“Excerpted from Seth Klarman’s Baupost 2012 Letter to investors,
Comments »If economics were a hard science like chemistry, you’d mix a little of this with a bit of that and the concoction would lead to strong economic growth, full employment, rising home prices, buoyant financial markets, and low inflation every time. But economics is a soft science, and real life simply doesn’t work so predictably. Though economists might wish otherwise, economics is, at its core, behavioral.
Modern economies are too complex to be reliably modeled; their connections and correlations are loose and imprecise, the second- and third-order effects largely immeasurable, the fickle vagaries of individual and aggregate human behavior utterly unknowable. Put an economist in a powerful government job and provide levers that can be pulled to start the printing presses, set reserve requirements, fiddle with the Fed funds rate, expand the Fed’s balance sheet, and deliver indecipherable communiqués, and that economist will feel compelled to pull those levers.
He or she, like a monkey with a typewriter, might even give us Shakespeare (or Adam Smith) on occasion. But mostly that economist will spout gibberish, a mélange of untested and potentially counterproductive measures that unleash all manner of unintended consequences.
Were the meddling to actually remedy the targeted deficiency, it might well be at the cost of dangerous feedback loops and unexpected ripples growing beneath the surface into the incipient waves of tomorrow’s much larger problems.”
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