Dice Have No Memory

The Folly of Economists

Economists, especially those who run central banks, are usually wrong. To call economics a science is an insult to science: While physical science discovers provable and unchanging facts, the “dismal science” of economics is more akin to reading the tea leaves of data and statistics that don’t take into account human emotions and reactions. Money is no longer tied to a gold standard, so the value of a currency relies on nothing more than faith. During the dot-com hysteria of the late 1990s and the housing bubble of the early 2000s, investors abandoned rational thought and succumbed to fantasy: After all, they reasoned, what goes up and up will continue to rise indefinitely. During these periods, everyone forgot to think about what could go wrong and focused instead on what could go right. These spells of herdlike behavior reveal the illusions behind economists’ pseudoscientific theories of rational markets and logical pricing of assets. But just as successive throws of the dice don’t depend on the outcome of previous throws, so, too, economic realities are independent of economists’ data, statistics and prognostications.

Central Bankers Are...