I’ve recently become intrigued by the writings of Nicholas Taleb.  They resonate with me because his criticism of mathematical modeling of markets–i.e., the central activity of “econometrics” and the basis of so much Wall Street activity–has long been a theme of the Austrian School of Economics. The same skepticism of predictability that leads the Austrians to reject socialism also casts a shadow over so much of the noise-making activity of Wall Street. 

Stressing instead, the unpredictability of markets, the role of idiosyncratic (and changing) individual preferences, and the heroic role of the entrepreneur and experience-driven gambles about unmet demand, the Austrians have long condemned the idea that the government, central banks, or even individual investment houses could reliably predict market movements in advance. There is a huge “X Factor,” namely, human action.

Taleb stresses that our social scientific hypotheses and data sets are likely misleading.  We craft comforting narratives from past events, even though these explanations may have little predictive value and can lead to positively dangerous “false positives” going forward.  We are, in essence, stumbling around, looking for answers, with various baffles and blinders. 

Like Taleb’s insights into Black Swans, the nice thing about the Austrian School is that it does not promise utopia.  Instead, it promises the least systemic damage because an authentic free market system–particularly one divorced from central banking and fiat money–is the least systematized.  There may be longer and shorter chains of production, misallocations of capital, and supply shocks, but these problems are dispersed and rooted in the unavoidable uncertainties of market activity.  Unlike the “modern” world of central banking based on fiat currency, temporarily correct but disastrous false signals cannot arise without the harmful pressures of central banking coupled with fiat currency.  Your loss is my gain in a true free market system, and speculators tend to cancel one another out without the false signal of inflationary monetary policy.  Wealth creation might be slower than in the present world of monteary-policy-driven economic bubbles, but so too are the crashes less frequent and less severe. 

Murray Rothbard was fond of pointing to the relatively short-lived 19th Century panics in contrast to the decade-long Great Depression and the repeated multi-year-post-war recessions.

One would have thought the econometricians would have retreated after the failure of Long Term Capital Management in the late 90s, but no such luck.  They returned with the same bravado and cock-sure certainty again, enabled by the same kind of monetary policy that presumes to ”create growth.”  Of course, no one can manage the economy, not least the government who, unlike private actors, is concerned equally with social goals and concentrated public choice players as it is with profits and wealth creation.

I was happy to see some criticism of the economists counseling government intervention in today’s Wall Street Journal.  Yet this criticism will likely be drowned out by calls for intervention.  So long as Wall Street’s economists embrace the wrong kind of mathematics in an attempt to predict the unpredictable–with extreme confidence, in fact, backed up by the wrong kinds of statistical reasoning–then the theoretical framework supporting central planning and government intervention will remain.