January 8, 2017 at 03:39AM
Wouldn’t today’s economists be better served by reading some economics history rather than relying on their models (Economics in crisis, admits Bank expert, 6 January)? JK Galbraith’s classic The Great Crash, 1929 details the things that contribute to a volatile, overheating economy, and in the foreword to the recent reprint, his son James, also an economist, notes the uncanny similarities in the build-up to 2007-08 to those before October 1929, particularly mentioning America, Britain and Iceland. But how far can economists be of help when the model is flawed and we have a government that is determined to sweep away all vestiges of Keynesianism and New Dealism and return our economy to the 19th century?
• The reason economics is so poor at predicting is that it was never designed as a science in the first place. The origins of the discipline were as a political and ethical subject, and the founders were explicit about this. Indeed Alfred Marshall (who first fully developed supply and demand analysis) said a pure economic science was a waste of time. What contemporary orthodox economics has done is to patch together a variety of competing political economies, which is why it is contradictory and irrelevant, and is unable to explain why change occurs let alone predict it. It is presented as a science in order to justify largely laissez-faire policies.
Most of the relevant concepts (including economic cycles) were initially developed as critiques of orthodox economics, and have been incorporated into the mainstream in a neutered form. This has left orthodox economics as a largely useless discipline.
Developing new economic models will not help in the slightest. Many of the people who did predict the latest crisis did so using generic statistical techniques and/or their own experience, rather than orthodox economic models. Also it is not clear what the point of prediction is unless some reaction is proposed. If, as former US Federal Reserve chairman Alan Greenspan suggested, nothing much would be done differently, there seems little point in predicting. There is a long alternative tradition of political economy looking at social and political institutions such as law and power, which are far more realistic and promising avenues than altering a few variables in pointless models.
Open University in the East of England
• Economics may be in crisis, but not because of the failure of economic forecasters precisely to anticipate the date of the financial crunch or the quantum of potential economic decline immediately following the EU referendum. This tendency to judge the success or failure of economic models by the above test of precision in forecasting is a cause of the crisis. The problem lies in the rejection of analysis which refuses to impart a spurious sense of precision to predictions arising out of that analysis. Those who expressed doubts about the potentially huge danger of deregulation, freeing speculators to create and gamble with financial derivatives which are priced by imputing spurious measures of risk, had been ignored for decades as failed Keynesians because they could not predict the precise date of any financial collapse.
It would likewise be wrong to dismiss the warning by those economists who refused to engage in precise forecasting before the referendum but expressed concern about economic policy being dictated by identity politics the likes of which have impoverished Europe in the past and now continue to hinder economic progress elsewhere, especially in poorer countries.
• Andy Haldane of the Bank of England rightly says “economics is in crisis”. He then attributes the failure of economic forecasting to consumers behaving irrationally. By irrationally, economists mean not behaving in ways that fit in with their theories. In every other branch of endeavour, theories are tested and changed if they do not fit reality. In economics, which falsely claims to be a science, reality is supposed to fit the theories. The irrational ones are the economists who confuse their fairy tales with reality to such an extent that they did not just fail to see the 2008 crisis but said it could not happen.
• It is a bit rich to use the headline “Economics in crisis” just because the chief economist of the Bank of England points out that economic forecasters invariably get their forecasts wrong. Economics is not forecasting. It is a set of tools and techniques of analysis that millions of businesses and consumers, governments, and other decision-makers use every day to allocate resources and income in an optimal manner.
Please do not exaggerate: economics is alive and well, even if the crystal ball fails.
Professor of applied economics, Keynes College, University of Kent
• Simon Jenkins claims that “Economists have completely failed us with their predictions” (First thoughts, theguardian.com, 6 January). In the physical sciences, experts are apparently aware that attempting to take measurements can interfere with the phenomenon that they seek to measure. Surely, the prediction of economic and financial consequences will have consequences. The predictions will cause players in the markets and those affected by consequences to take measures to exploit, mitigate or avert such consequences. The only way to assess the predictions of economic experts might be to keep them secret! Perhaps, what the economics experts require is a prediction strategy using double, triple, quadruple bluff with their true predictions kept in a sealed envelope.
• Andy Haldane identifies the 2008 financial crisis as the “Michael Fish moment” of the economics profession, and suggests that the economics profession needs to emulate the post-piscatorial improvement in weather forecasting. But elsewhere in his talk at the Institute for Government, Haldane explained why the forecasting of economic crises is inherently difficult: an easily forecasted crisis would be averted. Weather forecasting has improved since 1987 because of the use of hugely increased computing power and data; the underlying models of atmospheric physics are essentially unchanged. If the economics profession is to raise its game in understanding crises, it needs new thinking rather than more powerful computers and bigger data sets. Haldane’s analogy points us in the wrong direction.
Professor Alasdair Smith
Department of economics, University of Sussex
• Both Andy Haldane and Norwegian PM Erna Solberg (UK’s lack of negotiating experience may lead to a ‘very hard Brexit’, theguardian.com, 5 January) touch on the point of a lack of skilled British economists able to handle a Brexit negotiation. The problem lays in the way economics is taught. Keynes stated that an economist must be a “mathematician, historian, statesman
, philosopher”. Today, students only receive heavy doses of the mathmetician – trained in econometrics or else deemed unsuited to the field. Fortunately there are some institutions that deliver a more rounded curriculum that could create those much needed Brexit negotiators; unfortunately many sit in the EU.
Liam James Burton
Wakefield, West Yorkshire
• Economics is most certainly not in crisis. It is completely broken as it supports a model that assumes it is possible to obtain exponential growth of GDP in a world of finite resources, increasing population,climate change etc.
• Painful though it be to admit, it seems that Mr Gove was correct in his assessment of experts insofar as most economists are concerned. As economist (!) Ezra Solomon said: “The only function of economic forecasting is to make astrology look respectable.”
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