Yesterday, I read on NPR that the stock market actually went down because Wall Street was worried about an economic slowdown. I don’t get it. We spent billions of dollars to bail out Wall Street, because their economy is basically our economy—Main Street just doesn’t matter any more, apparently. Reading this article made me realize how much economics may be studied and described as a science, but is practiced more as a religion.
“Fears” is the first word in the article. I majored in biology in college, and one thing that every scientist tries to avoid in their work is emotion, because emotion leads to bias. We know it’s there, and we design experiments to minimize its effects. However, Wall Street seems to operate more on emotion than facts, or even common sense.
For example, if these people on Wall Street fear the economy is slowing down, why are they buying fewer stocks, thus actually causing the economy to slow down. This is like finding a leak in your canoe and then dipping a bucket in the river and pouring the water into the canoe. If economics were practiced as a science, rather than a religion, the right action for Wall Street to take would be to bail water out of, rather than into, the canoe. “Oh oh, the economy’s slipping,” Wall Street should tell itself. ” Time to buy more stocks!”
No, I don’t understand economics. But I don’t think many people on Wall Street do, either. Just look at this quotation:
Dollar General Corp. fell 9.3 percent after the discount store operator’s first-quarter profit growth fell short of analysts’ expectations. JoS. A. Bank Clothiers Inc. also reported first-quarter profit growth below analysts’ expectations. The men’s clothing maker fell 13 percent.
How does that work? Let’s get some guy who calls himself an analyst, have him make predictions about which companies are going to well and which are going to do poorly, and then when he guesses wrong, we punish the company by selling off its stock? Is that how the real world works? If a coach consistently recruits players who don’t do well, he loses his job. If a manager consistently hires poor employees, or consistently buys inferior raw materials, he loses his job. The problem isn’t that Dollar General and JoS A. Bank didn’t do as well as they were supposed to, the problem is that the analyst guessed wrong.
Maybe I should become an analyst. Then, when I get lousy service at some store, I just have to make unrealistic predictions about how well they’re going to do in the next quarter and sit back and smirk as their stock price gets pummeled. For all I know, that’s what is happening.
Here’s another one:
On the heels of those readings, the Labor Department’s more comprehensive jobs report, which includes hiring by both private employers and the government, will be released Friday. The ADP figures include about 24 million workers at the 430,000 companies that use ADP to process their payrolls while the government’s numbers capture the entire workforce of about 140 million. Analysts are already expecting those figures to be worse than they anticipated just a few weeks ago.
“As far as we can tell, employers have hugely overreacted to the surge in oil prices, which has slowed but not killed consumption,” said Ian Shepherdson, chief U.S. economist for High Frequency Economics. The weak ADP results pushed him to cut his forecast for overall job growth in May to 75,000. He earlier had forecast Friday’s report to show growth of 175,000 jobs.
Another analyst, making predictions. I don’t have a problem with making predictions; that’s a lot of what scientists do. Real scientists make predictions about the outcomes of experiments all the time. What they don’t do is get their knickers in a twist when the prediction turns out to be wrong. They examine the data, analyze it, and then try another experiment. That’s the nature of science.
Unfortunately, that’s not the nature of economics. Economics operates more like an ancient pagan religion. If it doesn’t rain, toss a virgin in the volcano, the high priest tells us. If it still doesn’t rain, it’s not because precipitation is unrelated to human sacrifice, it’s because we threw the wrong virgin in the volcano, or we should have thrown in more than one. If the people on Wall Street want to practice economics as a religion, that’s fine. I just think they should take their turn at being thrown in the volcano.This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.Permalink for this article: