Fictitious Economic Models

In compliment to my own recent thoughts on government macro-level statistics, David Stockman refers to them in his recent column as follows:

The hard core reality, however, is that the very foundations of the Keynesian full employment model cannot be measured, specified, validated or achieved. For all practical purposes there is no such thing in today’s world as potential GDP, full-employment, a natural rate of Federal funds, NARU (natural rate of unemployment) or quantifiable price stability.

These are all self-serving fictions fabricated by a small community of monetary central planners and their Wall Street henchmen. And they do one big but destructive thing: Namely, they are used to justify endless manipulation and falsification of the single most important set of prices in all of capitalism—-the price of money and financial assets.

This is precisely what I was arguing earlier: the government, in seeking control, needs statistics and empirically driven economic models in order to give them the confidence they feel they need in order to centrally plan. Their problem, of course, is no level of numbers and algorithms can give central planners the knowledge they need to manage the entire economy.

In fact, socialist ideals were the foundational cause of the drive for statistics.  As Zachary Karabell wrote in his fantastic look at the history of “economic indicators:”

The notion that a professionally run government could maximize a society’s output and stability through the application of scientific principles had widespread appeal, but almost every country lacked one key element: information. Yes, as we saw, governments had long been keeping track of trade and agriculture— the two traditional sources of wealth and power. But scientific management of society required data, and there, most societies and most governments were largely in the dark. As of the middle of the nineteenth century, almost every metric we now take as a given— from health statistics to economic data— simply did not exist.

In the United States, the birth of economic statistics was part of an overall movement toward social and political reform. The drive to create these statistics was fueled in part by a rising national suspicion that large companies, monopolies, railroads, and banks were reaping disproportionate rewards and thereby robbing the common man of his hard-earned gains. In Europe, a similar sensibility led to an efflorescence of Socialist movements, not to mention the birth of Communism. In the United States, it led to the birth of unions. Unions, in turn, believed that labor was being deprived of its rightful share of prosperity, but they couldn’t prove that. Hence the attempt to measure just what was going on in order to add weight to the widespread sense that many were suffering unnecessary hardship.

Karabell, Zachary (2014-02-11). The Leading Indicators: A Short History of the Numbers That Rule Our World (pp. 28-29). Simon & Schuster. Kindle Edition.

One should also consider Murray Rothbard on government statistics, who largely observed the same; namely, that governments needs statistics because without them, not only are they blind in trying to control their socialist economy, but also because they need a rationale to convince the people that what they are doing is right:

Ours is truly an Age of Statistics. In a country and an era that worships statistical data as super “scientific,” as offering us the keys to all knowledge, a vast supply of data of all shapes and sizes pours forth upon us. Mostly, it pours forth from government.

[…]Bureaucrats as well as statist reformers, however, are in a completely different state of affairs. They are decidedly outside the market. Therefore, in order to get “into” the situation that they are trying to plan and reform, they must obtain knowledge that is not personal, day-to-day experience; the only form that such knowledge can take is statistics.

Statistics are the eyes and ears of the bureaucrat, the politician, the socialistic reformer. Only by statistics can they know, or at least have any idea about, what is going on in the economy.

[…]Certainly, only by statistics, can the federal government make even a fitful attempt to plan, regulate, control, or reform various industries — or impose central planning and socialization on the entire economic system. If the government received no railroad statistics, for example, how in the world could it even start to regulate railroad rates, finances, and other affairs? How could the government impose price controls if it didn’t even know what goods have been sold on the market, and what prices were prevailing? Statistics, to repeat, are the eyes and ears of the interventionists: of the intellectual reformer, the politician, and the government bureaucrat. Cut off those eyes and ears, destroy those crucial guidelines to knowledge, and the whole threat of government intervention is almost completely eliminated.