A key to understanding the news: the unexpected rules in our age of wonders.

Summary: We’re in an age of wonders where the news overflows with unexpected events, things not predicted by even our greatest experts. Today we discuss two common responses to this, both ineffective: blindly accepting experts’ explanations that it’s all understood, and throwing away their advice as imperfect. There is a third and better way.  {2nd of 2 posts today.}

“History doesn’t always repeat itself. Sometimes it just screams, ‘Why don’t you listen to me?’ and lets fly with a big stick.”
— John W. Campbell Jr., Analog Science Fiction/Fact Magazine (1965).

"Machinery of the Stars" by alexiuss
“Machinery of the Stars” by alexiuss seen at DeviantArt. Posted with the artist’s generous permission.

Learning from the past — the lessons of history — boosts our odds of success in the present. But it’s equally important to see breaks with the past. Instead of flagging these, experts tend to bury them in explanations that conceal their role as valuable markers on the road to a different future. It’s the equivalent of asking about that Detour sign on the road and getting a lecture about the Vienna Convention about Road Signs.

Instead here we attempt to isolate such anomalies, examining them as clues to possible discontinuities in the normal trends of society. It’s an unpopular message. People want explanations, however bogus, to banish fears of uncertainty. It’s one of the primary services experts sell. Unfortunately, our world cannot be understood without understanding its strangeness, especially now — since we have so much of it.

Perhaps the most obvious oddity of our time is in economics. The developed nations appear locked into a slow-growth mode since the 2008 crash (US real GDP growth of ~2.4%), despite massive monetary stimulus on a scale never before seen. Central bank assets in the EU and USA have growth to ~25% of GDP — 64% of GDP in Japan — while interest rates have fallen to zero (below zero in Europe, something considered an absurdity until it happened) and inflation rates declined below central banks’ “floor” targets (despite widespread confident predictions that they would rise).

For a rare admission of uncertainty see “It seems nobody knows what’s going on with the economy,” Andrew McAfee (PhD business, Prof at MIT School of Management), The Financial Times, 26 February 2015. This would be extraordinary if by an economist.

 

He's here to save us!
He’s here to save us. Be suspicious.

Another of the great anomalies is the pause (aka “hiatus”) in warming of the world’s atmosphere since roughly 2000. None of the climate science agencies’ forecasts predicted this, or anything close to it.

Experts can easily explain these events. Experts can explain almost everything, even if they previously said it was impossible. But their explanations should not blind us to the significance of the signal given by unexpected events: that we’re in the presence of strangeness, that the explanations of the unexpected are inherently of low reliability, and — most important — we should expect further surprises.

On the other hand, failure to predict events does not invalidate or disprove economics or climate science (although they might puncture the pretensions of practitioners with excessive confidence). Neither is as mature as thermodynamics; both are in their early stages of development — circles of light amidst the great darkness.

We need to embrace the future with openness, neither throwing away our imperfect tools nor blindly following our experts. History shows us that sometimes the unexpected rules. In those times the aware and adaptable thrive; those with closed eyes and closed minds often fail.

“Unless you expect the unexpected you will never find truth, for it is difficult to discover.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia.

Explanations for these strange things.

About negative interest rates: “The Negative Way to Growth?” by Nouriel Roubini and “Something economists thought was impossible is happening in Europe” by Matthew Yglesias.

Abstracts and links to studies of the pause in warming of our atmosphere:  Scientists explore causes of the pause in warming, perhaps the most important research of the decade.  and One of the most important questions we face: when will the pause in global warming end?

Other posts about our weird world.

  1. The World of Wonders: Monetary Magic applied to cure America’s economic ills.
  2. The World of Wonders: Everybody Goes Nuts Together.
  3. Do you look at our economy and see a world of wonders? If not, look here for a clearer picture…,
  4. A guide to the weird numbers that run our world, describing financial bubbles & climate change.
  5. Look at the economy. Fight the illusion of normality. Feel the weirdness.
  6. Embrace the weird news. It signals the transition to a new world.
  7. Any day something small might happen that changes the history of the world.
  8. A frontier of climate science: the model-temperature divergence.
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3 thoughts on “A key to understanding the news: the unexpected rules in our age of wonders.

  • The ongoing collapse in gdp growth after the 2008 global financial crash is sort of what you’d expect. After previous epochal crashes, economies typically took at least a generation to regain their dynamism because of all the debt that has to be deleveraged. It’s Keynes’ “paradox of thrift” crushing aggregate demand.

    What’s really weird, as Larry Summers points out, is that we’re getting mixed signals, so the conventional explanations don’t parse. If middle-class wage stagnation is due to automation, then we should see huge increases in U.S. productivity — but we don’t. Productivity seems to have flattened after the year 2005. From “It seems nobody knows what’s going on with the economy,” Andrew McAfee, The Financial Times, 26 February 2015:

    …the economy’s behaviour is puzzling these days. No matter what you think is going on, there are some facts — important ones — that don’t fit your theory well at all, and/or some important things left unexplained.

    For example, if you believe that technological progress is reshaping the economy…then you’ve got to explain why productivity growth is so low. As Larry Summers pointed out on the first panel, strong labour productivity growth is the first thing you’d expect to see if tech progress really were taking off and reshaping the economy, disrupting industries, hollowing out the middle class, and so on. So why has it been so weak for the past 10 years?

    … If you believe that tech progress has not been that significant, however, you’ve got to explain why labor’s share of income is declining around the world. Since the turn of the century the labor share of income — essentially the amount of GDP that gets paid out in wages — has dropped significantly not only in high wage countries (which could be explained by outsourcing), but also in most low-wage countries including China, Mexico, and India. It’s very hard to account for this pattern without telling a story that involves technology becoming both cheaper and more capable over time.

    …another deep puzzle: why are economic dynamism and fluidity in decline? Entrepreneurship and new business formation have been dropping for a while now in America (Silicon Valley’s present frenzy is an exception, not the rule), and people are moving around less than they used to, both geographically and professionally. This is not good news, and it’s also not obvious how to fix it. There doesn’t appear to be any single main culprit. Instead, Haltiwanger described the situation as “death by a thousand cuts.”

    OTOH, if the problem is pikkety’s r > g, how does the rate of return keep skyrocketing? Historically, r has always declined as the rich slurp most of the profits in a growing economy without reinvesting. It’s the well-known law of diminishing returns. And if r really is >> g, then we shouldn’t see much demand for negative-real-rate-of-return instruments like fed inflation-adjusted TIPS bonds — but we do. The fed can’t print enough of these things, and rich people all over the world keeping buying TIPS bonds. From Larry Summers review of Piketty’s Capital in the 21st Century, 2014.

    A brief look at the Forbes 400 list also provides only limited support for Piketty’s ideas that fortunes are patiently accumulated through reinvestment. When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year. They did not, given pressures to spend, donate, or misinvest their wealth. In a similar vein, the data also indicate, contra Piketty, that the share of the Forbes 400 who inherited their wealth is in sharp decline.

    But if it is not at all clear that there is any kind of iron law of capitalism that leads to rising wealth and income inequality, the question of how to account for rising inequality remains. (..) So why has the labor income of the top 1 percent risen so sharply relative to the income of everyone else? No one really knows.

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    • Thomas,

      “The ongoing collapse in gdp growth after the 2008 global financial crash is sort of what you’d expect.”

      We have definitive experimental evidence that this is incorrect. Very few mainstream economics “expected” that. Richard Koo of Nomura is one of those, based on his experience with Japan.

      There were others. I’m no economist, but consistently said to expect slow GDP growth. I had fierce arguments with some A-team economists (even in mid-2014). They were friends and so nicely disagreed although they thought I wasn’t so much wrong but stupid.

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    • Thomas,

      “It’s Keynes’ “paradox of thrift” crushing aggregate demand.”

      True in the years after the crash. However the private sector has resumed borrowing, and savings rates remain low. That’s not the problem now. It might become so in the future as the Boomers retire, however — as they can no longer borrow, and their income crashes.

      Like

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