Investing in Precious Metals 101 Ad
  • Podcast

    Daniel Nevins: Economics for Independent Thinkers

    It's time we stop trusting the 'experts'
    by Adam Taggart

    Wednesday, February 28, 2018, 10:03 PM

Economists are supposed to monitor and analyze the economy, warn us if risks are getting out of hand, and advise us on how to make things runs more effectively — right?

Well, even though that's what most people expect from economists, it's not at all how they see their role, warns CFA and and behavioral economist Daniel Nevins.

Economists, he cautions, are modelers. They pursue academic lines of thought in order to make their models more perfect. They live in a universe of equations and presumptions about equilibrium states and other chimerical mathematical perfections that don't exist in real life.

In short, they are the wrong people to advise us, Nevins claims, as they have no clue how the imperfect world we live in actually works.

In his book Economics For Independent Thinkers, he argues that we need a new, more accurate and useful way of studying the economy:

However far you go back, you can find economists who had a more realistic approach to how humans actually behave, than the way that mainstreamers assume they behave in the models that the Fed uses to pick winners and losers.

You mentioned credit cycles, business environment, and behavioral economics. What I’ve done is to say, “Okay. We know that the modeling approach, the systems of equations approach doesn’t work. But instead of starting completely from scratch, what can we find in the economics literature that is maybe more realistic?”

And the interesting thing is that if you look at the work that was done, the state of the profession before the 1930s, before Keynesianism took hold, you can find a lot of work that was quite sensible.

I think where that points is towards this notion that when we think about economic volatility, there are really three things that we need to bring together:

One is the behavioral side. And we have to be realistic about the way that people really process information, the way that they truly make decisions.

The second has to do with the way businesses operate and all the challenges that businesses face to gain and retain profitability. That’s something that economists were intently focused on before Keynesianism and then it became kind of sidelined afterwards because all of these models assumed that businesses didn’t have any challenges.

If you pick apart the standard models that the Fed uses that are taught in PhD programs, they assume that business are always profitable, they always sell all of their output instantaneously, and they know exactly what their customers want, and businesses don’t struggle. So, that’s another thing we need to correct that you can find a lot of useful research if you know where to look (before Keynesianism and at the nontraditional schools that have continued in the older approaches).

And then the third thing is the credit side where mainstream economics is just so off-target, especially in their models that exclude any role for banks. Effectively, mainstream economists have made assumptions about the way money works and the way banks work that just flat do not match how they actually work in real life. That’s something that’s hugely critical to understanding economic volatility and understanding financial crises. But even regular business cycles have a lot to do with the ebbs and flows of bank lending. And banks just aren’t included in standard macroeconomic models(…)

Until you understand that the economic profession is really not doing anything like what I would say they should be doing—studying these things that go wrong, the recessions and depressions and crises—you might not realize that we shouldn’t really be relying on mainstream economists to tell us how policies should be crafted, to tell us what risks might be out there. We need a different approach. 

Click the play button below to listen to Chris' interview with Daniel Nevins (46m:19s).

Related content
» More

15 Comments

  • Wed, Feb 28, 2018 - 8:42pm

    #1
    gyurash

    gyurash

    Status Member (Offline)

    Joined: Sep 07 2016

    Posts: 11

    Paul Volker

    The mention of Paul Volker was interesting. I remember listening to a lecture given by Mr. Volker played on public radio in the mid 80s. He talked about the Spanish empire in the 16th century and the easy money train they had coming from South American gold and silver. He said that although it seemed to create great wealth it also made for a false economy in Spain. In addition to creating price bubbles, the Spanish did not use it to build much of anything other than big villas, built by itinerant foreign labor by the way, so when the gold and silver flow slowed when the biggest mines were effectively depleted, their economy crashed so hard that it never recovered, even up to today. He warned that deficit spending and easy credit can have the same effect, which is why his policies tried to cap them. I would submit that we have a triad of forces today working the same way. Credit, deficits, and cheap energy from fossil fuels. Now credit and deficits are constructs of people, and so can be manipulated easily. Fossil fuels are a product of nature, despite any technologies people might use to exploit them. Energy today serves the same function for global civilization as the metals plunder did for Spain. If total world energy production ever actually starts declining it will also have the same effects, or worse.

    Login or Register to post comments

  • Thu, Mar 01, 2018 - 7:43am

    #2

    LesPhelps

    Status Silver Member (Offline)

    Joined: Apr 30 2009

    Posts: 478

    An Excellent Discussion With a Last Minute Save

    I was becoming nervous as I listened to this excellent discussion, afraid that finite resources were not going to be mentioned.  Fortunately, as always, Chris made sure the concept of “finite” came up, a concept foreign to economics, at least the economics courses I have taken.

    Chris’s stadium filling with water covers the problem with exponential growth well.  However, Dr. Bartlett’s jars filling with bacteria hits home better from one perspective, by adding jars at the end.  He shows that, at the end of an exponential growth cycle, finding large quantities of extra resources won’t save the day, or even significantly pospone the day of reconing.

    Sadly, I’m becoming convinced that intelligence can be seen in individual people, but is virtually non-eistent when it comes to very large groups.  I’m not sure society as a whole can embrace this message.

    Perhaps that is why optimist clubs exist but not pessimist organizations?  I’ve always wondered.  If there were a “Malthusian’s International” club, I’d probably be a member.

    Login or Register to post comments

  • Thu, Mar 01, 2018 - 8:01am

    Reply to #2

    Snydeman

    Status Member (Offline)

    Joined: Feb 06 2013

    Posts: 521

    LesPhelps wrote: I've always

    LesPhelps wrote:

    I’ve always wondered.  If there were a “Malthusian’s International” club, I’d probably be a member.

    In some ways Peak Prosperity is just that, right?

     

    Either way, let’s start one! If for no other reason than to watch all the ways the mainstream media would malign it in an attempt to discredit anything we would say…

    Login or Register to post comments

  • Thu, Mar 01, 2018 - 12:28pm

    #3
    Uncletommy

    Uncletommy

    Status Bronze Member (Offline)

    Joined: May 03 2014

    Posts: 524

    Inconvenient Malthusian math!

    Login or Register to post comments

  • Thu, Mar 01, 2018 - 2:17pm

    Reply to #1

    KugsCheese

    Status Gold Member (Offline)

    Joined: Jan 01 2010

    Posts: 841

    The Spanish should have

    The Spanish should have banked the gold and silver for a rainy day.   But we know how politicians work.  Humans are doomed.

    Login or Register to post comments

  • Thu, Mar 01, 2018 - 6:29pm

    Reply to #1

    SagerXX

    Status Gold Member (Offline)

    Joined: Feb 11 2009

    Posts: 397

    KugsCheese wrote: The

    KugsCheese wrote:

    The Spanish should have banked the gold and silver for a rainy day.   But we know how politicians work.  Humans are doomed.

    Wellll…..  I think humanity will survive.  High techno civilization, maybe not so much…

    Login or Register to post comments

  • Thu, Mar 01, 2018 - 8:43pm

    Reply to #1

    LesPhelps

    Status Silver Member (Offline)

    Joined: Apr 30 2009

    Posts: 478

    SagerXX wrote: Wellll..... 

    SagerXX wrote:

    Wellll…..  I think humanity will survive.  High techno civilization, maybe not so much…

    Humanity will survive… until it doesn’t.

    Homo Sapiens have been around for what, 200,000 years?

    The dinosaurs were around for 160 million years.

    Think humans will top that bar?

    Login or Register to post comments

  • Thu, Mar 01, 2018 - 9:45pm

    #4

    Mark_BC

    Status Bronze Member (Offline)

    Joined: Apr 30 2010

    Posts: 298

    The word "economics" means

    The word “economics” means “the management of the surroundings”. I find it ironic that those at the top who are charged with managing the surroundings are not, in my understanding, required to take a single course actually “studying the surroundings” (literally, “ecology”, which is generally dismissed as being subservient to economics) or how the surroundings works — science or engineering. The whole lot of it is phooey, entirely, doesn’t matter what side of the political spectrum one comes from. If it is not based on a sound platform of real-world biophysical processes, it doesn’t matter how logical it might sound or mathematically well supported it might seem; in the end it is wrong and at some point in the future will fail.

    The reason this nightmarish US-centric system has gone on so long is because the US dollar is the reserve currency and up until now, all countries had to buy oil using dollars. This created a massive demand, market, and acceptance for dollar debt, which allowed (actually, required) the US to run trade deficits and engage in huge fiscal deficits to provide this debt for other countries to buy. This is also why so many alternative economists have gotten the timing of the US dollar collapse so wrong — because for that to happen there needs to be an alternative set up for oil trade, which as of yet, we don’t have although other countries are certainly working on it.

    Once the oil-backed dollar ends, so too will this charade. I’m sure the realities of oil-backed debt are not incorporated into any economic model but all of them are predicated on the economic environment that the petrodollar creates.

    Login or Register to post comments

  • Thu, Mar 01, 2018 - 11:52pm

    Reply to #1

    SagerXX

    Status Gold Member (Offline)

    Joined: Feb 11 2009

    Posts: 397

    LesPhelps wrote: SagerXX

    LesPhelps wrote:
    SagerXX wrote:

    Wellll…..  I think humanity will survive.  High techno civilization, maybe not so much…

    Humanity will survive… until it doesn’t.

    Homo Sapiens have been around for what, 200,000 years?

    The dinosaurs were around for 160 million years.

    Think humans will top that bar?

    No idea.  I’m just figuring we survive the current brace of calamities in one form or another, just minus much/most/all of the shiny tech.

    Login or Register to post comments

  • Fri, Mar 02, 2018 - 12:27am

    #5

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3156

    models that work

    It seems as though the thing the “independent thinker” economists can do to fight back is to construct an economic simulation that can actually be used to predict real world outcomes.

    Ultimately, the proof of all this stuff is in the pudding.

    I know, easier said than done, but – certainly the current flock of mainstream people say its impossible to either spot bubbles, or predict bubble pops.  I certainly don’t think that’s true.  If the “independent thinker model” was sufficiently complete, the law of big numbers says we should be able to sort out where things go next.

    The further I pull back in time, the more accurate my models become.  Monthly trends are much easier to predict than trends at the daily level.

    If I had longer timeseries data, I’d be more accurate.  I’ve been working on housing data to see where we are in the housing market, but the longer-dated timeseries I have (to 1963) is quarterly, not monthly.  Give me more granular data, and a longer-dated timeseries, and I’ll tell you where things are going to end up….

     

    Login or Register to post comments

  • Fri, Mar 02, 2018 - 1:15am

    #6

    tourcarve

    Status Member (Offline)

    Joined: May 21 2009

    Posts: 12

    Looking in the dark

    From the internet last week:

     

    “This post will go over the five fundamental principles of economics, rationality, costs, benefits, incentives, and marginal analysis.

     

    1. People make rational choices:

    If you drove to work/school today, I bet you would disagree with this one (because of all of the irrational drivers out there).  However, it is an assumption that economists have to make.  If people behaved irrationally, then there would be no chance in the world to predict their behavior.  By assuming that people are rational, and make decisions based on what is best for them, we can break down the decision making process.  This allows us to study the factors that influence decision making.”

     

    http://www.freeeconhelp.com/2011/06/five-fundamental-principles-of.html

     

     

    This is the drunk man looking for his keys under the street lamp because that is where the light is. Of course, mentioning that the man is drunk is beside the point.

    Login or Register to post comments

  • Fri, Mar 02, 2018 - 2:19am

    Reply to #5
    ezlxq1949

    ezlxq1949

    Status Bronze Member (Offline)

    Joined: Apr 29 2009

    Posts: 237

    Carp carp carp

    Can’t resist. davefairtex wrote,

    the proof of all this stuff is in the pudding.

    No. The proof of the PUDDING is in the EATING.

    Similar frequent mis-statement:

    Have your cake and eat it.

    No. EAT your cake and (still) HAVE it.

    Professor Pedanticus thanks you for your attention.

    Login or Register to post comments

  • Fri, Mar 02, 2018 - 6:19am

    Reply to #6

    LesPhelps

    Status Silver Member (Offline)

    Joined: Apr 30 2009

    Posts: 478

    tourcarve wrote: “1. People

    tourcarve wrote:

    1. People make rational choices:

     

     

    Shot form:

     

    “Man prefers to believe what he prefers to be true.”

     

    Long form:

     

    “For what a man had rather were true he more readily believes… Numberless are the ways, and sometimes imperceptible, in which the affections color and infect the understanding.”

     

    Both quotes are from Sir Francis Bacon.

    Login or Register to post comments

  • Fri, Mar 02, 2018 - 6:23am

    Reply to #6

    LesPhelps

    Status Silver Member (Offline)

    Joined: Apr 30 2009

    Posts: 478

    People are rational?

    tourcarve wrote:

    1. People make rational choices:

     

     

    It is not rational to die or go to prison for road rage, yet it happened a month ago South of Tucson.  It is not rational for a 65 year old man to beat up an 89 year old man for allegedly being cut off in a library parking lot.

     

    Shot form:

     

    “Man prefers to believe what he prefers to be true.”

     

    Long form:

     

    “For what a man had rather were true he more readily believes… Numberless are the ways, and sometimes imperceptible, in which the affections color and infect the understanding.”

     

    Both quotes are from Sir Francis Bacon.

    Login or Register to post comments

  • Fri, Mar 02, 2018 - 6:27am

    Reply to #6

    LesPhelps

    Status Silver Member (Offline)

    Joined: Apr 30 2009

    Posts: 478

    Sir Francis Bacons take on human rationality

    tourcarve wrote:

     

    1. People make rational choices:

    If you drove to work/school today, I bet you would disagree with this one (because of all of the irrational drivers out there).  However, it is an assumption that economists have to make.  If people behaved irrationally, then there would be no chance in the world to predict their behavior.  By assuming that people are rational, and make decisions based on what is best for them, we can break down the decision making process.  This allows us to study the factors that influence decision making.”

     

     

    Short form:

    “People prefer to believe what they prefer to be true.”

    Long form:

    For what a man had rather were true he more readily believes… Numberless are the ways, and sometimes imperceptible, in which the affections color and infect the understanding.

    Login or Register to post comments

Login or Register to post comments