Why Economic Models Are Always Wrong

mayberry42 writes "Did you ever wonder how and why professional economists often seem to get it wrong in terms of predicting consequences or policies accurately (or even at all)? Or how very few even saw the current economic collapse? This article provides an interesting, if obvious, reason as to why economic models are effectively always wrong."

Re:Could psychohistory be the answer?

[janimal]

Yes.
1. The economists, who were correct were not listened to. (just look up Peter Schiff's predictions and how he was ridiculed)
2. The economists, who were wrong were listened to, because that's what everyone *wished* were true.
3. If anyone was in a position to personally gain from what was going on, they would most likely not have stopped it. So even if there were potential whistleblowers among the bankers and brokers, their incentive structure made whistleblowing a dumb move. If everything is going to s**t and you know it, but are in a position to set yourself up for life from the situation, or risk your job and your retirement saving a train that you probably couldn't stop anyway... what do you do? Be honest with yourself.

Re:Economics...

[Jane Q. Public]

Not entirely true. Ron Paul, who until now has always been pushed aside as irrelevant to the party, predicted it clearly and concisely. He predicted what would happen, approximately when, and exactly why. And all three of those came to be. ("When" was of course inexact... nobody is claiming clairvoyance here.)

More to the point, he predicted what would happen afterward, which has also been coming to pass.

Peter Schiff, who is also of the Austrian school of economics, publicly predicted the same, back in 2006-2007. There is a great YouTube video of him arguing with Keynesians who were all basically saying "The economy is fine!"

But of course, he's not a politician. Yet.

Re:Obvious really

[trout007]

Here is the book you want to read if you want to learn economics that makes sense and has real predictive powers.

http://mises.org/Books/humanaction.pdf [mises.org]

I've been reading about Austrian Economics for years and it has made me much better at understanding what is going on.

I have also saved myself quite a bit of money. While everyone was using their home like an ATM I was paying off that debt and buying gold. I wasn't able to convince my wife to sell the house and rent for 5 years but that is mostly because where I live the rental homes were not very nice. The brilliance of this book is that it takes the fact that humans act as the given. It doesn't try to push a moral code on how they act or judge them for not behaving the way the author thinks they should.

Re:Many people saw the economic collapse

[argStyopa]

Bush's budget issued in 2001 warned that Fannie Mae and Freddie Mac were overleveraged, and said that they needed tighter controls, oversight, and a host of reforms because "their failure could cause strong repercussions in financial markets, affecting federally insured entities and economic activity".

D Senator Chris Dodd threatened to filibuster to block it.
D Congressman Barney Frank (who was sleeping with a senior exec at Fannie Mae, coincidentally) claimed the subprime system at Fannie Mae was "fundamentally sound" and the idea it needed reforms "inane".

Nobody saw this coming? No, it was pretty clearly that some people saw it coming but the system is so totally politicized that anything anyone is predictably responded-to according to the following algorithm:
1) who said it?
2) how is he affiliated?
3) are my affiliations in opposition?
4) if they are, I oppose whatever was said.

Really, that's all that's left of intellect inside the beltway.