Wednesday, December 31, 2008

Figuring what happened using a physicist or an economist

It's time to realize that there is one very important difference in economics and physics. Faced with facts that don't match theory, physicists try to come up with alternative theories. Economists, on the other hand, try to change facts so that it matches their theory. So, today, economists on the left are arguing that defective regulation caused all the troubles. A year from now, I am sure conservative economists will come back and argue that government meddling post the Lehman crises is what has caused the recession to be as long as it is going to turn out to be. And it is not just economists. Almost all fund managers have one particular lens through which they want to view everything in the world. All stocks in the world need to fit their theory of how stocks should behave. And if they don't, it is just a short term disruption that will be corrected duly in the course of time. "In the long run, everyone is dead", as Keynes said.

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