Anorak | Well of course Economists cannot predict things – it’s rock, paper scissors with graphs

Well of course Economists cannot predict things – it’s rock, paper scissors with graphs

by | 6th, February 2012

THERE’S a certain loigical problem floating around about what economists can and cannot do. This idea that if they’re all so smart then why can’t they predict what is going to happen? How did we end up with the financial crash if all those clever highly paid people couldn’t see it coming: or perhaps are these people clever and why are they highly paid because they didn’t see it coming?

And the answer there is actually that in most of the things that people want economists to predict economics itself insists that economics cannot predict them.

Oh, there’s some things that are easy enough. If you tax all of the money off all of the rich people then you’re not going to have any rich people and so you’ll not collect any tax. That sort of stuff is simple enough. But if you want to know what inflation is going to be next year, or the price of oil, or the level of the stock market, well, it’s only possible to make accurate predictions about these things as long as everbody doesn’t believe the prediction:

But one of the conclusions of economics is that prediction is literally impossible.  At least public prediction.  If I publicly announce a policy of inflation, to increase growth, and people believe me, then the inflation is anticipated and the real growth effects are just about zero.

Or if you prefer:

But the conclusion is not that economists are bad at predicting.  It’s that prediction is literally impossible, because of strategic reaction.

Suppose I publicly predict you are going to throw “rock” in an RPS game, and your opponent believes me. If you WERE going to throw rock, you would know that your opponent would be throwing paper. So you would switch to scissors.

All of which means that you need to consider which bits of what economists say you’re going to pay attention to. All that stuff about growth, interest rates, exchange rates, stock markets, predicting the levels of them, should be taken with a pinch of salt. They’re pretty pictures used to make economists look interesting and to sell newspapers.

The stuff about taxing all the money off the rich people is true though. In the jargon of economics much to most of microeconomics (how people respond to incentives, prices and the like) is pretty much correct. Much to most of macroeconomics exists to make weather forecasters look good.

Posted: 6th, February 2012 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink