To Drown a Frog

I believe in straightforward thinking.  Not simplistic, mind you.  Some things are complex enough to require sophisticated analysis.  Quantum mechanics comes to mind.  Other things will never be explained satisfactorily, such as what my wife really means when she says nothing is wrong.

Russ Roberts, writing in the Wall Street Journal Feb. 26, draws an analogy to economics from the science of biology.

If economics is a science, it is more like biology than physics. Biologists try to understand the relationships in a complex system. That’s hard enough. But they can’t tell you what will happen with any precision to the population of a particular species of frog if rainfall goes up this year in a particular rain forest. They might not even be able to count the number of frogs right now with any exactness.

We have the same problems in economics. The economy is a complex system, our data are imperfect and our models inevitably fail to account for all the interactions.

Roberts is entirely right.  Taking one variable such as rainfall and using it to predict another variable such as frog populations fails to take into account all sorts of other variables, like what the rainfall level does to predators, food the frogs eats, etc.  Few would disagree that modeling frog populations is a difficult business and easy to get wrong.

But the fact that we do not know some things does not imply that we do not know anything.  If it were to rain heavily for several years, wiping out dry places for frogs to do whatever frogs do, the population would suffer.  We might not know precisely when and how, but we would know decline was inevitable.

We also know what will happen if too much paper money is pumped into an economy.  Do this thought experiment.  Similar to our now-floating frogs, imagine that trillions of dollar bills were printed over the next few years.  Better make that quadrillions.  We can try all sorts of models with all sorts of variables in all sorts of mathematical configurations, none of which will predict precisely all the price changes for particular goods in the economy.  What we can predict is that prices will rise–a lot.

During this lull in our economic storm, I hear a huge sigh of relief from the country.  “It’s over!” declare the newspapers.  “The recession is over!”  Sure jobs are a bit shaky, but…”It’s over!”  Well, frogs, it ain’t over by a long shot.  Do some homework and learn how many unfunded liabilities are waiting like time bombs in our own economy.  Learn about the chain of events likely to transpire if even one country like Greece goes under.  Most of all, learn what governments always do when things go horribly wrong–like flood the economy with money.

No one, least of all me, can tell when the flood will come, but it will come.  Learn to build a boat while there is still a dry place to stand.

____________

Terry really doesn’t understand his wife sometimes.  He wonders if you would mind explaining her to him.

About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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4 Responses to To Drown a Frog

  1. E.L. Beck says:

    All true in the medium term, but the rising foreclosure backlog concerns me more in the short term. The levee has to give somewhere.

    Like

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