Friday, October 9, 2009

Bob Murphy Disses Hayek, Mises, Rothbard and (Oh, yes) Me

One tenet upon which the Austrian school of economics is founded on is the tenet that economics is a qualitative science, not a quantitative one. As Mises, Hayek, and Rothbard, each in their own style, have pointed out, the nature of human action is too complex, and with no constants--zero. In the physical sciences, we have such constants as water freezing at 32 degrees, and we have controlled experiments. There are no such constants in the world of economics. Further, there are too many ever changing factors to make exact predictive models using controlled experiments.

This does not mean we can not do anything in the realm of forecasting. I had the opportunity to discuss with Murray Rothbard my belief that economics was in certain ways like the science of meteorology. Rothbard seemed to agree

For example, no meteorologist will tell you today whether it is going to snow in New York City on February 3, 2011. However, he will tell you it is a possibility. He will also tell you that it is extremely unlikely that it will snow in NYC in August. Now, we all know these forecasts to be likely true. And if a forecaster told you that it is likely to snow between November and March, but not in August, we could have a good Bob Murphy belly laugh (and I do mean belly and laugh) about the range the meteorologist provided us--since, as you will see shortly Murphy is apparently against range forecasting. But, what does Murphy want the meteorologist to do, provide us NOW an exact forecast as to the exact days it will snow in 2011 and how much snow will fall on each respective day? Not even a Murphy belly would be a big enough belly for that laugher.

But, suppose we are from the southern hemisphere and don't quite know northern hemisphere seasonal trends, the meteorologist's information as to when it might snow, and not, would be valuable. That is he could provide ranges. This would be valuable since, we would know not to pack our gloves in August, but know to bring along the fur coat in January. That is really the limits of what a meteorologist can tells us about 2011 weather, today. It is not detailed, but it is not entirely useless. And, if we really have a desire to travel to the northern hemisphere to sun on Atlantic City beaches, the information a meteorologist can provide, as to timing our trip, will be very useful.

The same if we want to hit the Colorado Rockies for skiing.

I bring this range forecast up, because I have made such a forecast today, about gold. Indeed, it is a split range forecast. I point out on the one hand the factors that could drive gold higher by thousands of dollars (if there is international panic) and the factors, on the other hand, that could drive gold down to $5oo (No Fed money printing and no international panic). This split range forecast has caused Bob's belly to rumble. He is taking me to task for "hedging". I consider his objection to this forecast a diss of me, Rothbard, Hayek and Mises. What am I supposed to do make up an exact forecast when one can't be made?

The fact of the matter is that just as meteorologists' forecasts for 2011 are limited now, so must my forecast, since I don't know how the international community will react to current dollar weakness. If I knew the specifics of how this factor will play out, I would be more specific in my forecast. I see no way of knowing how different governments will react during a panic. If there is someone out there that is confident that they know how governments will react over coming months, i.e. whether governments will sell dollars or not, I have drawn the conclusions under both scenarios so that they can see in which direction and to what degree gold will move based on their superior international political financial understanding that they have.

Further, for those who don't have such superior international political understanding, my split range forecast is also valuable, indeed, perhaps, more valuable. I am warning: do not be too confident about your gold trading at this point, to the degree that you mortgage the house. This is a very complex environment.

For me to come out at this point and say gold is going to $2,000 or come out and say that gold is going to $500, would be irresponsible. That's not the way I forecast.

When I am confident about something, as I am in my forecast of a double dip recession, I do not split my forecast. I am clear that I expect a double dip. I just don't have enough information to make such a call about the price of gold, right now.

So while Murphy does rumble his belly at my split range forecast, I note he does not offer a solution to the problem of what will happen with markets internationally in coming weeks and months. He does not say, for example, "Wenzel is all wet. I know governments will panic and gold will go to $3,000 in the next two months" nor does he say that "Wenzel is all wet, Bernanke is not printing money and international governments will not panic, therefore gold will go to $500 per ounce."

In all honesty, it seems that what is really going on here is that Murphy has noted Obama getting the Nobel Peace prize on the flimsiest of work, Murphy's post may be a last minute attempt by Murphy to secure this year's Nobel Prize in economics (The winner will be named Monday)

One further note. Murphy writes that "I can't find the link right now, but Wenzel also forecast that depending on how things break, unemployment next year could be anywhere from 5% to 30%. You heard it there first." LOL. I have never made such a "forecast" and, for those of you who don't recognize Murphy's attempts at humor, this is one of them. If nothing else, Murphy does keep up with the news, he is taking a shot for the Nobel at just the right time, and he is upping his comedy quota in his posts, since Letterman has gotten himself in a bit of a scandal. I suspect Murphy thinks he has a shot at that late night slot. I'm sure he goes to sleep at night dreaming of being the late show host and after the monologue he sits at his desk where his Nobel is prominently featured. And if you listen carefully, he is mumbling, as he goes to sleep, "Thank you, Wenzel. Thank you."

Well, Murphy wants specific detailed predictions. Here are three:

1. Bob Murphy will not win the Nobel Prize in economics this year.

2. He will not get a late night television show slot, ever.

3. He will never again, ever, tip the scales at under 200 pounds.


  1. Mr. Wenzel,

    You are hard on Murphy for the weight issue. Thank heavens your not John Corzine! To be sure, concerning forecasting, you are absolutely correct and your analogy fits well. We Austrians need to remember economics is the study of human action-good title for a book. WE MUST NOT DUMP CANTILLON. Economumic forecasting depends upon watching the money and what people do with it.

  2. It seems like he knows Murphy, so I think he is just trying to give Murphy an incentive to get in shape.

    Afterall, if he breaks under 200 that's a failed Wenzel forecast.

  3. That exchange was just too funny! You and Murphy just made my day.

  4. What's the difference between saying, "I forecast that gold will go either to $500 or $3000" (or somewhere in between--if gold hit $2800 on Monday you certainly would claim vindication) and saying, "I have no idea where gold is going"? I don't think Mises or Rothbard ever said, "I forecast a certain variable will either get cut in half or triple."

    Now if you'll excuse me I need to order a pizza.

  5. Bob,

    You need to think outside of the box, pizza box, and otherwise.

    Perhaps, Mises and Rothbard never came across a period when, you had a tremendous currency overhang, yet no printing of dollars domestically.

  6. It seems to me that there is some value in making a prediction which is branched. e.g. "A price may go up about 50% if X happens, but if Y happens it will drop by about 50%." That's not the same as saying, "I don't know what will happen to the price."

    On the other hand, if you think that gold could go anywhere from $500 to $3000, and with no predicates, then that's not much of a forecast. That is, as Bob indicates, effectively saying, "I have no idea what's going to happen." Based on your post, though, Robert, I'm don't think that's the sort of forecast you gave. It's kind of ambiguous, though.

    As an aside, the fat jokes are in poor taste, I think. Maybe it's all in good fun, and Bob and you are totally cool with it, but from where I stand it just looks mean spirited.

  7. Thanks for recognising the existence of the southern hemisphere. (One day we ought to get our own planet!)