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Exogenous Variables: Economics and Demographics Economics and Demographics : Continued

Exogenous Variables: The Five Horsemen

Horseman Number Four: Economic Dogma

Government action depends on how rulers perceive the world and what goals they set based on these beliefs.

The Egyptian Pharaohs understood that the purpose of society was to ensure their own rule and their journey through the after life by building great temples and tombs.

Government actions depend upon how rulers perceive the world and the goals they set

The monarchs of medieval Europe perceived the importance of armies and cathedrals in keeping God on their side and their enemies away.

Nineteenth century Americans, guided by the Protestant Ethic, saw 'manifest destiny' and the need to occupy the West and contrive inventions that would bring material well-being to all.

Government in that century was concerned with the metallic content of money, tariffs, and the power of corporations and banks.

Today's High Priests

In the late twentieth century, American government defined its goals in terms invented and monitored by the orthodox economic priesthood that ruled from the Federal Reserve, the Treasury Department, the Great Universities, and the economic arms of the State Department: the World Bank and the IMF.

Goals are now set in economic terms that most of the population can not really understand.

We strive for increased GDP, steady but low inflation, productivity, and near-full employment, without fully grasping the significance of these numbers. [See Essay: 'The Truth About the GDP']

Karl Marx Was An Economist

The teachings of Karl Marx, distorted and simplified, provided an economic theory to support the Soviet Union.

Lenin arrived in St. Petersburg and installed a communist state, shutting down Russian stock exchanges for seventy years.

Lenin shut down the Russian stock exchanges for 70 years

When the Soviet dictatorship collapsed and Communist China moved towards a market economy, it appeared for a brief moment that orthodox economics of Western democracies would triumph as the revealed truth.

However, the repeated failure of economic nostrums applied by the International Monetary Fund to dozens of developing countries cast doubt as to the reliability of these beliefs.

The Death of Economics

A British professor of economics, Paul Omerod, has described the short-comings of orthodox Western economic theory in an easily understood book, 'The Death of Economics.'

The following quotes from the Preface to the North American edition set the theme of this most useful work:

' … Orthodox economics is in many ways an empty box.
Its understanding of the world is similar to that of the physical sciences in the Middle Ages.
A few insights have been obtained which will stand the test of time, but they are very few indeed, and the whole basis of conventional economics is deeply flawed. …
Conventional economics offers a very misleading view of how the world operates. …
The most devastating critiques have come from within economics itself, from those equipped with the formal modeling and mathematical skills to expose the limitations of orthodoxy on its own terms. '

Professor Omerod goes on to acknowledge that his book was criticized by many orthodox economists:

'The reception by conventional economists was in many cases hostile, some to the point of abuse. …
Taking the reaction to the book of economists as a whole, I cannot help but notice with amusement the clear correlation between the degree of hostility shown and the amount of taxpayers’ money which the economist concerned and his or her institution receive to carry out conventional economic research. …
Too much of economics has deteriorated into intellectual games subsidized at the expense of the taxpayer.
The best economists are fully aware of the limitations of their discipline.'

Without the useful political counterfoil of communist doctrine, orthodox economics now stands naked before the world and is unlikely to survive many more national economic disasters.

The mystical mathematical cloud of phony science that some economists use to intimidate the laity is already discredited by those who hold firm to commonsense.

Saving LTCM

The rush of functionaries of the Federal Reserve to shore up the failing hedge fund, Long Term Capital Management, may have had a legitimate justification, but also may have been an effort to save the reputation of Nobel laureates whose practical application of economic theory had gone so badly awry.

It is not yet clear what economic dogma will guide governments in the 21st century

The infamous Efficient Market Hypothesis that had narcotized the brains of so many professional investors during the Great Bubble of the 1990s has already been discussed in Lesson 7.

The spurious use of productivity statistics and the Gross Domestic Product are described in two essays on this site.

It is not clear what doctrines will replace today’s economic dogma and guide government policy in the twenty-first century.

We might hope that commonsense and the future of mankind will be ingredients, but there is no assurance that this will be so.

Politics and the interests of the establishment play a dominant role in economic theory.

In any case, the evolution of these doctrines will be among the random elements that jiggle and shake capital markets in coming decades.

Horseman Number Five: Demographics

There is nothing that influences governments and capital markets more than demographics.

As American Baby Boomers move into retirement and assisted living facilities, there will be a need for them to sell investments to pay escalating health costs and living expenses.

Since succeeding generations are smaller, these asset sales will put pressure on investment prices.

However, the demographic imbalance caused by Baby Boomers may be over-come by immigration.

Tomorrow's Americans Will Be Different

High minimum wages in the United States draw millions of workers from Mexico and Latin America, eager to participate in the American Dream.

The family and conservative religious values of Latin immigrants would normally swell the ranks of the Republican Party, but as usual, the Republicans dropped the ball, yielding the advantage among Latinos (except Cubans) to the Democrats.

The flood of Muslim immigrants into Europe is likely to weaken America’s influence in NATO.

Equity values are spurred as much by demographics as by technological advances

In the United States, Muslims almost equal the number of Jews, which, considering the fast-growing cohorts of Black Muslims, may shake up the Democrat party and long-standing U.S. support for Israel, especially with increasing costs of the War on Terror.

American Jews, for their part, are inter-marrying with Christians, moving away from traditional outlooks and customs.

Orientals are also arriving in the United States in large numbers, bringing valuable entrepreneurial skills, capital, and family values.

The growth in equity values over the last one hundred years has been spurred as much by changing demographics as by technological advances.

The United States still has empty space and immigration could provide the stimulus that reinforces the capital market.

However, restrictions on immigration stemming from the War on Terror, as well as antipathy towards inflows from people both from the labor wing of the Democrats and anti-welfare elements of the Republicans, may hold down immigration and slow economic growth.

Five Horsemen That Will Confound Economists

It is not so much interest rates that drive the economic machine as the exogenous forces of war, leadership, demographics, and technology.

These great random levers of the economic machine are beyond the reach of the Chairman of the Federal Reserve Bank.


Before proceeding, check your progress:


According to Paul Omerod, economic theory and economists are:
Choice 1Highly scientific, with many proven theories.
Choice 3On a par with physicists in the Middle Ages.
Choice 2An accurate picture of the real world.
Choice 4Dependent upon government subsidies.
The factor that influences capital markets more than any other is:
Choice 1The Gross Domestic Product.
Choice 3Productivity Increases.
Choice 2Demographics.
Choice 4Price Momentum.
An economic theory that had a devastating effect on at least one flourishing capital market was:
Choice 3 Say's Law.
Choice 1 Gresham's Law.
Choice 2 Marxism.
Choice 4 The Theory of Conspicuous Consumption.

Investment Theory: Capital Flow Analysis  Themes Learning Module : Completed

Lesson: 11 | 12| 13 | 14 | 15 | 16| 17 | 18| 19| 20

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Next Learning Module: Investment Tutorial: Capital Flow Analysis

Suggested Reading in Investment Theory of Capital Flow Analysis (Exogenous Variables)
'Rain of Iron and Ice: The Very Real Threat of Comet and Asteroid Bombardment', Paperback, John S. Lewis

Informative digest of current knowledge along with results of computer simulations based on accumulated data, projecting what we can expect from future encounters

'A Concise History of the Russian Revolution', Paperback, Richard Pipes, Peter Dimock

Harvard history professor Pipes summarizes three books on Russian history.

'Out of the Blue: Wild cards and other big future surprises; how to anticipate and respond to profound change', Paperback, John L. Petersen

John Petersen is unique among futurists because he understands that getting to the future is never a linear event

'The Crisis of Islam: Holy War and Unholy Terror', Audio CD, Bernard Lewis

The War on Terror will have an important impact on the American economy for years to come. This CD from a leading scholar on Islam is very useful.

'The Age of Reagan: 1964-1980: The Fall of the Old Liberal Order', Hardcover, Steven F. Hayward

The first of two volumes from a senior fellow at the Pacific Research Institute for Public Policy.

'Dereliction of Duty: The Eyewitness Account of How Bill Clinton Endangered America's Long-Term National Security', Hardcover, Robert Patterson

The military aide that carried Clinton's 'nuclear football' describes the incompetence and immorality of a weak leader.

'Frontiers of Illusion: Science, Technology, and the Politics of Progress', Paperback, Daniel Sarewitz

The fundamental myths that have guided formulation of science policy for half a century—myths that serve the interests of the scientific community, but often fail to advance the interests of society.

'First Flight: The Wright Brothers and the Invention of the Airplane', Hardcover, T.A. Heppenheimer

Debunking the standard view that the brothers more or less invented their flying machine by luck and persistence.

'The Affirmative Action Empire: Nations and Nationalism in the Soviet Union, 1923-1939', Paperback, Terry Martin

The Soviet Union fostered nationalities, creating 15 republics and dozens of autonomous republics and national soviets throughout the Soviet Union.

'Economics as Religion: From Samuelson to Chicago and Beyond', Paperback, Robert H. Nelson, Max L. Stackhouse

An insightful exploration of the powerful role that economic belief plays in our modern society as a secular religion that serves many of the same functions as early Christian and other religions did in their time.

'Towards a European Islam: (Migration, Minorities, and Citizenship)', Hardcover, Jorgen S. Nielsen

The development of Islam in cities of Western Europe over the last decade.

'The Rest of Us: The Rise of America's Eastern European Jews', Paperback, Stephen Birmingham

The American Jewish experience through the lives of those Russian immigrants who became famous in America.

'Inside the Asylum: Why the UN and Old Europe are Worse than You Think', Hardcover, Jed L. Babbin

Coalitions based on moral or military supremacy of the UN and the EU are not essential for America's defense.

'The Corporation under Russian Law, 1800-1917: A Study in Tsarist Economic Policy', Paperback, Thomas C. Owen

Illuminates the political nature of the autocracy's economic policies

'The Art of the Long View:Planning for the Future in an Uncertain World', Paperback, Peter Schwartz

Introduces the concept of scenario planning in business and in life.

'Churchill: A Life', Paperback, Martin Gilbert

A single-volume abridgement of an eight-volume work that took a quarter of a century to write.

'The Real Jimmy Carter: How Our Worst Ex-President Undermines Foreign Policy , Coddles Dictators, and Created the Party of Kerry and Clinton', Hardcover, Stephen F. Hayward

As bank robber Willie Sutton said of Carter: 'I've never seen a bigger confidence man in my life, and I've been around some of the best in the business.'

'Science and Technology in World History: An Introduction', Paperback, James E. McClellan, Harold Dorn

A study of human history through its scientific and technological development.

'Edison: A Life of Invention', Paperback, Paul Israel

Edison's name is on 1,093 U.S. patents--more than any other person's.

'George Eastman: A Biography', Hardcover, Elizabeth Brayer

The life of the inventor of the Kodak camera.

'The Gothic Enterprise: A Guide to Understanding the Medieval Cathedral', Hardcover, Robert A. Scott

Professor. Scott explores why medieval people built Gothic cathedrals.

'The Death of Economics', Paperback, Paul Omerodstar

Renowned British economist Paul Ormerod explodes current economic theory, explaining that 'orthodox economics is in many way an empty box. Its understanding of the world is similar to that of the physical sciences in the Middle Ages'. This book is a necessary antidote to the 'Fallacies of the Nobel Gods'.

'The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers', Paperback, Robert L. Heilbroner

Secular high priests of economic theory, from Adam Smith to Marx to Keynes, have shaped society, sometimes beyond the limits of commonsense.

'John Maynard Keynes: The Economist as Savior, 1920-1937', Paperback, Robert Skidelsky

In Skidelsky's view, Keynes was a practical visionary whose achievement was to align economics with changes taking place in ethics, politics and society in a post-WW I world.

'The Other Face of America: Chronicles of Immigrants Shaping Our Future', Hardcover, Jorge Ramos

Hispanics are the emerging minority, and their contributions to American society both culturally and socially are already well established.

'The New Americans: Economic, Demographic, and Fiscal Effects of Immigration', Hardcover, James P. Smith, Barry Edmonston, National Research Council'

A study of the impact of immigration on the American economy.

'The Nobel Laureates - How the World's Greatest Economic Minds Shaped Modern Thought', Hardcover, Marilu Hurt McCarty

An uncritical history of the 'Nobel Gods' and their theories. Essential to understand the development of Wall Street over the last fifty years.

External Links about Investment Theory, Capital Flow Analysis, and Exogenous Variables
Mutually Assured Destruction : 'Mutually Assured Destruction Revisited: Strategic Doctrine in Question', Col Alan J. Parrington, USAF. [Return]
Nuclear Winter : Definition, articles, and links. Answer.com. [Return]
Asteroid : 'Giant Asteroid Could Hit Earth In 2014', Reuters, September 2, 2020, CNN.com. [Return]
Henny Penny : 'English Fairy Tales', Sacred-Texts.com. [Return]
Keynesian Long Run : 'John Maynard Keynes - Theories', Biz-Ed.com. [Return]
St. Petersburg Stock Exchange : 'Russian Capital Markets Project 1965-1917', Yale University. [Return]
Modern Portfolio Theory : Definition. Investor-words.com. [Return]
War in Vietnam : 'Vietnam, The Impossible War', Cedric Hodgeman. [Return]
Carter : 'Jimmy Carter', White House Biography. [Return]
Dwight Eisenhower : White House Biography. [Return]
Lyndon Johnson : White House Biography. [Return]
Al-Qaeda : Terrorist Training Manual. U.S. Department of Justice. [Return]
Afghanistan : 'The War In Afghanistan', History-Teacher.net. [Return]
Al Gore : 'The Life of Al Gore', Washington Post. [Return]
George W. Bush : White House Biography. [Return]
Jimmy Carter : 'The Hostage Crisis in Iran', Jimmy Carter Library and Museum. [Return]
Gerald Ford : Biography. Gerald R. Ford Library and Museum. [Return]
Neville Chamberlain : Biography and Quotes, John Simkin, Spartacus Educational Website. [Return]
Golden Decade (1876-1886) : 'Does the "New Economy" Measure up to the Great Inventions of the Past?', Robert J. Gordon. NBER Abstract. [Return]
World Cup : 'World Cup Soccer Winners', MIStupid.com. [Return]
Benjamin Franklin : 'Inventor', The Franklin Institute Online. [Return]
Henry Ford : The Henry Ford Museum. [Return]
Thomas Edison : Edison Birthplace Museum. [Return]
Jimi Hendrix : The Official Jimi Hendrix Website. [Return]
George Eastman : George Eastman House Museum. [Return]
Wright Brothers : Wright Brothers Aeroplane Company Museum. [Return]
Bing Crosby : 'Bing Crosby - A Celebration of His Life', Gonzaga University. [Return]
John Wayne : 'Welcome to the John Wayne Birthplace'. [Return]
Janis Joplin : The Official Janis Joplin Site'. [Return]
Snoop Doggy Dogg : Official website. Universal Music Group. [Return]

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