Eytan Avriel, the chief editor of the business newspaper of Ha'aretz (the Israeli English language newspaper), has a fascinating article in today's paper entitled, Ten Reasons Why Economists Always Get It Wrong. The writer's headline reminds us that economists didn't foresee the financial crash, the collapse of property values, the rapid rebound of some economies afterwards or the meteoric rise of stocks. Nor, I will add, the phenomenal recent bonuses of Wall Street.
First, I have no brief against economists. They provide an absolutely necessary service, deal with highly complex financial, environmental, governmental and international issues. Indeed, I make a regular practice of reading the work of rather diverse economists from the around the English-speaking world. Avniel's article grew out of a closed-door dinner discussion at Davos, and included such leading minds as Robert Schiller, Joseph Stiglitz, Simon Johnson and Raghuram Rajan.
What I most appreciate about Avniel's article is its nuanced and amusing discussion of important issues. Fact of the matter, if you don't have background in economics, his article is a good place to start understanding the backstories and difficulties of economic prediction. So I'll just summarize his ten objections and link to the article (see above) for those of you who want read the entire column.
Here are Avniel's ten reasons why economists get it wrong, and why he says you shouldn't expect that to change anytime soon.
1. They never stood a chance. Forecasting doesn't work and never did. Like weather forecasts, which are based on physical parameters (not pschological--like economics), it's always a hit or miss affair. [Obviously, neither Schiller nor Avniel are aware that weather forecasting is the most accurately predictive vocation of all professions. That's a scary fact!]
2. You can't predict a turning point. It's the old issue of will this turn into a horrible recession, or merely a blip on the radar for the next 15 months?
3. Economic models assume that economies are stable. Data, such as bond ratings and debt structures, are never stable.
4. Economists tend to focus on specific, accepted parameters and ratios. As a result they fail to see warning signs unless they hit them over the head.
5. Economists are afraid to break rank with the consensus. If they're wrong, it's career suicide. Since no one dares to say otherwise, the consensus grows stronger and becomes even harder to buck. In other words, economists are human, and they err.
6. Forecasts, of themselves, affect the economy. The forecast becomes part of the "given," and influences human behavior--for good or ill.
7. Forecasts influence politicians. A politican approaching an election will treat a forecast differently than after he/she's elected. The most relevant example is Germany and Angela Merkel. All forecasts depend on how Germany and Merkel behave, but nobody really knows how they will behave.
8. People look for shortcuts, but there aren't any. Robert Shiller said the market failures of the recession were foretold in the economic literature, but nobody looked at the data. Just the bottom line. The devil is in the details but if you don't read the details, you'll get caught up.
9. Economists believe their own stories. "This time it's different, or our case is different." It never is. They thought, for example, that securitizing debt would change the world and that economics would start acting differently. But it didn't, and the world exploded.
10. When the economy is roaring and soaring, control mechanisms collapse. We make our biggest mistakes when the future looks very, very sunny.