Transactions: April 20, 2009

Let us review our file on Mr. Economics, who sits before us in the dock, blinking and mumbling. Economics is normally considered a science. Not an art, not a craft, not a sport (that's investing), but a science. There are two kinds of sciences lurking about: those that study complex human systems that are not quantitative, like anthropology or sociology, and those that, like physics and math, distill insights into formuli. The truth is, the former are generally envious of the latter. The latter, after all, are predictive: Count up inputs, crank out outputs. And predictive in a capitalist wonderland is the closest we get to powerful magic (see hand, invisible). Now the fact pattern of many of these "soft" -- the term is often used pejoratively, particularly relative to "hard" -- sciences, is that, over time, they have desperately robed themselves in quantitation to look harder, like a leather-clad geriatric Harley gang, and more predictive. Indeed, since John Maynard Keynes, the last great economist who avoided masses of equations, and who wrote like a dream, economics has increasingly resembled a data-crunching, model-building machine. (One issue in economic history is what was lost when Keynes' insights became "Keynesian," that is mathematized, after World War II.) The standard in much of economics, both academically and popularly, has come down to understanding well enough to accurately forecast.

OK, so it hasn't gone so well. Economics isn't alone: the line out the courtroom is long. But while economics will sit in that dock a while longer, I'm hardly one to prosecute. Questions, however, do arise because economics has not bailed from the prognostication business; au contraire, the current debate is dominated by economists, economists manqués and dismal fellow travelers. This is striking in that nearly every economist this side of Nouriel Roubini missed this mess in all its splendor (a few, like Robert Shiller, warned about real estate, while those who claim prescience mysteriously proliferate). All prediction shares one thing: It employs data from the past to anticipate the future, the old cause and effect. This is one reason economics has been such a growth field. Markets spit out more data every day. There are, alas, two problems known to every honest soul engaged in a human "science": The whole is not necessarily the same as the sum of its parts, and humanity is a deep, dark well of unpredictable behavior. People, in short, are not billiard balls, basketballs or slobbering Pavlovian dogs. From an economics perspective, folks are inadequately determined, which is a bummer if you're in the field.

Now one would expect our predictive capacity to suddenly improve if (a) we recognized something we had not understood before or (b) our tools for analysis suddenly improved. Currently, economists might argue the former, not the latter. But what have we learned? People are greedy. Incentives were whacked. There was too much leverage and liquidity. Globalization, complexity, innovation create strange pathways. And my favorite: What we don't know can hurt us. Drilling deeper, the basis of so many current predictions, each of which has a sidecar of policy, involves an interpretation of historical breakdowns: Japan's lost decade, the miserable '70s, the Great Depression. They share some things: plunging trend lines tend to resemble each other. All involve real estate, banks, downward spirals. And the Great Depression and our crisis are both global. But there are differences. Trade is very different from the '30s. Our response, fiscally, monetarily and multilaterally, breaks (so far) with the '30s. Developed economies today are more complex, wired more tightly, layered with safety nets. They are dominated (mostly) by services, not industry or agriculture. There are large vats of institutional money. Markets are deeper, more specialized. Nearly everyone is richer. Nazi Germany isn't Merkel Germany. Gold standards are history.

You could go on and on, to and fro. The truth is: We don't know. We suspect; we believe; we guess. We couldn't call the implosion because we didn't fully understand the wiring, globally or domestically. So how does that wiring differ in ways that matter from the '30s? The deeper question here may be apprehensible by math, but I suspect not. Are all market economies, no matter their state of development, unique histories or cultures, somehow, deep in their cellular matter, alike? There are reasons to suspect so, given the spooky regularity of cycles, which may be based on regularities of human nature; and there are countervailing reasons to suspect they're not alike. Put it another way: Is there running through capitalism, separated by space, time and haute couture, a common DNA? And, if so, do we have a clue -- a predictive ability -- to know what that DNA means and how it works? The fact that these remain questions may explain why Mr. Economics mumbles.