if put together - only 10 days after first being heard.

Why is this important? Plenty of less than supermodel quality singers have won contests. It is important because it demonstrates the changing social values in our society. People are ready to cast aside the old paradigm values characterized by sickly thin, botoxed women toting around shopping bags:

The reaction to Ms. Boyle's performance was not a celebration of a great voice, it was a celebration of the death of an era. An era that no average person wants back. The audience and the hosts intuitively recognized that they were witnessing a singer - not a representation of what a singer should look like. And this reaction is the result of a societal urge to experience what is real and cast aside what is fake. It is the same societal force behind the utter rejection of what was formerly known as our financial system. And it is the same force behind people electing to raise their own livestock or brown-bag their lunches, as opposed to settling for the fast food option.

Kevin Depew has been writing about this topic for years, starting in 2006, and following it up with his article last year titled, "The Crisis of the Real."

Neoclassical analysis has no room for attempting to spot changes in social mood to determine their consequences. Instead they would point to the people making their own lunches as "contributing to a problem of demand deficiency." They would then suggest that the government impose regulations on the sale of food ingredients or to give tax breaks to restauranteurs in order to "bring the market back into equilibrium." In trying to explain Susan Boyle's sudden popularity, the neoclassical economist would grade her appearance on a scale of 1 to 100, and based on the previous success rates of people with a similar appearance, they would assign a probability to the chances of something similar ever happening again. With a straight face, they would look at you and explain that her performance was a 1 in 963 year event and should therefore not warrant any further analysis.

If you are still interested in reading empirical studies of the economy based on statistics, I can provide you with a long list of harvard graduates who have published many university level papers on various subjects.

Alternatively, you could type into your browser window a random acronym followed by ".gov" and are sure to find something along the same lines.

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Anonymous said...

keep up the good work. I really enjoy your posts.

Matt H said...

Excellent article from an excellent writer.

One idea that I have had about so-called empiricism and economic modeling is that they might *at best* be effective for understanding trends and making policy in normal times. And by normal times, I am referring to 3, 4, or even 5-decade periods separating major social or political turning points. Many economists I suspect would be quite content to make excuses for their models on the grounds that they were never designed to hold up to truly "exceptional" circumstances.

Before this crisis started, the vast majority of economic articles would go back only to World War II for source data (if that far.) You NEVER saw graphs with years earlier than late forties and fifties on the X-axis. Now it is common to show graphs starting in the thirties or even twenties.

Part of the reason I find the Austrian School so compelling is because it alone provides a context for understanding not just those large spans of normalcy, but also the critical turning points. And it also celebrates certain behaviors (saving and investing) that seem to lose their value during normal periods (i.e. "paradox of thrift") but nevertheless reveal themselves time and time again, at those key turning points, to be the foundation of any sound economy. Understanding and practicing those behaviors are what allows a person or nation to maintain real prosperity that doesn't unravel every couple decades.

I also find compelling your insight regarding the social desire to return to reality. This is the ultimate silver lining of what we are experiencing. For too long, people have been conditioned to accept marketing and propaganda as the truth. It came from everywhere: from their bosses, their PR departments, their government, their schools, their military leaders. Many people probably suspected, as I did, that the constant preoccupation with how some action or product or speech would be perceived, rather than whether it was truly productive, truly useful, or truly informative, was ultimately unsustainable. Some who had been living with perception for so long even began to marvel that things seemed to continue to operate. There were even hints of celebration: "Yup, that's politics!" or "That's how the game is played!"

But no, that's not how the game is played. Eventually, perception gives way to reality. You are right to point out that people cling to perception. Obama, for example, clings to his political strategists who still operate in the perception paradigm. Proudly announcing $100 million in spending cuts when the federal budget is growing by trillions is clearly a perception-era move. The failing newspapers that ran articles about it are perception-era organizations. But I am convinced the hunger for truth and reality is so great that these moves will entirely lose their effectiveness. We may actually experience Obama saying something real in the next 4-8 years. It will surly be bad news, and it will be wonderful hearing it.

mike.montchalin said...

Nice job on the Beatles. I am from that era, and you got it right.

I am always amazed by those academics who wound up Austrian in spite of their education. I am thinking of the fine folks at www.econtalk.org
George Mason is a hotbed of Austrianism.

rick said...

This morning I listened to a commercial on a local radio station in Vancouver BC. The commercial was trying to convince the audience that now was an excellent time to buy a home: dramatic price decreases, low interest rates, etc. The crazy thing was, the ad wasn't sponsored by the local real estate board or the CMHC, it was sponsored by the radio station! Totally irresponsible.

I guess the idea is: promote reinflation to help increase ad revenues.

Matt Stiles said...

anonymous - thank you

Matt H - Bang on. One thing I forgot to mention in the article was that just like the Boomers went way out of their way to disown the values of their parents, we will also likely go way out of our way in disowning the values of the last few decades. Even reasonable consumption will be frowned upon. The savings rate will probably hit levels never seen before (on the upside, that is).

Mike - Indeed. They are a rare find. But there is a small percentage of university professors (3% maybe) who are either Austrians themselves or have strong sympathies. If one is lucky enough, they can be taught by one of these. I've been contacted by a student of Robert Nozick from the Wharton School of Biz as one example. They do exist. Thanks for the link.

Rick - Yes, I've noticed that too while listening to hockey games. It was likely the Team 1040, whose hockey broadcasts are owned by the Aquilini brothers (a part of the package in buying the Canucks). They are real estate developers themselves - so no surprise there. They even had the play-by-play guys hawking luxury condos in Abbotsford in between whistles last year.

Anonymous said...

Not enough statistics in this article.


fish10 said...

Good article Matt.

This is truly the end of an era. The end of the 64" flatscreen TV and BMW 7's as the ultimate dream and source of happiness.

Anonymous said...

Interesting blog. Keep up the good work.



John Cooper said...

A very thoughtful piece, and a great blog. Thanks.

I actually laughed when I saw the news stories about the Wojtowicz family, having gone through a similar phase back in my hippie days.

They're going to learn real soon that it costs them more in chicken and pig feed than the meat and eggs are worth. Not to mention vet bills and the smell...Sure, it's a great feeling having pork and chicken 'on the hoof' in the back yard, but practically, it doesn't make sense.

Even back in the seventies when people could go dumpster-diving for animal food behind the supermarket, it still didn't make sense economically. I know, I've been there and done that. I learned a lot.

The main thing I learned in my 'back to the land' days was how great it was to be able to drive down to the supermarket and buy a cut-up chicken or a beef steak for a couple bucks without having to feed it for six months and then butcher it myself. Ever butchered a calf at home? It ain't pretty and takes days to cut it all up and grind the hamburger, even with refrigeration.

Frugality is good. So is raising your own food - but it's expensive, back-breaking, and time consuming. That's why our grandparents moved to the city as soon as they were able. They knew...

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