hko in Israel

Economics is a bit different from history by the use and study of certain underlying principles. It is  not a physical science but a  social science using scientific methods to analyze and understand. There are certain principles that are quite useful to explain and to in some sense predict inflation, unemployment, economic growth, trade deficits, unintended consequences, recessions, etc. But being social sciences these predictions are more meaningful in the long term than seeing changes by the month or quarter. These principles are useful to explain what happened even if it was not clear beforehand.  Keynesians predicted low interest rates would stimulate the economy, foes predicted inflation. Both were wrong. Monetarists did not foresee the drop in velocity.  Keynesians did not foresee that the accumulation of  higher fiscal friction costs would offset monetary stimulus. (Keynes, himself, was quite aware of this possibility and warned FDR accordingly.)  A lot of economists got pieces of the puzzle correct, but missed the picture.

But this experience like the Great Depression, and the Great Stagnation are great additions to the body of economic knowledge; like every plane crash makes flying safer.  Economics is still a very young “science”.

Economics began as a school of philosophy which was what Keynes earned his PhD in.  During this last collapse, we witnessed Wall Street surrendering its old philosophical understanding  of risk for a delusional mathematical certainty.  (PhD quants were becoming popular additions to trading organizations.)  The most notorious result was the record collapse of Long Term Capital –  a loud warning of what was to come that no body heard.)   Modern economics is guilty of the same.

Economic models are useful 90% of the time, but become quite useless in extreme circumstances, inflection points. Such points have also been the source of new discoveries in the physical sciences.

Woodrow Wilson was guilty of  seeing history as a predictive science, with an inevitability that defies… well, history.  Remnants of this flawed thinking remains whenever we hear of our political intellectuals speak of being on the right side of history.