Tarot is more and less than it’s cracked up to be. The cards are authentically fascinating. They are a colourful invitation down a rabbit-hole housing whole libraries devoted to explanation, argument, and, of course, divination. Once you begin to ‘cast’ them, you find the cards illustrate a coherent view of life which is subtle, intellectually demanding, and very nearly complete.
This means that a random choice of cards will generate ‘readings’ which are themselves by no means random. Rather, the ‘readings’ are compelling, indeed often ‘over-determined’.
The result is that Tarot readings are simply not wrong all the time. That’s not because they have knowledge. It is the opposite, it is because the cards mean nothing, and the readings are ‘Thinking in Rubbish’.
That doesn’t necessarily mean that Tarot-readers are stupid. There is genuine intellectual excitement in teasing out the complex web of illustrated clues which go to make up reading. Probably many intelligent people stay down this rabbit hole because of the intellectual challenge. But it’s still ‘Thinking in Rubbish’.
‘Thinking in Rubbish’ is always with us. We are told - though personally I doubt it - that medieval theologians and metaphysicians exhausted themselves trying to determine how many angels could dance on the head of a pin. These were the among the brightest and most credentialed people of their time, and they were thinking hard. But - because no angels - they were ‘Thinking in Rubbish’.
Isaac Newton was mainly an alchemist.
I wonder if you can see where this is going?
A unhealthy proportion of what passes for economics is ‘Thinking in Rubbish’ because so many of the commonly-used words and concepts in economics are vacuous or indeterminable. Oh, it doesn’t feel like that: we economists sound like, and think, we know what we are talking about. People also think they understand what we say. But ‘meaning is use’ isn’t actually true in this case. Too often, we are ‘Thinking in Rubbish’.
Or put it another way: most of the ‘problems in economics’ are actually ontological - about the existence and nature of objects under discussion.
P*Q = M*V is Thinking in Rubbish
Let’s start with something everyone knows. The fundamental monetary equation: M*V = P*Q. This sounds about as obviously correct as can be: ‘quantity of money times velocity of money must equal price times by quantity’. Elegant, comprehensive but if you try and apply it, I’m afraid you’ll find yourself ‘Thinking in Rubbish.’
The Rubbish here are the terms ‘money’, ‘price’ and ‘quantity’, whilst ‘velocity can only be an artefact derived from those terms. The difficulties emerge immediately you stop to think. Question: what is money, what are its limits, and how do those limits change over time? If you can answer this, a Nobel Prize surely awaits. Question: what is ‘price’? For sure it cannot be CPI inflation or anything like it, since we already know that our relationship with money is much wider than buying goods (saving? spending? investing?). In turn, that relationship will be hostage to demographic structure, income & wealth inequality, political imperatives or preferences, which will surely shift over time. Once again, good answers, if there were any, would get you to Copenhagen. And in a world dominated by disembodied ‘property’ and its manipulations, what do you make of ‘Quantity'?
It is terrible to know that this foundational truth evaporates under even casual inspection. If it is anything, it is an axiom - unprovable and unusable.
Do not mistake this for ‘scepticism’. Scepticism implies a decent doubt about something. I’m not sceptical about these economic terms, I’m quite sure we can’t know what they mean. I’m quite certain they are ‘Rubbish’.
Neoclassical Economics is Thinking in Rubbish
Sometimes a ‘Rubbish’ economic term or concept has been unanswerably routed for decades, but survives in economic textbooks and argument nonetheless. There can be no reasonable argument about the impossibility of assessing or counting ‘capital stock’. The insuperable problems with the concept have been known since the 1950s, when they were uncovered by Joan Robinson and Piero Sraffa. The problem is how you count it: can you really count ‘capital stock’ in a way which works for both, say, spades and cyclotrons? What would/could you say about it that makes any sense? Why would you even try?
Father of neo-classical economics Paul Samuelson realized that this drove a stake through the heart of the Samuelson/Solow production-function models upon which his school was founded. So he set his best post-grads the task of proving how Robinson and Sraffa were wrong. But they couldn’t because Robinson & Sraffa were right, and are right, about this. What happened next was tragic: Samuelson et al responded: ‘OK, it’s rubbish, but its useful, so we’ll keep it’. I’m not kidding: right at the start, Samuelson himself acknowledged he was ‘Thinking in Rubbish’.
In a way he was right: neo-classical economics spawn wonderfully elegant arguments. Indeed, I have lectured on their purported ‘Golden Rule’ allocations of consumption and saving, with entertaining charts, to students in Shenzhen. But this was and is ‘Thinking in Rubbish’, and the founders of the neoclassical school knew it all along.
(To that I would add another problem - the absurdity of attempting to count ‘real capital investment’ or ‘real capital stock’ in any chapter of economic analysis, since the extreme volatility of the price of capital goods is absolutely central to all business cycles. Sadly, this does obliterate the standard accounting for ‘real GDP’. Sorry - can’t be helped.)
I don’t want to pick on the neoclassical school: the ontological problems of economics are equal-opportunity destroyers.
Inflation is Thinking in Rubbish
For example, let’s think about ‘inflation’: another term which we foolishly think we understand. In fact, ‘inflation’ has not only trivial but unsolvable problems, but also profound and unstable unsolvable problems.
The trivial/unsolvable problem is measuring the Consumer Price Index. The ‘basket’ measured can only ever be a description of what things used to look like. But let that pass. Focus instead on the impact of ‘hedonics’. ‘Hedonics’ is the attempt to adjust the price of something to reflect changes in its technological content. The price of phones or computers has gone up, but - wow! - they’re so much more powerful than they used to be, so after hedonics has does its work, the price has actually fallen. The problem is that as time has gone on, what we use a phone for has changed, and changed dramatically. You end up spending more on a ‘phone’, because ‘phone use’ has changed, and so has the phone you need and buy.
The impact of hedonics is dramatic. A few years ago Alibaba (China’s Amazon) used its massive buyers’ database to construct two different inflation indexes. One used the commonly-accepted hedonics techniques; the other merely tracked the actual average price paid for - say - a phone. The underlying purchasing data was the same for both, but in yoy terms, the difference between the traditional ‘hedonics-adjusted’ index, and the ‘average price spent’ index was very nearly in double-digits. In December 2016, the traditional index reported prices up 0.2% yoy; the actual average price index rose 9.3% yoy.
Faced with such an alarming result, Alibaba stopped publishing its findings.
I do not know how you solve a problem like hedonics. But let’s not pretend it isn’t profound.
The more profound and unstable problem is the pretence that ‘inflation’ is indistinguisable from Consumer Price Inflation, and that measuring CPI is an appropriate proxy for changes in the value of money. But because the functions of money change with demographics/affluence/technology/political environment, this cannot possibly be true. If you want to buy an apple, CPI might inform you; if you want to buy a piece of Apple, it certainly won’t. If you want to buy a home, you’ll not find CPI remotely capable of tracking changes in the value of money.
So when an economist argues that because the central bank is creating huge amounts of money, inflation must rise. . . . realize that he probably literally doesn’t know, can’t know actually, what he is talking about. Because he is Thinking in Rubbish.
Like Tarot, No Economic Nostrum Turns Out to be Wrong All The Time
I could go on and on, pointing out the ontological problems of economic terms (For example, I very much doubt we understand ‘work’, or ‘the labour force’). But given that we’ve established we can’t nail down a meaning for money, inflation, capital stock, and that national accounting contains terms which cannot be counted, I think I have made the point.
And the point is this: most of what passes for economic analysis and economic commentary, among even the most illustrious and credentialled professionals and academics cannot be anything but ‘Thinking in Rubbish’. Which is why, just like the Tarot diviners, the central problem is that so very few of the economic ideas and theories put forward by commentators/analysts/academics are wrong all the time. Almost every ‘economic theory’ can turn out to be right under some circumstances.
How Not to Think in Rubbish
What, then, to do? What can I rescue from this ontological train-wreck?
I have spent my life and career thinking about economics, writing about it, and practicing it. I am hugely invested in it, emotionally, financially, intellectually. To face up to its dreadful ontological problems is not easy. Those seeking a better future for mankind claim to practice ‘New Economics’ but until and unless they deal with the ontological issues they are wasting their time and deceiving themselves and their public.
My solution is to accept the mess for what it is, but generally withdraw from attempting to construct economic ‘narratives’ or ‘forecasts’ from specific economic data. Constructing those ‘interesting arguments’ is easy, but, in all honesty, not worth my time, or yours.
Nevertheless, I do accept that fatally flawed though ‘the economic data’ is, it does make an impact on public sentiment, and on expectations. That impact cannot be rational in the sense of deliberative thought, and it cannot be expected to remain stable or persist for long. But if you embrace Kahneman’s ‘fast thinking’ and ‘slow thinking’ models - which I do - there’s every reason to expect some regular ‘fast thinking’ reactions to economic data as a whole.
In order to capture (and profit from) that ‘fast thinking’ reaction to possibly senseless/vacuous economic data, I construct and maintain what I believe to be the best set of Shocks & Surprises Indexes currently available. Here’s what the world looks like today:
You may not know that this is what is forming your ‘economic mood’ right now, but it is. How do I know? Well, I use a suite of these indexes to run the ‘Coldwater Fast Model’ portfolio which invests only in indexes, and invests only with a time horizon of two weeks. Over the last seven years, it has approximately doubled the gain in the MSCI World Equity index, and has outperformed every individual index making up that index. I no longer believe in economics, but I do believe I know how ‘Thinking in Rubbish’ plays out in world stockmarkets.