Macroeconomics has not been successful for 200 years. I’ve noticed. Exactly. It's been a failure for 200 years. No progress. I think most economic ideas are bad ideas. If t here's a group of people that I can't stand, it is economists driving me up the wall. Mainly in a career, I say don't do an economics degree. Bashing economics, especially on popular podcasts like Lex Fridman or Tucker Carlson. Can get you hundreds of thousands, if not millions of views. But are these criticisms fair, or are they just sensationalist nonsense that's used to get views?

Hey, I'm Joeri, I have a Ph.D. in economics and I used to teach economics at several universities. And today my employee, Alejandro here who is also an economist, has selected several popular video clips with people ranging from professors to YouTubers to investors -bashing economics for me to react to. And as I understood it, these criticisms essentially come in three flavors. Number one, economics is not a hard or a real science. Number two, economic models are terribly outdated. And number three, don't study economics, It's a waste of time. This is how Alejandro ordered the clips for me. So let's get into criticism type number one.

Economists make bad predictions. It's not a hard or real science. You know economics is not a physical science. There's no way for me to go and do an experiment and say here, let's let's run the Covid economy again. But with taxation on the rich and show high living standards, you bet we can't do that physical experiment. All we can do is predict. And that is why banks pay millions of pounds a year to good predictors. Because that's the best way to tell who's a good economist, because we can't do physical experiments. And it drives me mad that these economists who make policy and protect policy that protects them and their class and the rich don't even accept when somebody consistently predicts them, they won't even listen to you. Drives me mad.

Okay, so popular YouTuber Gary, an ex-trader makes two claims here. Economics is not as good as physical sciences. And number two, so this critique is not entirely true. To make financial market predictions. And therefore he is actually a really good economist. And yet economists like me do not listen to him. Okay, I see variants of these two claims actually a lot in the comment section on this channel. Economics is not a very good science, and you should really listen to rich investors rather than economists. So let me just address both of these once and for all. For the first claim, I actually half agree with Gary. Economics is a social science which is less good than a physical or hard science.

Let's play a part of that clip again. And you know, economics is not a physical science. There's no way for me to go and do an experiment and say, here, let's let's run the Covid economy again. Here, he gets to an absolutely crucial point about why economists, and especially macro economists, can never get to this scientific gold standard of doing control experiments in the laboratory. Yeah, that's the half that I agree with. I'm pretty envious that, for example, chemists can do super control experiments in a lab. Well, this is much harder for social scientists like economists like me, but also sociologists or political scientists. But I would argue that not being able to do laboratory experiments is actually a problem for many, many natural systems as well, given that they're big enough not to fit in lab right?

Gary's Covid economy is a macroeconomic phenomena. If you just look at the UK like Gary tends to do, that means that we're talking about millions of individuals, millions of firms, hundreds of banks interacting with government and the central bank, as well as, of course, other countries. You cannot put the entire UK inside a laboratory to do a controlled experiment to compare the differences between doing Covid stimulus and not doing Covid stimulus, like how medical scientists compare a placebo group to a treatment group. But this is true for big physical systems as well. You kind of put the Earth in a laboratory to study the impact of greenhouse gases on global warming. You cannot put stars in a lab to study how black holes are formed. Therefore, you see in all of science that the bigger the system gets, the more difficult science becomes, and the easier it is to criticize the results of studies that use mathematical models or statistical models, or quasi experimental methods, rather than real gold standard controlled experiments.

However, even though natural scientists also struggle with this problem, I do agree with Gary that even for these big systems, social systems on average are even more difficult to study than very big natural systems like the solar system, for two reasons. The first reason is that social systems simply tend to be more complex than physical systems. After all, atoms or chemicals do not have a brain that can plan ahead, learn, and react to its environment like humans do. Therefore, while economists may do experiments in a laboratory, just as chemists or biologists do, the results from small scale controlled human experiments are far less likely to hold up in a real world setting than those from a small scale chemical experiment. Similarly, on the big scale, while macro economists are using more and more experiments or so-called quasi experimental methods that mimic experiments, they still have to deal with the fact that humans are inherently less predictable than atoms or even animals.

To make matters worse, there's this second reason why social sciences struggle, which is that unlike natural scientists, social scientists are part of the system that they study. For example, about Gary's Covid economy, most economists predicted that the world would face a big recession or depression with deflation rather than inflation. However, because the government actually listened to these economists, they started massive stimulus programs to avert a recession with deflation. But they then created an economic boom with lots of inflation. This is a problem that natural scientists do not have to deal with. For example, an asteroid does not change its course because some physicists predict that it will crash into a planet.

So Gary is right economics is not a physical science, making it harder to do experiments that then help generate reliable predictions. This is why on this channel, I often try to stress that while I do make some macroeconomic predictions, they will typically not be very reliable. This brings us to Gary's second claim in that clip.

Let's watch it again. And that is why banks pay millions of pounds a year to good predictors, because that's the best way to tell who is a good economist, because we can't do physical experiments. And it drives me mad that these economists who make policy and protect policy that protects them and their class and the rich don't even accept when somebody consistently predicts them, they won't even listen to them. It drives me mad. Okay, this is where Gary and I truly, completely disagree. I say nobody can make really good macroeconomic predictions because the system is so complex and we can't study it’s dynamics in the lab. But Gary says, hold on. Banks paid people like me a lot of money to make these types of predictions. And I got rich. And you academic economists did not. So why don't economists listen to people like Gary?

Well, the reason it is going to sound really brutal, but actually is because economists have found that they cannot actually distinguish professional traders like Gary from monkeys throwing darts at a financial newspaper. Okay, let me explain. And please don't take this personal. Gary, I personally believe you were a very skilled trader and I look at your predictions on YouTube and they were pretty good. You some point had six out of nine or something like that were correct. Gary, then to tell you about all the ones that were correct a lot on this channel. But yeah, he also got some stuff wrong, like saying house prices would go up quite a bit further while they really didn't, and that Covid would massively increase inequality, while the data at least says that that really was not the case. Still six out of nine, that's actually really good. I said the system cannot be predicted, so you'd probably expect Gary would get about 50% or so of his predictions. Right? And he clearly got more than 50% just being a bit more right than wrong. That's enough to make you a millionaire in financial markets.

However, the problem is simply that if enough people bet on markets every day, some people will, yes, inevitably, statistically, always do well for a couple of years. This is why there are actually serious experiments where professional traders like Gary get beaten by animals. For example, there's a famous Wall Street Journal supervised experiment where a blindfolded monkey beat professional traders. To make matters worse, in 2012, professional traders like Gary were defeated by a cat dropping a mouse toys on the stock market. Suggestions. In an experiment that lasted a full year, and then more scientific experiments with hundreds of simulated monkeys selecting random stocks, about 10% of monkeys outperformed the market by over 940%. Well, professional traders are famously struggling to outperform the market at all. So sure, Gary's predictions track record may seem impressive, and it could be his impressive skills as an economist. Absolutely. But at the end of the day, there will always be some monkeys that are better at predicting than professional traders like Gary or Ray Dalio or Cathie Wood for that matter.

So this is why economists don't even accept when somebody consistently predicts them, they won't even listen to them. And instead, economic theories need to be able to predict the future. Yes, but they also need to be able to explain hundreds of years of economic history at the same time, and also be confirmed in quasi experimental studies. That is a much higher standard than just betting money on financial markets going up or down for a couple of years, which, as we have seen, can be done by a lucky monkey as well. So yeah, that was a very long response, I realize. So quick summary. Yes, economic science is not as good or reliable as most natural sciences because humans are unpredictable. And to make matters worse, they actually listen to economists, which then makes economic predictions sometimes not come true. Yes, some rich traders make good predictions for years. And yes, it could be that they're really good at economics. But for us economists, we cannot distinguish them from monkeys throwing darts at a financial newspaper. So this is why economic theories have to explain the future and past and be confirmed in experiments which economists are doing more and more often, which is great, right? Economics is getting more scientific. But of course, there's still plenty that economists can genuinely be criticized about. And I will react to that.

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Okay, Alejandro told me this was a clip from famous Bitcoin investor Michael Saylor on the Lex Fridman podcast. Let's have a look. Yeah, I think that if we're going to want to really make any scientific progress in economics, we have to apply much, much more computationally intensive and richer forms of mathematics. So if you want to describe how anything works in the real world, you have to start with the concept of feedback. If I double the price of something, demand will fall and attempts to to create supply will increase and there will be a delay before the capacity increases. There'll be an end demand change, and there will be rippling effects throughout every other segment of the economy, downstream and upstream of such thing. So it's kind of common sense. But most economics, most classical economics, it's always, you know, taught with linear models, you know, fairly simplistic linear models.

All right. That was a really interesting clip by Michael Saylor. Because for me it really encompasses ignorance. That is a critique that people often have about economic models is, look, they are too simple. They're oversimplified. And actually, that point I agree with. I did my thesis on this very thing. I explored this new modeling technique exactly. Something that Michael Saylor here is talking about agent based models, computational agent based models. And I made these massive models. I coded them up, simulated thousands of households and hundreds of firms and tens of banks and the government and central bank. And what I found is that this is a really useful technique to study some phenomena in macroeconomics, but there's also a huge downside to it, and that is that the more complex your model is, the more difficult it is to actually understand what's going on in the model, and the more likely there will be some bugs, just as you see in computer games, with these models.

So to that point, I think Saylor is right with this critique is very old. I started my Phd a lot of years ago, and in the meantime, you know, central banks are working now with a lot of these agent based computational models alongside many different modeling techniques, alongside the more simple models that Saylor here is critiquing. But then for his critique about these more simple models, I don't think he knows what he's talking about. He's saying, look, these models don't have feedback like their general equilibrium models. This what they call typically dynamics stochastic general equilibrium models are the most popular models in macroeconomics. They're dynamic okay. They're talking about equilibrium, about supply demand being in in balance with each other in equilibrium, and how they react if they become out of equilibrium or if something happens to that, and then they react back and forth with each other. And Michael Saylor is saying, oh, economists don't follow this. This is just a basic mistake like they do while it it's at the heart of these relatively simple models is supply and demand is feedback. And they are dynamic that he's saying they're linear models. They're not dynamic stochastic general equilibrium models are not linear models okay. They're dynamic, but I think I know where the confusion comes from because some of these models are solved in a linear way. That's a mathematical trick to make solving them easier. And I think that's what he's talking about. But honestly, this guy doesn't know much about economic models. And he got very rich investing in Bitcoin. And I'm not gonna criticize him for that. But economic models no.

Someone who does know a lot about economic models though, and economics in general is Professor Richard Werner, which I think the next clip is from. Well, the reason is that the the economists follow this theory that banks are just financial intermediaries, that just, you know, gather deposits here. Do the analysis credit, in analysis, you know, risk assessment and, and all that. And then they allocate the funds and invest or they just take a percentage. They're a - So so they're intermediaries. Yes. But that's wrong. That's not what they are. That's it's one theory of banking. And it's still the one that still dominant in all the text books the leading journals. They still use that but actually, if you look into it, you realize there's three theories of banking. A second theory, slightly older, that was dominant until the 1960s, so-called fractional reserve theory. And you may have heard this fractional reserve, banking. What is that? Well, this theory says this part is similar. Each bank is a financial intermediary. It just collects deposits and then does the analysis lends out the money. But in aggregate, as banks interact, there's money creation. Oh, and that's where students, yes, should have bricked up money creation. They even talk about money multiplier. What. That's the second theory. Now there's a third theory. And that one had been made out to be a wacky conspiracy theory. Oh, but it is the one that was more or less quite widely known until about a century ago. And that's the credit creation theory of banking. And this one says banks are not financial intermediaries. Banks are special. They have a unique power that no other player in the economy has, and that is the power to create money.

Okay. So this critique, I fundamentally really agree with in the sense that I do focus on this channel very much on bank money creation in many, many videos. And, he's right, that many standard macroeconomic models don't have banks that create money, which seems like a giant oversight. Right? That seems super important. But the problem here is kind of similar to what Michael Saylor said here is that, like, you can't model everything, right? So you need to simplify somewhere. And after in this in these models, these DSD models, they don't have banks that create money. But now after a financial crisis, there are also many DHC models that do have bank money creation and do have these things that Professor Werner here is talking about. So I think his critique, there's definitely truth in it. Bank money creation. I've been promoting this super important for the economy, more important than most economists I think, recognize. But many economists do recognize this. Central banks do recognize this, and they're more and more models that do actually include this. And I think Professor Richard Werner, I know I've read his books, he's been criticizing this, this type of criticism for a long time, and I think by now is a little bit outdated. And there are a lot of models that have this, but definitely read his books. They're very interesting. It is important. So yeah, absolutely.

But there's more there's more wrong with macroeconomic models. Let's see our friend Gary again, who I think the next clip is from the models which we study at universities nowadays. One of the big simplifications is that there is no inequality in the model. In fact, it's more than just that. There is no inequality in the model. There is only one person in the model. So these models are what they call representative agent models. So rather than looking at 6 or 7 billion people in the world, or like 66 million people in the UK, or 300 million people in the US, they say to make the model simpler, we are just going to look at one representative person. So the average person in the whole economy. So all you care about is averages, right? You're just taking one average person. And of course if we change the distribution, if I take some wealth from you and give it to Bill gates, or if I take some wealth from Rishi Sunak and give it to you, that changes the distribution. But it doesn't change the average. So basically, once you build this model, which only looks at the representative agent, which is the average, which is the aggregate, it's not only that there is no inequality in the model. There is not even any possibility for inequality model. These are models of averages. Theorem. These are models of aggregates, which is why when modern economists you've been to these elite universities think about the economy, they tend to think about them in terms of averages or aggregate, so that they're obsessed with the big aggregate measurements of the economy. For example, GDP is, of course, the classic one unemployment, inflation, central bank interest rates, level of government spending, level of government taxation. These are things which you can measure on an aggregate economy, but they're nothing to do with how is one person affected versus another person.

So okay again we see this critique standard simplified models don't have a realistic feature or a critical feature like inequality. Again, the models that I previously made did have this. They were very complex. They also had bank money creation. But my model was really hard to study precisely because it had so many, so many features. Therefore, most economists make specialized variants of the models that are in the standard. For example, economists like Chicago professor Greg Kaplan do study inequality in these types of models that Gary is talking about. And they just do it by expanding it, creating a variation. And then they do model wealth inequality between households. So this critique is not entirely true. And there's really actually a lot of very well known economists that even some of them won Nobel Prizes. Angus Deaton, there's also Joseph Stiglitz, Toni Atkinson. Piketty is also very well known that do study inequality. So in fact, this literature has really exploded over the past six years. So I don't think this critique is completely true. But Gary's right that a standard model does not have this. So if you are just doing a bachelors or a masters in economics like Gary did, you will not encounter these types of models and then you won't learn about inequality too much. And that's a fair critique. I think that is a problem.

So yeah, there's absolutely some truth here, but I think what we've seen now with these three clips is that, yeah, many models are wrong and many don't have crucial features. But the problem is also that if you include all of these features, then the model is too big. You don't understand it anymore. So this is just something that economists and and scientists overall I think have not figured out yet. And if you are going to study economics in university, then yeah, you will not see many of this super important features. You will only see the simple models, which gets us to the third type of criticism, which I'm going to react to today, which is that economic education is bad.

Professor Steve Keen, whom I actually met a couple of times, I did a visit to the university that he was at the time, King's University of London during my BSD, and I think Steve King does some really good modeling, and he made some really interesting software for students called Minsky that I absolutely encourage people to tinker with if they want to understand macroeconomics, but that does not mean that I agree with Keen on Everything. So let's see what he has to say. What you learn is an obsolete technology. Learning economics at a university is like learning. It's all like astronomy. The centric equilibrium epicycles being added to make your models fit the data. So it's not that economics is not a discipline worth deeply studying, it's that the university education around that kind of so bad is bad. Yeah, I'd say learn system dynamics, do a course in system the dynamics which you can apply in any field, and then apply what you learn out of system dynamics to the issues of economics, if that's what interests you.

Okay. So here I disagree with Steve Keene. Yes. An economics education is too often about just doing some simple math rather than studying economics. But this can be explains. You see, education is very conservative. It takes time. Research is actually quite a lot further. We have banks and we have inequality in research. But for teachers to implement all of this in their teaching program is actually pretty difficult because teachers are under a lot of pressure. Typically in economics they're not so well-paid, and they have so many students and so much grading to do. And now, as a conclusion, very often students don't see all the best things that the economics profession is working on right now. But honestly, Keynes models are not perfect either. They don't have a lot of realistic features like actual humans in their modeled and how they would behave. So again, I think the same problem comes back. Economics is not perfect, but it's also, as we discussed at the start of this video, because the system, especially the macroeconomic system that economists are trying to study, is just so massive and not fully explored yet.

And so, yeah, because economists have a lot of work to do and an economics education is not perfect, but definitely do study it in university I did, and I loved it. And you will too. You will learn a lot. I think. Conclusion. So yeah, that was my response to these three types of critiques. Critique. Number one, economics is not a hard or real science. Yeah, it's not a hard science. It is real science, I'd argue. But it's a social science. Social systems are more complex than natural systems because humans are more complex. And on top of that, social scientists may influence the system that they're in, in validating their predictions. And on top of that, just as with climate science or studying planets, the bigger a system gets, the less easy it is to study them through at least a gold standard of science controlled experiments. That being said, economists are trying to do more and more experiments are even featured. A proper macroeconomic experiment on this channel last year. So I'm actually very excited for the future of economics, and you'll hear all about it on this channel.

Even if critiques like economic models aren't terribly outdated, have some truth to them. I somewhat agree with these. Yes, most economic models are very much oversimplified, but as I have seen firsthand, we don't have a perfect alternative yet. Yes, I've made some super advanced simulation models that Michael Saylor would love, but these had their own problems. They were very difficult to track what was going on with them. Yeah. And so I think there's a place for many different types of models. And there are. And when Keynes says don't study economics, it's a waste of time, I really disagree. Yes, you should be careful where you study economics. I recommend that you pick a department that's known to be somewhat progressive, scientifically speaking, where they teach multiple schools of thought, teach them economic history, and focus on empirical economics, where really all the action is these days alongside these standard mathematical models. And of course, on the side, always watch this channel. But yeah, that is my take. Do you agree? Let me know in the comments. And if you like these nice products from Ekster, consider ordering them via our link below. This gets you a really nice discount and it indirectly supports the channel.