When approached by people that have not seen me for some time, it is a common procedure to make me the following standard questions: “How are you? What have you been doing lately?”. Once I mention my studies in economics people tend to immediately inquire me about the current economic situation, mainly in Portugal.
This is a question of highly interest to me, and to which I dedicate a long time of my thinking. Nevertheless I invariably reach no specific conclusion as the topic seems of high complexity. How come?! After studying intensely for four years several economic issues shouldn’t I came up with some solid ideas? What have I been doing so far?
This is as surprising and confusing to me as it is to people that receive my, apparently uninterested, answer. However I have become aware that as years pass by and my knowledge regarding economics deepens, the more difficult it becomes for me to be sure about things, since the feeling of not fully understanding them becomes more and more present. Numerous persons have told me this is a natural path to follow, and that through life this feeling will only increase. Curiously these are the exact same people that feel confused with my answer in the first place.
At the beginning, this was something frightening, especially for someone like me that always was full of certainties. Nowadays I look upon such situation as a challenge to my intellect, something that will only produce more questions and therefore enable my reasoning to evolve. Even so, in order to jump from one stage to another I had to cross a long road.
A book by Nassim Taleb was of high importance to help me address this issue, and at the same time to increase my preoccupation over it. This book was the best-seller Black Swan. In its pages a “simple” explanation is described, the so-called “Kolmogorov’s complexity”: in order to process the information (nowadays flowing at the speed of light), one must summarize it, by doing so one can easily generate “drawers” for each topic in one’s head. What we call the Black Swan is exactly what we left out from this simplification process.
The problem surges when this procedure is done, as the better the summaries, less random will things be. In other words, the more one summarizes the information the world broadcasts, the less random reality will seem to be, since everything is easily tidied in our “drawers”. One must also have in mind that the more information and details we keep in inside each “drawer” the easiest it becomes for one to remember it, since more information and causality links enables the creation of a single summary, instead of a bunch of them.
Such phenomenon is easily understood when learning History. Events may be easily listed, as well as its causes and consequences, even though when things took place no one was fully aware of what was really happening. Every single person is currently creating new history, despite not being able to state reality in such neat bullet points. This is also why one usually disregards facts that seem not to have a causal effect in History, while at the same time we produce a way of thinking based in following events that we are already aware of (eg: WWI had several consequences, that are at the same time WWII’s background). Ultimately since one is not able to remember events as they really were but as one thinks they were, History will be much easier to explain than what it was in reality.
Being this an individual process, each person is able to reinvent History in his own way. Therefore, for a particular event different explanations will probably take place due to personal distortions. Consequently, this will be on the basis of an opinion’s creation, but how come may someone that does not have a clue regarding a specific subject be able to produce a solid and coherent point of view that follows a valid logic path? There is no doubt that two persons may disagree on something based on the same facts, still, does this mean that several explanations coexist and each is as solid as the other? Certainly this is not the case, as only one true answer exists, even if it is not in our reach.
Additionally, as one constructs less random events in his mind, one will feel less responsible towards each event, since with or without one’s participation the event would take place anyway. Media tend to be major players in this line of thought, as they perceive themselves as simple communicators that have no influence in reality, disregarding the obvious power they have in setting minds and ways of thinking. In order to sell their stories, the media construct complex causality theories instead of admitting they could only be partially right. Nevertheless this problem is just a response from media to its public that seeks the exact same thing. No one seems able to deeply study a subject in order to give an opinion, a simple argument sustained in a few causality effects seems to be enough.
One of the three axioms under which the current global economic system works is related with rational expectations. Briefly explaining it to the ones unfamiliar with such expression, and reformulating professor’s Robert Waldmann’s words, rational expectations are nothing more than assuming that every economic agent (each one of us) always knows every conditional probability for every decision, having therefore complete information regarding future events. These assumptions imply that no agent will incur in systematic errors when predicting the future, meaning that the only source able to destabilize an economy are events that never took place before, and consequently, cannot be part of anyone’s information book, the aforementioned Black Swans.
After the analysis made before under which arguments/opinions are built upon, and that decisions are taken under such arguments, it is my belief that this is an axiom that must be questioned. In some way, this perspective goes in line with the need to rethink economics as Robert Skidelsky proposes it, that economics should try to acknowledge that for different activities, different knowledge assumptions are appropriate. In order to perform such reform the economics’ courses should also include other disciplines beyond Microeconomics and Macroeconomics, such as, Moral Philosophy, History of Economic Thinking, Politics, and so on and so forth. By doing so an economics student would not receive its diploma merely due to his mathematical skills, but because of its more broaden approach to problems, enabling more complete opinions.
About the author: Francisco Cluny is graduated in Economics by NovaSbe. He is particularly interested in the fields of macroeconomics and health economics and is currently writing his thesis on the topic: “ Hospital Costs and uncertain demand”, under the supervision of Professor Pedro Pita Barros. Francisco Cluny is presently President of Nova Economics Club