Author:McCloskey, Eirdre Nansen

YOU NEED TO be inoculated from some strange but popular notions about the economy. After the inoculation--it won't hurt much--you can turn off CNBC and skip over most of the economic chatter. It'll give you time to read Moby Dick. You really should. It's amazing and is markedly less Actional than the notions here.

Let's begin with this one: The stock market is predictable. CNBC specializes in it, with its talking, or sometimes shouting, heads. People want certitude, and stock tips provide the illusion. The industry of stock tipping came out of some century-old court decisions that trustees be prudent. The idea was to prevent the trustees from making off with the assets of widows and orphans yet allow for regrettable but unforeseeable losses. Preventing an agent from cheating the principal is the most ancient reason for accounting. But how to be prudent? Well, take sober advice on what stocks will perform. From CNBC.

A closely related notion is that interest rates are predictable. At a private meeting of the governing board of the American Economic Association in 1996, the secretary-treasurer read out, as was his duty, a letter sent in by a naive member. The letter proposed that economists, like every profession around them (statisticians, engineers, accountants, sociologists, political scientists, historians), adopt a code of ethics. After he read the suggestion, an embarrassed silence descended. Economists think of themselves as positivist scientists, without a need for ethical codes. Then one of the smart-alecks in the room dropped into the silence a suggestion: "The first rule should be 'Never predict interest rates.'" Everyone laughed.

Why do the sophisticated economists laugh at stock tips and interest-rate predictions? The answer is another question: "If you're so smart, why aren't you rich?" One might call it the American Question. If Ms. Jones, an investment counselor, knew the future of financial prices, she could get a second mortgage on her house and make a fortune. An unlimited fortune, in fact, because she could reinvest the profits. So why is she wearing a suit from JCPenney? And why is she selling tips to you for a modest commission?

The American Question is a fair one to ask of anyone who claims to know the future price of a thing or an event on which you can speculate. Paintings. Houses. The Kentucky Derby. The date of the next recession. The identity of the next president. If there's not a direct market in it, you can...

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