One good reason why economics is known as the “dismal science” is that it is not a science at all, because virtually all of its complex tabulations come up against one single and disruptive imponderable, which is human behavior. And herein lies the reason that by and large the predictions of most economists turn out to be wrong. The laurels go to the few “outliers”, those economists who, from conviction or cunning, predict against the prevailing trend on the basis that at some point markets will change and their warnings will proven right.
The history of economic forecasting is strewn with individuals who have stood out against the generally rosy predictions of their peers and, sooner rather than later, been found to have called the economic cycle correctly. Yet, after they have been hailed as wise men and gathered a considerable following, it often happens that their next predictions turn out to be sensationally wide of the mark.
The truth is that economists, for all their training and calculations, are probably no smarter than the man in the street. Markets are like herds of wildebeest moving as one in a single direction until something alarms them and they all charge off together in panic in the opposite route. And speculators lie in wait like beasts of prey picking off the weak and vulnerable as they flee. However, even lions can be trampled by the rampaging herd.
Trying to bring long-term order to markets, most especially to the intricacy of closely-linked globalized markets, is pretty well impossible. Yet still regulators continue to try, if for no better reason than they are paid to make the effort.
High-technology has, meanwhile, allowed nonofficial attempts to create market instruments which are free of normal regulation. The prime example is Bitcoin, the virtual currency that can be traded digitally with a series of checks to ensure the validity of the deal. The programers who created Bitcoin deliberately set the maximum issue of the cryptocurrency at 21 million. Their principle was that, unlike central banks that could print new money and thus create inflation, a Bitcoin’s value would rise or fall depending on demand, thus absorbing changes in market sentiment.
Yet now, as reported in the Financial Times, there is a move afoot to expand the number of Bitcoins to 42 million. This would seem to be a clear abandonment of the core principle upon which the cryptocurrency was based. This, however, is to ignore the other digital currencies that have sprung up following Bitcoin’s launch, to widespread doubt, eight years ago. Indeed, the new “currency” almost hit the buffers when a major trader in Japan “lost” coins worth several hundreds of millions of dollars.
To any sensible person, the idea of using an unregulated and barely transparent digital currency is a high-risk proposition. Not for nothing has the secrecy of Bitcoin and its copycat rivals attracted criminal elements on the Dark Web, where trades have to be settled in cryptocurrencies. It surely does not take a highly trained economist to see that if central banks with all their power and regulations can make a hash of money management and bank regulation, and so plunge the world into financial crisis, reposing any trust in a secret and uncontrolled cryptocurrency is hardly wise.
