Onion Eater
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- Jun 28, 2008
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At another forum, their resident doomsayer posted this chilling warning:
I reply:
Kondratieff waves are pure rubbish – comparable to roulette players seeing patterns in the history of the ball landing on a red or black number.
According to Wikipedia:
"Long wave theory is not accepted by most academic economists. Among economists who accept it, there has been no universal agreement about the start and the end years of particular waves. This points to another criticism of the theory: that it amounts to seeing patterns in a mass of statistics that aren't really there. Moreover, there is a lack of agreement over the cause of this phenomenon."
The MIT Dictionary of Modern Economics concurs:
“Kondratieff held that the existence of long waves was ‘at least very probable’ but offered no systematic theory, merely outlining certain relevant factors. Subsequent work has suggested that the waves identified may be due to the statistical techniques used by Kondratieff.”
That's basically it:
1) They are seeing patterns that aren’t there.
2) They have no systematic theory to explain them.
Kondratieff long waves are very similar to the “reversion to the mean” theory promoted by Bonner and Wiggin. I mock them in my Devil’s Dictionary of Economics:
Reversion to the Mean: “Things that are unusual usually return to normal. If they did not, there would be no ‘norma’ to return to. That is why you can expect stocks to become more expensive when they are cheap and cheaper when they are expensive,” write Bonner and Wiggin, “The older the investor, the more confidence we have in him. He has seen good times and bad times. He has seen bulls and bears.” With all due respect, this is not a theory. Theories are expected to explain why an event happens, not just sagely announce that it will happen eventually. As I write in my 1999 book, “Nothing prevents young fools from growing into old fools.” Just stroking one’s white beard and propounding, “seen it before,” does not imply that one could explain it then, or can now. (With this “theory,” Bonner and Wiggin could get rich at roulette simply by stroking their beards and saying, “It’s red now but eventually it will be black.” Anybody want to invest in their next trip to Las Vegas?) See Section VIII of my 2004 paper.
Roulette: Pop quiz! Which of these statements is more profound? 1) It’s red now, but eventually it will be black. Always bet on reversion to the mean! 2) It’s red now, so it is sure to be red again. Never bet against a winning streak! Answer: Neither. Playing roulette is not profound, no matter how you bet. Neither is playing the stock market, unless you have an actual explanation for why a particular stock is going to pay fat dividends or go up in price.
So why is this pseudo-science still being discussed today, decades after competent statisticians showed Kondratieff’s long waves to be rubbish? There are two reasons:
1) In spite of a long and distinguished career helping the USSR’s communist government with economic planning, Kondratieff was arrested in 1930, never brought to open trial and died in a Siberian prison camp. This allows modern followers of Ron Paul to claim that their mentor was a martyr for freedom.
2) Kondratieff originally said that his cycle was fifty to sixty years long, though this was gradually extended to be anywhere from forty to eighty years. Since we are always forty to eighty years from some sort of downturn, doomsayers can make a comfortable living by publishing and selling – Top secret insider info! – a new paper every year that predicts a depression the following year, all based on the same theory.
Exposing the myth of Kondratieff is quite easy:
1) Stalin killed hundreds of thousands of Russians and starved tens of millions more. While it is sad that Mr. Kondratieff died in this way, his experience was hardly unique. Nor unexpected, frankly; the Russians don’t like doomsayers anymore than the Americans do. It is just that we don’t kill them. We are content to chuckle quietly to ourselves as the doomsayer marches up and down the sidewalk waving a “THE END IS NEAR!!!” sign and haranguing passing pedestrians. There is no reason for modern followers of Ron Paul to see Kondratieff as a martyr to their cause, anymore than all the other junior officers and petty bureaucrats whom Stalin purged from the Red Army and the Communist Party.
2) An example that is better known to Americans than Walter Eichelburg is Gary North, who has grown old (and rich) making the same gloomy prediction year after year. He began his illustrious career in 1986 with publication of “Ten Feet to Survival,” a book about digging bomb shelters. Every year since then he has proven P. T. Barnum’s observation about a fool being born every minute by selling those fools predictions of imminent economic collapse. And every year there has been a new crop of fools to shell out good money for his predictions – money that would have been better spent on prescriptions for anti-depressants.
Thus, thanks to Kondratieff, a prophet of doom need not be embarrassed when his dire predictions fail to materialize. He can, like North, Eichelburg and Roller, just rewrite them using a slightly different definition of “long wave” and predict another Great Depression another year hence. It is a guaranteed money maker! Like snake oil, but without the hassle of having to ship a physical product – or handle snakes.
Michael Roller said:
I reply:
Kondratieff waves are pure rubbish – comparable to roulette players seeing patterns in the history of the ball landing on a red or black number.
According to Wikipedia:
"Long wave theory is not accepted by most academic economists. Among economists who accept it, there has been no universal agreement about the start and the end years of particular waves. This points to another criticism of the theory: that it amounts to seeing patterns in a mass of statistics that aren't really there. Moreover, there is a lack of agreement over the cause of this phenomenon."
The MIT Dictionary of Modern Economics concurs:
“Kondratieff held that the existence of long waves was ‘at least very probable’ but offered no systematic theory, merely outlining certain relevant factors. Subsequent work has suggested that the waves identified may be due to the statistical techniques used by Kondratieff.”
That's basically it:
1) They are seeing patterns that aren’t there.
2) They have no systematic theory to explain them.
Kondratieff long waves are very similar to the “reversion to the mean” theory promoted by Bonner and Wiggin. I mock them in my Devil’s Dictionary of Economics:
Reversion to the Mean: “Things that are unusual usually return to normal. If they did not, there would be no ‘norma’ to return to. That is why you can expect stocks to become more expensive when they are cheap and cheaper when they are expensive,” write Bonner and Wiggin, “The older the investor, the more confidence we have in him. He has seen good times and bad times. He has seen bulls and bears.” With all due respect, this is not a theory. Theories are expected to explain why an event happens, not just sagely announce that it will happen eventually. As I write in my 1999 book, “Nothing prevents young fools from growing into old fools.” Just stroking one’s white beard and propounding, “seen it before,” does not imply that one could explain it then, or can now. (With this “theory,” Bonner and Wiggin could get rich at roulette simply by stroking their beards and saying, “It’s red now but eventually it will be black.” Anybody want to invest in their next trip to Las Vegas?) See Section VIII of my 2004 paper.
Roulette: Pop quiz! Which of these statements is more profound? 1) It’s red now, but eventually it will be black. Always bet on reversion to the mean! 2) It’s red now, so it is sure to be red again. Never bet against a winning streak! Answer: Neither. Playing roulette is not profound, no matter how you bet. Neither is playing the stock market, unless you have an actual explanation for why a particular stock is going to pay fat dividends or go up in price.
So why is this pseudo-science still being discussed today, decades after competent statisticians showed Kondratieff’s long waves to be rubbish? There are two reasons:
1) In spite of a long and distinguished career helping the USSR’s communist government with economic planning, Kondratieff was arrested in 1930, never brought to open trial and died in a Siberian prison camp. This allows modern followers of Ron Paul to claim that their mentor was a martyr for freedom.
2) Kondratieff originally said that his cycle was fifty to sixty years long, though this was gradually extended to be anywhere from forty to eighty years. Since we are always forty to eighty years from some sort of downturn, doomsayers can make a comfortable living by publishing and selling – Top secret insider info! – a new paper every year that predicts a depression the following year, all based on the same theory.
Exposing the myth of Kondratieff is quite easy:
1) Stalin killed hundreds of thousands of Russians and starved tens of millions more. While it is sad that Mr. Kondratieff died in this way, his experience was hardly unique. Nor unexpected, frankly; the Russians don’t like doomsayers anymore than the Americans do. It is just that we don’t kill them. We are content to chuckle quietly to ourselves as the doomsayer marches up and down the sidewalk waving a “THE END IS NEAR!!!” sign and haranguing passing pedestrians. There is no reason for modern followers of Ron Paul to see Kondratieff as a martyr to their cause, anymore than all the other junior officers and petty bureaucrats whom Stalin purged from the Red Army and the Communist Party.
2) An example that is better known to Americans than Walter Eichelburg is Gary North, who has grown old (and rich) making the same gloomy prediction year after year. He began his illustrious career in 1986 with publication of “Ten Feet to Survival,” a book about digging bomb shelters. Every year since then he has proven P. T. Barnum’s observation about a fool being born every minute by selling those fools predictions of imminent economic collapse. And every year there has been a new crop of fools to shell out good money for his predictions – money that would have been better spent on prescriptions for anti-depressants.
Thus, thanks to Kondratieff, a prophet of doom need not be embarrassed when his dire predictions fail to materialize. He can, like North, Eichelburg and Roller, just rewrite them using a slightly different definition of “long wave” and predict another Great Depression another year hence. It is a guaranteed money maker! Like snake oil, but without the hassle of having to ship a physical product – or handle snakes.