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The Nobel Prize in economics was recently awarded to two Americans Dr. Christopher Sims and Dr. Thomas Sargent.

What do economists do?  At the highest level they invent ways to predict things about the world economy.  They are experts in the branch of knowledge concerned with the production, consumption, and transfer of wealth. 

Economists follow the money.  In the past they have invented terms like supply and demand and the balance between them, but over the past 50 years their 'science' has grown into a mathematical look at large databases that are resident on computers around the world.

The tools of the trade are computers and statistical programs.  They try to 'tease' out of data the meanings, if any. 

One statistical tool that they use extensively is called auto-regression or sometimes just regression.  Sounds sinister does it not?

"Regression analysis is widely used for prediction and forecasting, where its use has substantial overlap with the field of machine learning. (artificial intelligence) Regression analysis is also used to understand which among the independent variables are related to the dependent variable, and to explore the forms of these relationships. In restricted circumstances, regression analysis can be used to infer causal relationships between the independent and dependent variables." (Wiki)

Here is a simple example that is self evident, but would pop out of a regression analysis. 

If there was a severe drought in the west, we could expect to  see a corresponding effect on the price of wheat.  Of all the factors that influence wheat prices, the vital ones would pop out of a good regression analysis.  So economists care about the weather, but weather forecasters have less affection for economists.

Where global economics is concerned, there are literally millions of events and series of events at work, so economists are much like weather forecasters.  They are prisoners of their data and how they can obtain it. Once obtained, they have to play with it to see what it means.  Lately, they have not been reading the tea leaves.  They have regressed.

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Tuesday, October 11, 2011