Nathan Scandella (personal)

Grilled Greenspan

Well, Alan Greenspan finally got the welcome he deserves in Congress today. For years, politicians of both parties welcomed him to their hearings as if he were the Dalai Lama. I can proudly say that I never-for-an-instant bought into this guy's spiel. When things seemed like they were going well, I gave him absolutely no credit. But, I'm happy to pile on the blame now that things are falling apart.

In the 80s, we had the appearance of growth because Reagan was running up massive debt to feed our economy by way of defense contractors. In the 90s, we actually had some legitimate increases in productivity, largely as a result of new computer and software technology. The "dot-com bubble" exaggerated the real gains we made, and we floated back to earth at the start of this decade. Since then, we've been limping along, held up again by Bush's massive debt machine, and also by convincing ourselves that we're all more wealthy because everyone's house got more valuable while we slept.

None of the actual (as opposed to perceived) success was as result of Alan Greenspan's actions. He's never written a line of code, never riveted together an auto body, never decontaminated a Superfund site, or taught someone else to do any of those things. Greenspan is merely overhead. His job was to sit in front of the US Monetary Policy machine, look at his data, and turn a couple of knobs when the system got out of tune. And he blew it.

He wontonly advocated for deregulation, promoted over-leveraging of the entire country with his low rates, and failed to do anything even in those times when he did see problems coming. I'll give Greenspan one thing ... he was in a position of tremendous power, given the aforementioned adulation of the Congress. If he opposed the Bush tax cuts, he could have said why, and had an army of zombies in Washington follow him.

Today he said that he was surprised that the financial players in the private sector broke down because in the 40 years he's been watching them, this sort of thing has never happened. Are you kidding me? Well, if it hasn't happened in 40 years, that must mean it's impossible, right?

This is why I cannot acknowledge Economics as an actual science. In a real science, you need swarms of data to be able to arrive at conclusions. The first-hand experience of one man over 40 years in the same country does not constitute a sufficient sample size. Sometimes, in real sciences, basic laws allow you to derive a relationship (a function relating one observable quantity to another) on paper. Then, you get to go into a laboratory and try to isolate all the other factors, except for the ones you are trying to quantify the relationship between. If the tests you run under controlled conditions in the lab agree with the prediction you derived on paper (or via computer), then you get to claim some understanding of the forces at work, and you present your work to the rest of the scientists, so they can try to tell you why you're wrong.

Economics doesn't work this way at all. A bunch of guys look at a minimal set of data, and try to back out patterns from that economic data. They throw in their own personal ideological biases, and out comes a theory. If you're the Chairman of the Federal Reserve, then you get to try out your theory in the real world, which means playing with the contents our all of our bank accounts. This isn't science. This is art. This is improvisation.

Why do I care about this distinction? Because the validity of an economic policy, or philosophy, needs to be viewed in the same way you would approach a piece of art: by realizing that there is no right answer, because there are no laws that govern how people will spend their money. Just as their are no laws that govern how people will receive a piece of art. At best, you can consider the best artwork to be that which receives the best reactions from its audience. But, Greenspan did not present his artwork to the world with humility. He presented it as the manifestation of his understanding of how things work. Unfortunately for us, he did not actually understand how things work at all. Is that a crime? No, not really. I only wish he, and others in his field, would acknowledge the true nature of their work. They are still Freshman in the College of Sciences, and their ultimate graduation cannot be considered a foregone conclusion.

I saw an episode of NOVA once, where they discussed String Theory, or some other niche in modern physics. Some very smart people had generated a lot of good ideas about how things worked, on a scale far smaller than that of atoms. They had very strong math to support their ideas, but unfortunately, we currently have no technology that would allow us to definitively confirm or reject those ideas. One scientist concluded, "[in that case] is it really Science [if you can't prove it]?"

As much as I respect those scientists, I can see that when it comes to the nature of energy itself, they have some work left to do. Therefore, I will base no decisions in my world on the correctness of their as yet unproven ideas about String Theory. Perhaps if Greenspan, et al were to realize the limitations of their ideas (in real time, as opposed to what happened today!), their confidence might recede a bit, and our elected officials might be more apt to question them next time a bold ideology crops up.

Personally, I'm glad we have other disciplines that understand what real science actually is. Where would we be if climatologists said, "well the Earth's climate hasn't significantly changed in the 40 years I've been watching it, so we shouldn't need to do anything to prevent a crisis in the future"?

Posted at 10:15PM Oct 23, 2008 by Nathan in Economics  |  Comments[0]