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Adrift in a Sea of Economic Data

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Yves here. This post from MacroBusiness provides a good point of departure, and I’ll provide some comments further down.

By Sell on News, a global macro equities analyst. Cross posted from MacroBusiness

A little known fact about John Maynard Keynes, detailed in Jane Gleeson-White’s book “Double Entry” is that he was responsible for the development of national economic statistics and that he expected them to be aggregated only on a temporary basis.

It was being done for the war effort, and would, he reasoned, not be necessary afterwards. This certainly puts “Keynesianism” in a different perspective, and poses the intriguing question: where would we be without economic statistics?

The Economist recently had a leader “Don’t Lie to Me Argentina” in which it accused Argentina of some kind of unforgivable treachery for politicising its economic statistics. As if economic statistics aren’t political in their very nature (a heavy bias towards capital and against labour, for instance).

So in contrast to H&H [a fellow MacroBusiness blogger], who enthuses that without economic data we are “naked, bereft of meaning” I wish to present a very different perspective. I wish to briefly examine what it would mean not to have economic statistics. Here are a few implications, I submit:

1. We would have to stop being lazy in the way we construct meaning and do the work of creating meaning ourselves.
The worship of economic statistics encourages a certain passivity of mind because it presents us with a picture ready made that we can then seek to interpret. Trouble is, that picture is heavily biased. Imagine, for instance, if it included unpaid housework as was proposed in Keynes’ time? Economics just presents transactions and makes little distinction between good transactions and bad ones.

A natural disaster, for instance, is generally thought to be bad, but in statistical terms it is not because typically the reconstruction creates a lot of economic activity (witness the Japanese growth figures post Fukushima). What happens is that transactions are not seen as a reflection of reality; rather reality has to be fitted into the transactions. “We all must change our behaviour because GDP is not growing fast enough, or productivity is not improving enough”.

2. We would embrace a broader sense of meaning, one that did not involve just what can be measured.
Most economic growth statistics measure the exchange of consumer goods, because it is easy. Much harder to measure assets, because they are not continually transacted — that was why the asset bubbles in America were ignored for so long, because they are hard to measure – and harder again to measure long term infrastructure investment. It is impossible to measure culture, yet culture is essential to well being. Indeed, well being is not really measured, and when they have tried to use broader measures it is generally found that life has improved little despite the economic growth.

3. We would not have a financial/economics sector purporting to understand what they do not understand.
For example, the “inter-relationships” between various economic indicators (such as Friedmanites v Keynesianism). This is for the most part an intellectual fraud. There are the obvious conclusions – you can’t spend more than you own, for instance – that derive from housekeeping (that being the etymology of economics). But anything beyond that is either unknowable or a circular argument (for instance Friedman’s maxim inflation is always and everywhere a monetary phenomenon is a tautology dressed up as insight).

4. We would have a greater sense of how we can impel affairs as thinking creatures with free will, rather than being pushed about by the “economic system”.
There is a reason why economists are so poor at anticipating the future. Economic statistics are always retrospective and tell us little about what people are going to do – and it is what people DO that shapes the future. Of course the past will shape what people do, but it does not determine it. Money is a social construct and transactions are social arrangements. They are subject to individual and collective will, not the logic of a mathematical system.

5. We would not have the giant casino that is amusingly referred to as the global capital markets.
The use of algorithms, which poses deep dangers to the system, is only possible because of the blizzard of data and statistics. That is exactly what is being codified and manipulated. Intriguingly, one of the geeks made an interesting comment, saying that a 2-3% variation, which makes all the difference in GDP statistics between acceptable growth and recession is all but inevitable in his geek world. he could not understand why it is considered so significant. But that is our world, dominated by economic statistics.

So there are five reasons why we would probably be a lot better without all that data. Far from being naked, bereft of meaning, I would suggest we could put on some decent clothes and find some more substantial, dare I say it, real meaning.

Yves here. While I would come up with a different list of implications, I’ve long been struck with the fetishization of numbers, particularly when all numbers are not created equal. Transaction data, say the price at which a particular stock traded at for a specific order, is a hard number. But the overwhelming majority of economic statistics are “soft” in that they are constructions, and statisticians care a great deal about consistency over time. That is useful up to a point. The procedures that produce consistency mean that if the measurement fails to capture or underweights an issue that is becoming increasingly prominent, it will have obtained consistency at the expense of representativeness (the notorious non-farm payrolls “birth-death adjustment” is a classic of this type). And the caliber of official statistics had decayed due to reduced staffing thanks to budget cuts.

I wrote about some of the problematic behaviors that result from the propensity to give quantitative information, no matter how poor it may actually be, great weight, in an article, “Management’s Great Addiction.” One the symptoms, and it takes place way too often, is when people rely unduly on a single or very few metrics to analyze a complex phenomenon (think of the use of VAR to measure firm wide risk!). If you must measure to get a grip on a complicated situation, use more rather fewer views in (provided you don’t go for more just to have more but can find pretty reliable measures of different, important aspects of a complex situation).

And perhaps the most important habit to adopt is to be aware of the limits of your knowledge.

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52 comments

  1. ScottB

    Hmm. “There are so many bad books out there, we’d be better off if we burned down the library.” Really?

      1. ScottB

        Sorry, I should have added more (but maybe you’ll still disagree). Numbers and measures are what they are, it’s up to us users to use them critically and not be ruled by them. To me it makes no sense to throw them all out. Per Nietzsche, ‘all numbers are lies, without which we cannot live’ (not an exact quote).

        I agree the numbers are fetishized (it isn’t a news report unless the Dow Jones has been announced). But is the point, don’t get caught up with them, or throw them all out?

        1. Tiercelet

          You’re underestimating the tendency, drilled into our ruling class throughout their economics and b-school education, to glom inseparably onto any quantitative metric, no matter how useless.

          Indeed, in the absence of a meaningful metric, a completely meaningless one will be embraced & probably defended even more staunchly than an actual valid one — a trend visible across realms of human endeavor so diverse as elementary school teacher ratings, LSAT & other standardized test scores, and quantitative text-readability metrics.

        2. ScottS

          Look at the example in the original post. A messy car accident is not the huge boon to society that it’s contribution to GDP would suggest it is.

          If a stay-at-home mom, instead of raising her own kids took care of a neighbor’s kids for pay, she would increase the GDP, pay taxes, and contribute to social security. But raising her own kids is a “drag” on the economy.

          That’s the angle of the original article — the things we measure inherently lead us to biased conclusions. Numbers, seemingly judgement-free, mask an agenda. The agenda is the financialization of everything, and the reduction of human beings to homo economicus so that we correctly fit the sociopaths’ models.

  2. gs_runsthiscountry

    I like the observations in the last two paragraphs. Also, thanks for citing your past article. You had me at: “It’s time we recognized that we just can’t measure everything.”

  3. Hugh

    I wrote a longer comment to this post which I posted but which disappeared into the ether apparently. Ah well.

    1. Dirk77

      I’ll need a quantitative measure of your problem before you are to get any sympathy from me.

      While the certain solution is one you’ve already thought of, and I am not sure this will help in your case, but I find that turning off JavaScript makes my NC experience easier.

    2. Lambert Strether

      Another tip: Get in the habit of always, always doing a Select All followed by a Copy before pressing the Submit Comment button.

      That way, if the Comment fails, you have a copy of the comment on the Clipboard (in memory) and can Past the copy into Notepad or whatever. So you lose nothing.

      The Internet is not a word processor. It is a hostile computing environment.

    3. scraping_by

      My own favorite: compose on Wordpad or Notepad, then cut and paste. Remember to double return after graphs, if you want a line separation.

  4. Mel

    That’s a hell of a question. It leads in all directions and it seems to go forever. Obviously calls for a different standard of objectivity …

    If people are already politically disputing the values of simple numbers, how much more confusion can they generate over “softer” concepts. Contrariwise, people are fighting over what’s important; since we all say that the values of those numbers are important, that’s where the battle will be held.

    Objectivity … (wanders off, perhaps never to return.)

  5. Tom

    The biggest joke in economic numbers are the “jobs numbers”. I love the charts of ‘job creation’ over decades. As if a data point (a job created) in a 1960′s GM factory is the same as a data point (job created) in a Wal Marts are identical data points in terms of standard of living. Whereas, the 1960′s GM job supported a middle class suburban standard of living, the Wal Marts job puts the worker in the ‘working poor’ class.

  6. Tony Wonder

    “Transaction data, say the price at which a particular stock traded at for a specific order, is a hard number”

    Yves, I respectfully disagree.

    One of the reasons that our system is so complex and broken is because “price” now represents an imaginary, non-defined concept (i.e. a dollar, yen, euro, etc.), all made up human abstractions that don’t actually represent anything tangible (with the possible exception of the “petrodollar”), taking the “hard” out of ALL price discovery.

    Now, you can do what I find extremely helpful in certain circumstances, which is to compare one tangible asset directly to another, i.e. crude oil priced in gold or how many bushels of wheat a share of the Dow will buy you.

    But most people do not even know how to think like this; half of every economic equation they do involves an abstract currency of some kind, and this is how they attempt to measure value, even “hard” value, not to mention all the “soft” calculations that take place that you were alluding to.

    All of this Keynesian claptrap is predicated on the notion that the numerator of all of our financial calculations has to be a slippery, abstract value that is constantly changing over time. This hurts our markets and our ability to efficiently allocate captial tremendously, and it is only done because it benefits those running the printing press and those who empower them (i.e. the banks and the government).

    My reason for making this argument is because of my study of history and the ills that have always, literally in every case, accompanied the issuance of nonconvertible fiat paper currency. The ways these ills are playing out this time are unique, to be sure, but they are no less devastating.

    “And perhaps the most important habit to adopt is to be aware of the limits of your knowledge.”

    I hope you truly believe this, Yves.

    1. Heretic

      Concerning your paragraph below:
      ‘l of this Keynesian claptrap is predicated on the notion that the numerator of all of our financial calculations has to be a slippery, abstract value that is constantly changing over time. This hurts our markets and our ability to efficiently allocate captial tremendously, and it is only done because it benefits those running the printing press and those who empower them (i.e. the banks and the government).’
      My question to you is by what mechanism do we allocate Capitol, and what or who are the parties that engage in it?

      Please expound your examples from your paragraph:
      My reason for making this argument is because of my study of history and the ills that have always, literally in every case, accompanied the issuance of nonconvertible fiat paper currency’… I know there are plenty of examples in history, but I believe that the issue of the Fiat Currency was not only cause of destructive outcomes. What historical examples do you have?

    2. F. Beard

      all made up human abstractions that don’t actually represent anything tangible Tony Wonder

      So what? It works. People buy tangible things all the time with intangible money.

    3. votersway

      What “Keynesian claptrap”? There is nothing Keynesian in your comment, not even a reference. Keynes was for balanced trade and balanced budget – moving from surplus years in good times to deficit years in bad times. He never recommended anything else.

      Too many people say “Keynes” to refer to what they’ve heard from Krugman. The difference between the two is larger than Mount Everest.

      1. F. Beard

        Balanced budgets don’t make sense either. Where else is new money to come from but deficit spending?

        1. votersway

          Interesting, deficit spending creates EXCESS new money. Deficits are admissible to clear surpluses, neither is good beyond measure.

          The banking system can create money just fine, although the present one is utterly corrupt.

          PS.
          I’m not sure what’s going on here, some comments appear other don’t. Apologies if duplicates show up.

          1. F. Beard

            Whether deficit spending is excessive or not is properly a judgment call of the money issuer so long as other people are not forced to use that money for private debts.

          2. F. Beard

            The banking system can create money just fine, although the present one is utterly corrupt. votersway

            The banks don’t create permanent money; they can only create temporary money – credit. But where is the usury to come from for those loans?

          3. votersway

            Banks quit lending only when the government is there to bail them out, and at the same time, when the government is there to make opening new banks a hard task. Only corrupt regulations cat be a problem. It’s the same when the government quits lending to the “bad people”.

          4. F. Beard

            Banks quit lending when other banks quit lending which leads other banks to quit lending and so-forth. Why? Because the economy needs a constant increase in debt just so the interest on existing debt can be paid.

          5. votersway

            A bank can’t quit lending without going out of business. It’s like saying that if all of us quit breathing we’ll all die, and the economy with us. It’s true but such self-destructive behavior is rare. The same with the banks – unless the government is corrupt and bails them out. But then, why do you want that same government to… do the job of the banks which it’s preventing form operating properly?

          6. F. Beard

            Banks can stay in business for a while on the interest from existing loans. But yeah, the government does provide subsidies to the banks such as the interest spread between borrowing from the Fed and lending to the US Treasury plus the interest the Fed pays for reserves plus …

          7. votersway

            It’s a mess isn’t it? A regulatory mess, no less. It’s impossible to fix broken regulation with more of the same. The major problem of economics is its refusal to analyze the effects of real regulations – with their conflicts of interest, loopholes, lack of clarity and other problems which are presently dominant. If there was a proper science in place, we wouldn’t have to argue about these issues. Follow my name to read more.

          8. F. Beard

            It’s a regulatory mess because banking is inherently dishonest and unstable. Government should have nothing with banking other than to punish fraud and insolvency with zeal.

          9. votersway

            We are in full agreement here. Indeed, banking is a special case, it’s more prone to corruption and requires stricter regulations. Getting rid of the secrecy would be a good first step.

      2. Iolaus

        Too many people say “Keynes” to refer to what they’ve heard from Krugman. The difference between the two is larger than Mount Everest.

        Could you expand upon this please, with examples?

  7. F. Beard

    And perhaps the most important habit to adopt is to be aware of the limits of your knowledge. Yves Smith

    I am reminded that the number crunchers thought “Planned Obsolescence” was a brilliant idea so American cars were designed to fall apart after 3 years. Well, we know how that worked; just look at Detroit. The effect on the moral of the engineers alone must have been devastating – being forced to purposely design crap.

  8. ScentOfViolets

    I’m wondering if this notion that the numbers are somehow more real than the things they describe is cultural (and hence at least theoretically alterable) as opposed to something intrinsic to human nature.

    I don’t know how many times I’ve seen someone make ten times the effort to call time and temperature it would have taken them to simply step outside to see what the weather was like. Such is the power of a two-digit figure.

  9. Jean

    Thank you, Yves, for posting this, and thank you, Sell on News. This is a magnificent piece! I would add one very important item to the world without economic data, that we would begin the long and necessary process of removing the masters of finance from the top rung of the ladder, disabling one of their primary weapons in defending their respective positions. They will never lose any argument that they alone are able to frame, and conversely, they will lose EVERY argument that they are unable to frame.

  10. Mac

    If one wants to defend the “numbers” as valid they must prove how the “numbers” actually describe the situation in reality.

  11. Smellslikechapter11

    I like this post because I have always been baffled about the govt can issue a GDP number down to a tenth of a percent given the size of economy, let alone its dynamic changing nature and every month to boot.

    Those numbers are a bit like god to me. I do not believe that god exists as some separate physical presence. However, enough people do that to ignore god, I do so at my own peril, the same applies to these numbers.

    Lastly, I found the title to the post a bit deceiving in that I thought that it would be about how we are overwhelmed by the sheer volume and speed by which they are generated.

  12. ScentOfViolets

    I’m having trouble posting, even after following the suggestions above. My comments don’t seem that long . . .

  13. kris

    Wow.
    Thx madam for this new perspective. Since I never thought of thinking this way, I have no opinion,……yet.
    Quite intriguing.

  14. kris

    “4. We would have a greater sense of how we can impel affairs as thinking creatures with free will, rather than being pushed about by the “economic system”.”

    This is the core clue of every system. So glad to see this written here.

  15. racing

    I grew up going to the CanAm races with my Dad at Laguna Seca. I always had such mixed emotions about who I wanted to see win… the McLarens and Lolas sounded so incredible with their big bloch Chevy engines, but there was nothing like watching Donohue peel the asphalt off the track in the 917/10s and then the 917/30s. Incredible times, those were, and some of the few experiences from my youth that I’d like to re-live!

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