The Scientists Of Sintra

The world’s most powerful central bankers traveled to Portugal this week for the ECB’s annual forum in Sintra, where Jerome Powell, Christine Lagarde and Andrew Bailey availed themselves of another opportunity to explain how wrong they were about inflation, and why.

As usual, my Sintra invitation was lost in the mail, so I can’t offer anything like a comprehensive assessment of what was or wasn’t discussed aloud, let alone what subjects were broached during whispered dinner conversations. But I’m reasonably confident no one in attendance demanded we relegate the “science” of economics to the dustbin of history or, at the least, strip it of the elevated status it’s enjoyed over the past six decades.

You’d like to think there’s a threshold beyond which failure to accurately predict real world outcomes renders forecasting frameworks irredeemable, but the fact that economists not only still have jobs, but actually occupy the most important positions on the planet, suggests otherwise. Never in human history has an endeavor with a track record as poor as that associated with economics survived as an enterprise worth pursuing. Although I doubt this is a testable hypothesis, it’s not a stretch to suggest astrology has a better track record than economics.

I’m frequently reminded of Steve Martin’s Neal Page who, in one of the most beloved films in all of American cinema, tells John Candy’s Del Griffith, “You’re a miracle! Your stories aren’t even amusing accidentally.” I can see myself venting to a teary-eyed economist: “You’re a miracle! Your forecasts aren’t even right accidentally.”

On Wednesday, Powell who, to his credit, actually isn’t an economist, but seems to have contracted their affliction after associating too closely with them for too long, mused about the imperfections of models. “One way to say it would be that I think we now understand better how little we understand about inflation,” he said, to nervous laughter (video below).


“That’s not very reassuring,” Bloomberg’s Francine Lacqua joked.

But it’s not a joke. And one reason the laughter from Lagarde, Bailey and Agustín Carstens sounded so belabored is precisely because Powell’s “plain English” (as he describes his communications style) isn’t necessarily welcome at such a delicate juncture. Economics is in the process of failing the public for what, if there was any justice in the world, would be the final time.

Powell continued: “Really everyone had the same model, which was the Phillips Curve, and it just was not capable of producing high inflation.” He then attempted to explain “what it was missing.” To the extent such explanations can be, Powell’s remarks were convincing.

The problem, though, is that these sorts of shortcomings are only forgivable in the context of soft (or “pseudo-,” if you’re feeling less generous in your adjective selection) sciences. We forgive assumptions that turn out to be wrong in the soft sciences because generally speaking, we don’t elevate those disciplines such that mistaken assumptions are immediately ruinous.

When it comes to people’s lives, we don’t usually rely on soft sciences. When we build planes, for example, we rely on any number of assumptions associated with hard sciences to ensure that once we launch 150 people 30,000 feet into the sky, those people are safe. When something (anything, really) goes wrong with planes, we demand answers. In aerodynamics (like bowling), there are rules. Physicists may debate the finer points, but we long ago established enough in the way of consensus to allow people to fly around the world safely. When planes crash, and it’s not the result of bad weather or terrorism, we can be reasonably sure that human error (either on the part of the pilots or the manufacturer) was responsible. If aerodynamics is at fault, it’s only because we (humans) failed to understand something about it. Aerodynamics itself can’t be “wrong.”

Contrast that with economics. There’s no consensus in economics about anything, and when there is, it isn’t absolute. Economists can’t be sure about things in the same way real scientists can be. That’s because there are no rules around which to form a real consensus. Economics is just a collection of observations about the way humans tend to transact with one another. The problem isn’t necessarily the method. The problem is that whereas the human element is only present on one side of the equation in the hard sciences, it’s present on both sides in the soft sciences. In economics, humans are observing humans. The presence of the human element on both sides rules out rules. We’re an erratic species prone to bouts of mania, depression, greed, despair and irrationality, especially as it relates to money. And money itself isn’t an objective reality. We made it up. That makes the situation even more indeterminate and even less amenable to scientific codification and axiomatic treatment.

This charade needs to stop. And unlike the army of tongue-in-cheek critics who spend their days deriding economists and central bankers because it’s fashionable or conducive to web traffic, I’m quite serious. Economics should be demoted to its proper place in academia, where it should sit alongside sociology, anthropology, political science and philosophy, from which it was born.

There’s a place for technocrats in policymaking, but inherent in the idea of the technocrat is the notion of precision and skill in something that’s at least a modicum of scientific. You can be clever or persuasive — innovative even — in economics, but you can’t properly be skilled or precise. Because economics isn’t real. Not in any scientific sense, anyway. In some cases, you can make something more scientific by mathematizing it. But no amount of mathematizing can turn a soft science into a hard science. Econometrics is just the economics lie taken to its illogical extreme.

“Is there a point at which inflation expectations get de-anchored?” Bloomberg’s Lacqua wondered, during the same Wednesday panel discussion in Sintra. “You never really know. There’s no way to know in real time,” Powell said. “But there’s a clock running here. We have high inflation running now for more than a year,” he added, quickly. “No one should assume — it would be bad risk management to just assume that those longer-term expectations will remain anchored indefinitely.”

He’s correct, but unwilling to connect the final dots. There’s no way to know if inflation expectations are becoming de-anchored in real time because inflation expectations are subjective. They’re the sole purview of the people who harbor them. They don’t exist “out there” in a way that’s amenable to “risk management.” And, arguably, they were only low in the first place due to structural factors that kept inflation low and had nothing whatsoever to do with central banks.

Inflation expectations are subdued when inflation is, and vice versa. That’s a tautology, it’s not science. You don’t need a PhD to predict that when the price of food is rising, people will become more concerned about the future cost of food. But we award PhDs for those kinds of revelations. Then we hand our newly christened “doctors” the keys to the universe.

Read more:

Economics May Kill Us

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12 thoughts on “The Scientists Of Sintra

  1. I am an economics drop out from a PHD program for many of the reasons you cite in your article. During the time I studied, awhile ago- the discipline was besotted with econometrics and determinism. It turned me off- economics is a behavioral science not a physical science. And many of the practioners believed that human behavior could be precisely modeled. The last 20 years has demonstrated the folly of that sort of thinking.

  2. +1 on my colleague RIA’s points, though I never made it as far as grad school in the subject. My revelation occurred during my freshman year.

    But a massive BRAVO to Dr H on this piece. Seriously.

  3. Just think of economics as a cult. It has wacky articles of faith and intense brainwashing. It was a science once, but lost track about 40 years ago. Right now it is just used to grant legitimacy to the socio-economic system adopted by western democracies. As the system fails almost everyone, many economists are needed to prop it up.

    1. 40 years ago? 1980s, oh yeah. GQP Saint Ronald Reagan’s economic policies, succinctly described as Voodoo economics by George H.W. Bush before he jumped on the ticket. Let’s see: tax cuts, the deregulation of domestic markets, lower government spending (DOD excepted), a tightening of the money supply to combat inflation, de-unionization of labor and morning in America through the magic of trickle down dynamics. Maybe we should have just sacrificed a goat.

  4. H squarely struck the crooked nail, but what is the alternative fastener? If central banks are not to use their best understanding of economics, what else?

    We can think of improvements. A more grounded understanding of real world markets and supply chains and consumer behavior, more timely and granular information flow, closer consultation with persons outside of the ivory tower. Perhaps incrementally less dependence on theory and more on data.

    How much would these have helped? The financial markets and industry, with tens of thousands of participants deep in the weeds, also broadly got the forecast wrong back in 2020 and 2021. For every pundit who was singing the Inflation Song all along, dozens were not.

    This is a humbling business, both ours and the Fed’s. If we, or at least I, look back on our calls over the past two years, there were plenty of wrongs among the rights, even if we are lucky enough to have had more of the former than the latter.

    We are fortunate to have only one objective – profit – and no responsibility to anyone but the clients whose portfolios we manage. If we had been saddled with triple conflicting explicit mandates – e.g. financial system stability, low inflation, and full employment – might we not today be mumbling about we got some of them wrong but the others right? Kind of like I look back at my performance over the past two years and despite my best efforts still find no shortage of things to wince about?

    The Fed got the full employment part very right and the financial system stability part as well (so far). It got the inflation part very wrong. It is really too bad that it didn’t thread the needle more deftly, but it may be that there was simply no way to stitch the full quilt.

  5. This whole post is devastating and poetic at the same time, the sword of democles slicing economic “science,” great read.

    1. Agreed. It read like a true crime. Inevitable tragedy preceded by interviews with officials and justification from the responsible/passionate acting party. The contrast of true reality with criminal human efforts/excuses.

  6. The assumption of western economic theory is that economic growth and population growth can go on indefinitely–and should go on indefinitely. This is a violation of the most basic principles of population biology–which is most definitely a real science.

  7. Economics is a soft science that provides an avenue to unimaginable riches. This is why it won’t end now, nor will it ever end. Combined with the soft science of humanism which, in my opinion, essentially makes humans and electrons inseparable, you have a path to unimaginable riches for those willing to do the least amount of work. Economics is now applicable to pretty much anything in human existence. Money, time, school, work, investment, class warfare, and politics. All of it is distilled into an unempathetic sociapathic economic decision. Rational will say that it doesn’t matter that some or many are injured, the “strongest” survive. The periodic we are going through echoes many in the 20th century and yet it exceeds all of them. However, economics is the driving force that brought us to America, built our nation through slavery, expanded our nation through genocide, elevated our empire during world war 2, and put us at the pinacle of power in human history. The US may fall to Authoritarianism, but economics will absolutely go on.

  8. H

    You said, “Never in human history has an endeavor with a track record as poor as that associated with economics survived as an enterprise worth pursuing.” Hear, hear. And it’s got a Nobel Prize, to boot.

    I was an undergraduate econ major, as well as having a field in econ for my PhD in Finance (where the money is actually made, rather than in econ) I was a candidate for honors at my school so I had to write an undergraduate thesis. My school also required two days of written comprehensive examinations covering everything we studied in the subject. After completing those exams, two days later we had to sit for a two-hour oral exam based on our written answers. So I just sat down for oral and the examiner as how I felt about macro-econ and I had an epiphany I have never been able to shake. This totally politically incorrect, but as a child I read a Golden Book about “Little Black Sambo” and the Tiger. The indelible image I took from the book is of the two characters, the lad and the tiger chasing each other around a tree, faster and faster until they turned to butter. For me the point was who was chasing who? Macro econ strikes me the same way. Does more money cause inflation from increased demand or does increased demand cause the need for more money? There is this sort of circular quality in the macro economy you write about often. I think one reason economists can’t get it right, aside from the fact that incorrect forecasts are inevitable or statistical grounds, is that no one knows what causes what first — the chicken-egg question.

    Econ has been around for a long time. In John Stuart Mill’s day, it was called “Political Economy” and it was studied by philosophers who never seem to get anything right by design.

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