In this time of crisis, we need an economic revolution

IN the 1980s, while studying economics inuniversity, it was already apparent. The number cruncher geeks had taken control of economics.

At that point, if you were to be considered a serious economist, it was mandatory to learn and apply quantitative analysis to the economy.

Using a jungle of mathematical formulas, wrapped up in econometrics, we were expected to devise forecasting models to tell the future.

If you railed against this approach (guilty as charged) you were taking on the system.

Those who excelled in quantitative and model- driven skills did best in the real world. And now?

In the course of the past 30 years I have watched the machines march on. Econometrics has emerged to define the subject of economics and sets the standard for public and private sector roles.

Yet, economics has failed entirely to assist the western world during the disaster of the past three years.

Its modelling has proven bogus and its forecasts have been as helpful to policymakers as an Indian rain dance in predicting next summer.

All of this suggests that a revolution inside the world of economics is long overdue.

Economics should never have been tilted towards a keel comprised of number jockeys.

It does not belong in the same academic space as accountants or actuaries. Instead, it must be brought back to the “social science” category where it surely belongs.

An economy, ultimately, is made up of human beings. You cannot predict my spending and saving habits next year using an elaborate Excel model.

That behaviour will instead depend hugely of the level of confidence and fear that fills everyday life between now and them. Ditto for billions of consumers worldwide. Throwing algebra at it just won’t work.

Instead, we need to use logical thought and debate as the core methods of analysing and predicting economic behaviour.

The so-called Austrian School of Economics believed in this over 100 years ago, but they were washed away by calculators. If economics understands its brief is to examine humans, and not figures, it could again be a valuable tool for our society.

Similar patterns are evident in equity research, which underpins investments in companies.

Here too, I have seen Excel models dominate the way companies are analysed. The guy with the most sophisticated discounted cashflow model is deemed bright even though tiny adjustments to assumed inputs dramatically alters potential share prices.

Instead of being anal about numbers, equity researchers should spend more time debating the structure of business models, their position in served markets, and the skill of managers who run them.

That approach, which is less scientific and more pragmatic, is in my view a better way to make money for investors.

So, if you are out there and contemplating a life in economics or investment research it is important to understand the conventional wisdom that applies.

Those good at maths and doodling with numbers can do well in these professions.

Whether or not that adds one iota to the challenges facing politicians and investors is an altogether different proposition.

Joe Gill is director of research with Bloxham Stockbrokers