September 9, 2009

New poll: Should economists have been able to predict the global economic collapse?

I've added a new poll (see sidebar):

It's been a year since the global economy imploded -- an event that was largely unpredicted. Did economists drop the ball?
  • No, economics is too complex and susceptible to sudden trends
  • No, economics is not an exact science, but the discipline needs to steadily improve
  • Yes, economists are clearly asleep at the wheel and barking up the wrong trees
  • Yes, but let’s not overstate the degree to which this could have been predicted
Feel free to add alternative perspectives to the comments.


mpkirkland said...

Yes, but only in the doomsayer sense. Predict an economic disaster for long enough, and eventually you'll be right.

It worked for Peter Schiff.

fallingupthesky said...

From what I've seen, most of the fundamentals of economics work well on the micro scale, but macro-scale economics isn't science. It's philosophy. If things go well, economists see it as a validation of their theories, even though there has never been any tests which control for other factors. (Considering that such a thing may need to be a society-wide test, I'm not even sure how they'd manage to do that anyway.) If things go badly, they're like, "wow, think of how much worse things would be if people weren't acting according to our theories!" ...again without controlling for other factors, or even considering the possibility that people acting according to their theories is what caused things to go bad.

That doesn't even account for the fact that many if not most modern economic theories assume that most consumers have complete and accurate information about their products (which is generally false) and use mathematical simplifications that are somewhat justified in an era of logarithmically expanding growth - an era which is now almost certainly over. They weren't a very accurate model of reality but sort of worked anyway, but it's really hard to use a flawed mathematical model to predict a point where the model itself breaks down.

In other words, it could not have been reasonably predicted by economists because most economists are quacks. It could have been predicted by people whose grasp of macro-scale economics are more intuitive than dogmatically theoretical... and are aware of a wide variety of real-world trends that are not directly related to economics but nevertheless could have a significant impact on it. And it *was*. But since those people were mostly not actual economists, they were ignored until after things went wrong.

Particleion said...


Peter schiff hit it on the nail. He told you what sector when and even how.. Give him he's credit please!

For us true economic buffs we knew the crash was coming... We spend a great deal talking about the crash before October 08 ...

So I don't want to hear this unpredictable nonsense..

DocMartn said...

I think there should have been at least 1-2 more choices with economists, like regulators and/or financial analysts and possibly financial media. Economists are simply one piece to a very complex network of people, places and things. You also have to consider the type of economist. IMO there are two types - Academics or Govt economists (I lump them together) and then there are practical economists like Schiff or Summers who have hands on experience in apply their education to real world situations. It's this latter group that should be sounding the alarms - louder than the first unfortunately many of then have no incentive to do so or worse profit from remaining mum.

Will said...

@fallingupthesky "From what I've seen, most of the fundamentals of economics work well on the micro scale, but macro-scale economics isn't science. It's philosophy."
That may be a little harsh, but its close to true. Although macroeconomists generally have a good understanding of things like GDP and GDP growth, the overall flow of goods and service in the economy, and the effects of some government intervention, there's a lot that's disagreed over.

Especially in the short run, macroeconomics has a lot of holes in it over the how and why of economic behavior. On top of that, as we've seen in this crisis, some parts of the overall economy have very strong effect on the rest of the economy, but are poorly understood (finance, which is basically the economy's plumbing because it circulates capital).

But its not really fair to say its not science. As you point out, its difficult if not impossible to run experiments on a macroeconomic level, which makes macroecomomists jobs a lot harder. But there are other fields of science, such as astronomy and evolutionary biology where experimentation is similarly difficult, and just like those fields, macroeconomics relies on observation and interpretation. Events like the financial crisis give it more situations to observe and learn from. This recession could help answer important questions about the usefulness of a keynsian stimulus, and what tools are available to monetary authorities once interest rates are no longer an option.

Also I'd like to add "Some economists did predict it but we didn't listen to them". Nouriel Roubini comes to mind, but there were others too. Sure you can ask how we filter good economics from bad, especially if the majority of economists are wrong. But it at least proves the field isn't scientifically inscrutable, that some people can formulate correct theories about it.

Particleion said...

> Sure you can ask how we filter good economics from bad, especially if the majority of economists are wrong

Get rid of the current media set in place.. The market almost surely does exactly the opposite of what the media calls for...

Chaos I think not.

There is another deep problem with all of this, the data does suggest a non chaotic almost timed pattern to market down turns. Unfortunately the needed deep exploration into this is quickly dwarted by people and there conspiracy theory claims. It can get quite frustrating talking to people about such patterns.

hmusseau said...

I can't vote in the poll, because it lacks the choice: "No, several economists predicted it, but unregulated free market is unable to restrain itself until it crashes and needs a public bailout."

Nato said...

I think those economists who actually understood the investment vehicles (a fairly small group, since it's a bit too specific a knowledge point) did predict some crash at some point, since it was essentially a classic pyramid scheme. I know I wasn't the only econ guy warning my friends not to buy houses a couple years ago. That said, it went for much longer than I thought it could, and consequently came down much harder than I would have predicted.

Particleion said...

All of this is old news can we talk about the next big possible move in world economics? A possible dollar crash...