Uncommon Sense. Pape Scott

get away with as much artistic licence as in economics. But, hey, I'm not the only one who thinks this way. If you want to do some further reading, look out for The Pretense of Knowledge by Friedrich August von Hayek or ‘Science as Falsification' by Karl Popper.

      A SOCIAL SCIENCE

      Another monumental difference between economics and science is the human factor. Scientific laws are unshakeable but economic outcomes are influenced by human sentiment and behaviour. The imagined future can affect the present, and thereby influence how the future turns out, which means economic researchers are studying themselves. I've heard it said that this makes economics a bit like studying the movement of ‘billiard balls with eyes'. The rules of physics describe how two billiard balls interact as they crash into each other and the cushions of the billiard table. But consider how a billiard ball would move out of the way if it was capable of seeing another ball approaching!

      In deference to others, I acknowledge that my views are not held by all. Consider these words taken from The Next Great Bubble Boom by Harry Dent Jr, published in 2004, containing cover-to-cover stock market and economic predictions:

      Today in economics and in many fields of politics, sociology, and science, there is an attitude that ‘nobody can predict the future past a certain point' … But this is obviously nonsense as more and more fields of science have become capable of predicting more phenomena for centuries as our knowledge of the universe has grown exponentially.¹¹

      Clearly this author is confused. He argues that our ability to make economic predictions has improved as a result of progress in the ‘fields of science'. Interestingly, this book was released not long before the GFC, yet it failed to predict it. (No doubt this will be fixed in the next edition.)

      Famed US economist John Burr Williams was working as a security analyst when the 1929 Crash decimated stock portfolios around the country. He later told of the experience, noting the price movement in a stock called American & Foreign Power. Pre-crash it traded for 199¼1 (100 times historical earnings). Post-crash it plummeted to a low of 2. Like pretty much everyone else, Williams hadn't seen the Crash coming. He felt this was due to an inadequate appreciation of the forces driving the economy. It prompted him, in 1932, to enrol at Harvard to obtain a PhD in economics. Someone, he figured, must be able to explain to him what had caused the biggest collapse in stock market prices ever seen and the ensuing Great Depression. He later reported that he never found the answer he was seeking.

      Want to summarise the whole macroeconomic question in a few lines? Economics presents an interesting study. It assists us in thinking about and articulating important issues that impact our lives. It measures and reports on historical information in an interesting way. But economic models fail abysmally in either describing or predicting the real world.

      Chapter summary

      • Economics doesn't lend itself to experimental rigour. Therefore most economic concepts can be neither proved nor disproved.

      • Economics is largely a social science.

      4

      FORECASTING THE STOCK MARKET

      I want to start this chapter by saying that everything I've stated so far regarding our inability to predict applies to the stock market. I'll say it again. Everything I have stated so far regarding our inability to predict applies to the stock market. I could repeat that sentence a hundred times. But most people would forget it the minute they closed this book. Why?