The Point of Economists
Following Queen Elizabeth’s question to the economists—Why did no one see the crisis coming?—the Financial Times goes one further asking, What is the point of economists?
If the economics profession could not warn the public about the credit crunch and the recession, what is the profession’s raison d’etre? Did this reflect, as some claim, that economics has gone astray with models that no longer help understand economic reality but rather distort it? Did such models even contribute to the crisis?
Respondents include Samuel Brittan, the FT’s economic commentator; George Magnus, senior economic adviser for UBS Investment Bank and author of The Age of Aging; and Robert Shrimsley, FT managing editor. This, from an FT editorial:
No economic theory can perform the feats its users have come to expect of it. Economics is unlikely ever to be very good at predicting the future. Too much of what happens in an economy depends on what people expect to happen. Even state-of-the-art forecasts are therefore better guides to the present mood than the future. Though they may also be self-fulfilling prophecies.
Dabbling in paradox limits the use of economics as a practical guide. Today the profession’s best advice must convince politicians and the public to combat a crisis born of insufficient thrift by a recourse to record borrowing. Those who saw danger had no easier task: even reminding people of gravity’s existence is a hard sell when everything is going up.
If predictions of physics-like precision are in demand, they will be supplied. Collective delusion must therefore be blamed as much on the consumers of economics – companies, investors, the media – as its producers.
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The Victorian historian Carlyle Economics called it “the dismal science” because it is just that — a science in the displine sense, but not scientific enough to allow for accurate projection beyond the end of the economist’s nose.
There were two fundamental concepts in economics when I was a lad; Ceteris Paribus which means “With all other things equal” and Rational expectation theory which supposes that under certain conditions, a consumer will make certain buying/selling decisions. The sooner we all understand what these concepts mean and how central they still are to economic theory, the sooner we will realise that economics can never predict anything with any particular certainty.
Reading some of The Times and The Sunday Times economics commentators’ articles, I’m not surprised that they are asking what the point of ‘economists’ is. David Smith and Anatole Kaletsky, take note.
Seriously though, with regard to the recent economic crisis, there are two views that I will not and cannot subscribe to. The first is Taleb’s theory of the ‘Black Swan’ event, namely that the crisis was the coincidence of a number of extraordinary and diverse factors that could not have been foreseen. If this were true, then how come so many people correctly predicted the credit crunch before it happened? You’ll obviously have to take my word for it, but I predicted that we would run out of credit resulting in a ‘credit crunch’ in 2006. That’s better than the Times and Sunday Times economists managed.
The second theory that I cannot accept is that the crisis was everyone’s fault. It was not. At no point during the credit boom could I have gone to my mortgage lender and said “Excuse me, I’d like to buy a house but I’d like to opt out of the current cheap credit-fuelled speculative housing boom, please. Do you have an alternative price list?”. Blaming the ‘man on the street’ for having some vague notion of ‘collective delusion’ is a thinly veiled attempt to divert blame away from the real culprits — central bankers and politicians eager to see the good times roll on while ignoring the systemic risk.