One of my favorite moments after the financial crisis in 2008 was when Alan Greenspan, the legendary chairman of the Federal Reserve, had to admit that he did not understand how the economy works. Here is a part of a transcript from a congressional hearing on October 23, 2008:
Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not.
And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.
REP. HENRY WAXMAN:
You found a flaw in the reality…
Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
REP. HENRY WAXMAN:
In other words, you found that your view of the world, your ideology, was not right, it was not working?
That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.THE FINANCIAL CRISIS AND THE ROLE OF FEDERAL REGULATORS, October 23, 2008. The full transcript is available here.
Oops! To misquote Mike Tyson slightly, everybody has a world view until he gets punched in the face. Unfortunately, with great power comes great responsibility, and mistakes made by generals, presidents, CEOs, or the chairmen of the FED have consequences.
It is dangerous when people base their thinking on a flawed understanding of the world. People who believe in UFOs, witches, or weird conspiracy theories should not be allowed to run things. Before the scientific revolution and the discovery of microbes, people used to believe in the spontaneous generation of life. The proof was simple: if you left a piece of meat out in the sun for a while, it would soon be crawling with maggots and worms.
Today, a majority of people, including a large fraction of the ruling class, seems to believe in the spontaneous generation of money. Generations of school children have been taught how to calculate compound interest, but nobody asked where the money was supposed to come from.
In a stunningly absurd “press conference”, which lasted for approximately 90 seconds, the soon to be ex-president of the USA revealed to the world the limits of his mental abilities.
Never mind the 270’000 dead from COVID-19, the fact that millions of Americans have lost their jobs due to the pandemic, and the melting polar caps. As long as the Ponzi-Scheme commonly referred to as the stock market continues to rise, everything is fine.
One of my first textbooks in physics contained an poignant warning: “Never mistake the model for reality!” The illustration was a person devouring the menu in a restaurant. Mainstream economics is a theory about a model. Unfortunately, reality seems to have moved on so that the model does not apply anymore.