Worstall @ the Weekend As Her Majesty the Queen remarked a few years back, why was it that no economist actually saw the crash coming? There's actually two answers to that. First, the cute one: that sort of violent change cannot be predicted. If it could be predicted then prices would move before it happened, meaning that it would have already happened. This is a bit cute, though, however true it might be.
A part B to this first answer could be that some people did predict the crash and made fortunes, to which a reasonable answer is yes, but there are people who predict everything every day. Such as the economists who have predicted 11 out of the past three recessions.
Then there's actually the real answer, which is that certain parts of economics just aren't very good at what they purport to do, nor very good at explaining anything but the sketchiest aspects of the real world that the rest of us live in.
The standard division in economics is between macroeconomics and microeconomics. One tries to study the economy as a whole, while the other looks at certain very much smaller aspects of things, such as the pricing system or the behaviour of individual agents within that larger economy. We can also characterise this as, as political satirist PJ O'Rourke once did, into the bits of economics that we're pretty sure we've got wrong and the bits we're pretty sure we've got right. Macro is the bit we're pretty sure we've got wrong.
This does pose something of a problem. As American economist Alan Blinder once said:
Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.
There's a rather wonkish debate going on in the economics blogs (summed up here at Bloomberg) over the precise models that macroeconomists use. That summary includes the usual defences, that they are models and thus are simplifying the world, meaning no one model can be used to model everything.
Yet there's a deeper problem in macroeconomics. Which is that there isn't actually any one theory that you could get all economists to sign onto. There's not even any one theory that all Nobel Laureates who work as macroeconomists would readily sign up to as being unequivocally true. The analogy I use is that this area of the subject is at the same stage of development where chemistry was when it was still pondering phlogiston>.
As an example, there's a list from macroeconomist Greg Mankiw of things that economists do generally sign on to:
- A ceiling on rents reduces the quantity and quality of housing available. (93 per cent)
- Tariffs and import quotas usually reduce general economic welfare. (93 per cent)
- Flexible and floating exchange rates offer an effective international monetary arrangement. (90 per cent)
- Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90 per cent)
- The United States should not restrict employers from outsourcing work to foreign countries. (90 per cent)
- The United States should eliminate agricultural subsidies. (85 per cent)
- Local and state governments should eliminate subsidies to professional sports franchises. (85 per cent)
- If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85 per cent)
- The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85 per cent)
- Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84 per cent)
Only two of those 10 would be vaguely described as macroeconomics, while the fiscal policy one is riven with sub-disputes. From people like blogger Scott Sumner, who think that monetary policy will take care of it all (indeed, that monetary policy will change to accommodate a change in fiscal policy and therefore fiscal policy has no effect) through to people who insist that prices adjust instantaneously and thus we can't actually have recessions (towards the nuttier end, that one).
It's also true that the point about rent controls has been expressed more forcefully: rent control is the best way to destroy urban housing short of aerial bombing.
Now, look at what it is that people want economists to tell them about. What should the interest rate be? What should the deficit be? Thousands upon thousands of economists are employed, inside government and out, to opine on just those things on the very points that economics and economists don't really have good tools to be discussing. It is true that the best macroeconomic forecast is that tomorrow will be the same as today and next year the same as this year, plus or minus a percentage point or two. It's really quite difficult to see that it requires a PhD to be able to say that, nor a gratifyingly professional salary – although the PhD might be useful in drumming the point in.
Yet, as we see in that list, the areas where people don't listen to economists are the areas where there's the most agreement that they should: free trade; no subsidies; free markets in currencies; if people are poor just give them money; and so on. All of the things that just don't get done by governments are the things that the profession is most insistent that government should do.