“We can get it wrong some of the time. I think, non-economists get it wrong a lot more often than economists. But, this isn’t a precise game. There are gonna be a number of occasions in the future that we will get things wrong too”
- Nicholas Stern (World Bank Chief Economist 2000-2003), in an interview with John Pilger
- Nicholas Stern (World Bank Chief Economist 2000-2003), in an interview with John Pilger
(The New Rulers of The World, 2001)
You may ever wonder why economists, many of them have had very good trainings and amazing academic background, are sometimes nothing more than fortune teller without crystal ball (if there were such thing). Some cynical observers or an economist-phobia may even say that economist is a person who makes a living by producing bad prediction: telling worriedly that something gloomy will happen, but it actually does not; promising that a particular policy will bring about some good impacts, but most people are becoming worse-off. Why do economists sometimes get it wrong? Here is a list of some possible reasons.
First, Positive vs. Normative Economic Analysis. Positive economic analysis seeks to explain the economic phenomena that are observed, while normative economic analysis deals with what “should” be done. Considering political acceptability, normative analysis may recommend something different from what is proposed by positive analysis, quite often, in the expense of economic efficiency or even social desirability. Also sometimes, economists easily surrender to popular beliefs. Remember the case of Asian Miracles and the debate whether these are due to, what Krugman calls, “inspiration or perspiration”? Alwyn Young are among the very few who is brave enough to present hard facts against the popular views. Yet, it took quite sometime for his works to get attention.
Second, Self-Interests. Like members of any other professions, economists themselves are actors whose self-interests or sometimes working to serve vested interests and change their views accordingly. It relates to the first reason. Several examples are available. A formerly independent university-based economist once said that subsidy removal will boost inflation. However, right after he’s hired by government as an expert staff, he estimated that inflationary effects of fuel-subsidy removal would only be tiny. Laura Tyson, an economic professor at Haas Business School, UC Berkeley and the first female Dean at London Business School, surely used to preach about the virtue of free market and trade liberalization in class, but she was widely criticized by her fellow economists for being harsh protectionist when she served in the Clinton administration as Chair(wo)man of the President’s Council of Economic Advisers. Gregory Mankiw, one of best economists, a Harvard professor and text-book writer, used to criticize Bushonomics (supply-side beliefs, etc.), but turned to be the defender during his assignment as Bush’s Chief Economist.
Third, Over-Simplifying. Market-framework is useful benchmark for economic analysis. Yet, it has inherent limitations, including market failures and the absence of transaction costs in the framework. Also, economists tend to focus on objective, choices, and constraints of individual actors. In reality, peer-effects, bandwagon effects, demonstration effects, neighborhood effects or other forms of interdependencies among actors or spillovers between adjacent places often matter. In addition, it is also the case of “old ideas die hard”, adopting particular theory without sufficient examination on different context and time frame. For example, one may simply refer to Philips Curve in proposing deficit spending or higher interest rates to lower unemployment rates. Yet, it may not work in some places. Instead, the action could lead to stagflation. Careful analysis should recognize that Philips Curve is more a historical relationship between inflation and unemployment than a model with solid underlying theoretical foundation. Dealing with unemployment goes beyond monetary and fiscal policy.
Fourth, Being Political or Ideological. Many analysts for whatever reasons try hard to maintain some ideological or political label. They are more worried on their status as “member of the family” than on the rigor quality of the analysis. Because of this attitude, they became more a politician than an economist: trying to convince people to believe something that they themselves do not. They are blind to see that there are various models of successful development; there are both cases of success and failure in privatization. While there is a lot of (seemingly) conflicting school of thoughts, these schools reach intellectual agreement in a number of issues. Are Austrian School and Chicago School Foes or Friends? Many great economists will say that they are both foes and friends. Friedman refers to Keynes when he was asked who is another great economist after Smith, Ricardo, and Schumpeter. Friedman also once said that there is no such thing as left-economics or right-economics, there is only either good or bad economics.
Fifth, Being Abusive. Many economists do well in empirical works, but others intentionally or, worse, unintentionally abuse empirical methods. Many simply use a time-series model to forecast for “infinite” time, regardless of the size of the sample used to build up the model. For the sake of a mere statistical exercise, it is just fine, but it is meaningless in economic sense. Prediction is hard, especially when it comes to the future.
Nevertheless, even though economists often make mistakes, they are still useful in one way or another and economics is highly regarded in scientific world. Nobel Prize for economics, so far the only field in social sciences that has Nobel, is apparent evidence.
First, Positive vs. Normative Economic Analysis. Positive economic analysis seeks to explain the economic phenomena that are observed, while normative economic analysis deals with what “should” be done. Considering political acceptability, normative analysis may recommend something different from what is proposed by positive analysis, quite often, in the expense of economic efficiency or even social desirability. Also sometimes, economists easily surrender to popular beliefs. Remember the case of Asian Miracles and the debate whether these are due to, what Krugman calls, “inspiration or perspiration”? Alwyn Young are among the very few who is brave enough to present hard facts against the popular views. Yet, it took quite sometime for his works to get attention.
Second, Self-Interests. Like members of any other professions, economists themselves are actors whose self-interests or sometimes working to serve vested interests and change their views accordingly. It relates to the first reason. Several examples are available. A formerly independent university-based economist once said that subsidy removal will boost inflation. However, right after he’s hired by government as an expert staff, he estimated that inflationary effects of fuel-subsidy removal would only be tiny. Laura Tyson, an economic professor at Haas Business School, UC Berkeley and the first female Dean at London Business School, surely used to preach about the virtue of free market and trade liberalization in class, but she was widely criticized by her fellow economists for being harsh protectionist when she served in the Clinton administration as Chair(wo)man of the President’s Council of Economic Advisers. Gregory Mankiw, one of best economists, a Harvard professor and text-book writer, used to criticize Bushonomics (supply-side beliefs, etc.), but turned to be the defender during his assignment as Bush’s Chief Economist.
Third, Over-Simplifying. Market-framework is useful benchmark for economic analysis. Yet, it has inherent limitations, including market failures and the absence of transaction costs in the framework. Also, economists tend to focus on objective, choices, and constraints of individual actors. In reality, peer-effects, bandwagon effects, demonstration effects, neighborhood effects or other forms of interdependencies among actors or spillovers between adjacent places often matter. In addition, it is also the case of “old ideas die hard”, adopting particular theory without sufficient examination on different context and time frame. For example, one may simply refer to Philips Curve in proposing deficit spending or higher interest rates to lower unemployment rates. Yet, it may not work in some places. Instead, the action could lead to stagflation. Careful analysis should recognize that Philips Curve is more a historical relationship between inflation and unemployment than a model with solid underlying theoretical foundation. Dealing with unemployment goes beyond monetary and fiscal policy.
Fourth, Being Political or Ideological. Many analysts for whatever reasons try hard to maintain some ideological or political label. They are more worried on their status as “member of the family” than on the rigor quality of the analysis. Because of this attitude, they became more a politician than an economist: trying to convince people to believe something that they themselves do not. They are blind to see that there are various models of successful development; there are both cases of success and failure in privatization. While there is a lot of (seemingly) conflicting school of thoughts, these schools reach intellectual agreement in a number of issues. Are Austrian School and Chicago School Foes or Friends? Many great economists will say that they are both foes and friends. Friedman refers to Keynes when he was asked who is another great economist after Smith, Ricardo, and Schumpeter. Friedman also once said that there is no such thing as left-economics or right-economics, there is only either good or bad economics.
Fifth, Being Abusive. Many economists do well in empirical works, but others intentionally or, worse, unintentionally abuse empirical methods. Many simply use a time-series model to forecast for “infinite” time, regardless of the size of the sample used to build up the model. For the sake of a mere statistical exercise, it is just fine, but it is meaningless in economic sense. Prediction is hard, especially when it comes to the future.
Nevertheless, even though economists often make mistakes, they are still useful in one way or another and economics is highly regarded in scientific world. Nobel Prize for economics, so far the only field in social sciences that has Nobel, is apparent evidence.
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