A while back I heard an education expert say that the single smartest move schools could make in teaching math would be to get rid of high school trigonometry and calculus classes and replace them with statistics. According to this guy, the government began pushing trig and calc during the Cold War and the race to the moon. Back then, we needed people who could calculate the trajectories of missiles and how to get astronauts safely back to Earth. The bonus was, we ended up with the kinds of engineers who could design airplanes and cars and washing machines, too, which was great for our booming manufacturing economy.

Nowadays, though, the manufacturing economy has tanked, moved overseas to places with cheap labor and lax environmental laws. In fact, by 2005 manufacturing was down to a measly 12 percent of our gross domestic product. It had been replaced by, of all things, financial services, which, at a whopping 21 percent of GDP, had become the new engine of the American economy.

It was a strange transformation. Our economy used to be all about the kind of stuff you could actually touch - real things made of gears and oil pans and zippers. But now we make our money by guessing the future - which is, after all, what the stock, real estate and insurance markets are all about - and betting on the likely winners and losers. It's a scary thought: Over 20 percent of our GDP is now in gambling.

The trajectories the finance industry needs to calculate are market-based. When will oil top $150 a barrel? When will the housing market bottom out? Are corn prices going to crash next year? Sounds simple, right? Wrong. To get around the banking regulations put in place after the 1929 stock market crash, investors have created devilishly complex financial instruments - things with mysterious names like "collateralized debt obligations," "over the counter derivatives," and "structured investment vehicles."

Nowadays, the uber-rich stash their money not in traditional banks but in barely regulated hedge funds - secretive companies that specialize in risky, arcane investments selected by PhDs in

economics and mathematics. Using tools like computer modeling and "quantitative behavioral finance" (a cross between the psychology of herds and statistical analysis), they make educated guesses about the future - things like what the weather will be like in Brazil next year or who will win the presidential election or whether war in Congo will drive up the price of tantalite. They then feed these guesses into complex mathematical formulas whose answers guide their investments.

And so calculus has become as outmoded as the slide rule - statistics is the bedrock of financial services. Even kids who don't want to become arbitrageurs should be studying stats and economics. Especially kids who don't want to be arbitrageurs. Because the sad fact is that people who understand economics use this knowledge to get money out of people who don't understand economics. Take the sub-prime mortgage crisis. Untold thousands of people who were tricked into signing high-interest mortgages might not be facing foreclosure today had they only taken a basic econ class in high school.

Government scam

Even our own government is in on the scam. We all read the monthly statistics produced by the Labor Department in the newspaper - the cost of living, inflation, unemployment and so on. Have you ever wondered why the government report never seems to jibe with your on-the-ground reality?

This is because government economists take the raw data every month and then "adjust" it. For example, consumer prices were up 3.9 percent this April compared to last April. But to come up with the "core inflation rate" (which is the number the Federal Reserve Bank focuses on when deciding whether or not to raise interest rates), the Labor Department subtracts out the cost of energy and food. This dropped the rate down to 2.3 percent. Such adjustments supposedly get at underlying trends. But it's ridiculous. We all need to eat and most of us drive cars - why take these numbers out of the equation? (next page »)