Brian Miller, an ageist reporter from The Globe and Mail (Toronto) interviewed David Orrell, a fellow-Canadian and mathematician, who “has delved deeply into the world of economics and found more holes in it than in your average slice of Swiss cheese”. Even its most revered rules, like the law of supply and demand, don’t hold up to scientific scrutiny, Mr. Orrell says. “Like unicorns, the plot of supply and demand is a mythological beast that is often drawn, but never actually seen,” he argues in his latest book, Economyths.
As I keep saying, financial markets are neither inherently stable, nor rational, nor particularly efficient. Today I will tell my paid readers about an example. But back to Mr. Orrell:
“To say markets are not efficient, you would have to say markets are [also] not rational and they’re not at equilibrium. So you can’t really relax one of them without getting yourself into trouble if you’re a mainstream thinker.” The example he cites is of Alan Greenspan who remarked recently “We would be far better off to allow the normal market forces to operate.” The old invisible hand may be shaking with palsy, but apparently it still works for the ancient economist, comments Miller.
Mr. Orrell adds; “It seems to me the economy is very similar to a biological system. It has a lot of the same properties. It’s complex, non-linear, and full of complicated networks,” wrote the Alberta-born math whiz who works for a medical consulting firm in Oxford, England designing models of cancer tumors using powerful new tools like network and complexity theory.
He sees economics heading down the same road sooner than many tradition-bound economists realize. “Current economic theory is less a science than an ideology peculiar to a certain period of history, which may well be nearing an end,” he concluded in his book.
Many discredited economic ideas of today go back to the 19th century, constructed into what looked like a solid structure, with strong supporting columns. “They’re all starting to crumble now. When they break, the whole thing is going to come down and you’re going to see a different approach coming through” writes Mr. Orrell. He calls economists “the jilted lovers of the science world – the more rigidly they approach their subject, the more it mocks them with spurious and headstrong behavior.”
Market crashes he views as large earthquakes in pattern. Most earthquakes are tiny, but a small number are huge. So the probability of a quake of extremely high magnitude is more than zero. “Financial crashes exhibit exactly the same kind of power-law behavior. It’s different from a normal distribution. If a normal distribution were true, you would never really have a market crash. You would just have continuous random fluctuations.”
If economists used their current toolkit in geophysics, they would conclude that earthquakes don’t exist. And that shaking would be interpreted as nothing more than a low-level hum that could be safely ignored. Mr. Orrell’s criticism is not that economists can’t predict the future, because no one can. “The problem is that they pretended to be able to measure risk” and thus underestimate it which winds up making the system riskier. “So the issue is not that they didn’t see the crisis coming, but that they helped make it happen.”
Canadian reader Maurice F. emailed:
I am currently looking at Macquarie Airport group (although thankfully, Macquarie is no longer controlling this infrastructure). It owns roughly 3/4 of sydney airport and roughly 30% of Brussels and Copenhagen airports plus 16% of the mexican airport group ASUR. The problem is no ADR not even pink sheet. You can buy in Sydney or Frankfurt.
I replied:
You can buy in Australia or Frankfurt. Brokers who do this include Fidelity, e-trade, interactive brokerage (cheapest), Charles Schwab, and TD Ameritrade. You get to shop around and check with their offices in Vancouver to see who wants to do it for you. alternatively you can go to an outfit like Europacific Capital or Marquette De Bary or HSBC and they will charge about $70 US for a bank transaction.
More about gold, oil, nuclear, and geothermal power, along with a new stock idea follows. Plus news about banks, drug companies, and gambling.
