“The test of science is its ability to predict”
— Richard Feynman

As if governed by some deterministic law, the current debates between economists and critics follow a predictable path. Critics begin by mentioning the failure of economists to predict or warn of the crisis. Howard Reed for example recently wrote in Prospect that ‘When the great crash hit a decade ago, the public realised that the economics profession was clueless.’

Thus provoked, economists then reply by pointing out that macroeconomic forecasting is only a small part of what economists do, that their models are based on mathematics and logical consistency, and that it is critics who don’t know what they are talking about – as in the riposte by Diane Coyle, which describes Reed’s piece as ‘lamentable’, a ‘caricature’ and an ‘ill-informed diatribe’ that furthermore ignores existing guidelines on what criticism is ‘good’ and ‘bad’ (the former includes ‘The criticism is by an economist’ which doesn’t seem in the multidisciplinary spirit, and would rule out this piece since I am an applied mathematician).

In a similar debate last year in Times Higher Education, Steve Keen wrote that the global financial crisis caught ‘leading economists and policy bodies completely by surprise. A decade later, economics is a divided and lost discipline.’ Christopher Auld responded that ‘Criticism of economics that relegates the field to … failed “weather” forecasting is not just misguided, it is anti-intellectual and dangerous.’

Over in the Guardian, Larry Elliott wrote that ‘Neoclassical economics has become an unquestioned belief system and treats those challenging the creed as dangerous’. A group of economists from the Institute for Fiscal Studies (IFS) appeared to confirm the latter when they called the article ‘dangerous’ and ‘ill-informed expert bashing … Like most economists, we do not try to forecast the date of the next financial crisis, or any other such event. We are not astrologers, nor priests to the market gods. We analyse data.’

The usual excuse offered for failing to predict the crisis, as Robert Lucas put it in 2009, is that ‘simulations were not presented as assurance that no crisis would occur, but as a forecast of what could be expected conditional on a crisis not occurring.’ That is like a weather forecaster saying their forecast was explicitly based on no storms. (The claim here reflects the efficient market-related idea that changes are caused by random external shocks.) Another is that no one else predicted it either – though a number of heterodox economists and others would beg to disagree.

But for both sides, the debate soon veers from discussing the crisis, to the topic of politics, with critics saying that economic models have been exploited by the right, while mainstream economists claim that in fact they are terribly progressive.

I would argue though that the debate isn’t really about politics, and less so about what most economists do with their time (the oft-advertised fact that economists apply their models to many things other than macroeconomic forecasting isn’t necessarily reassuring to a critic). Instead it is one of scientific legitimacy, and it as old as the word ‘forecast’.

Forecast

The argument between orthodox economists and their critics resembles one that occurred in weather forecasting in the mid-nineteenth century, with the establishment of the UK Meteorology Office in 1854 by Admiral Robert FitzRoy.

As captain of the Beagle, FitzRoy had taken Charles Darwin on the trip around the world that sparked Darwin’s theory of evolution. Seeing the potential that weather forecasting had to save lives by warning mariners of storms, he set up a network of 40 weather stations around the UK, with weather reports published in London newspapers.

However FitzRoy’s efforts were not well received, either by the public or the scientific establishment. At the time, weather prediction was something practised by astrologers, and the popular press enjoyed themselves comparing the Met. Office’s inaccurate predictions with those from sources such as ‘Zadkiel’s Almanac’. The mainstream scientists saw this prediction contest as a threat to their reputation, just as economists do today.

FitzRoy tried to blunt the comparison with astrology by avoiding use of loaded words such as ‘prediction’, and instead invented a new word of his own: forecast. ‘Prophecies or predictions they are not; the term forecast is strictly applicable to such an opinion as is the result of a scientific combination and calculation.’ In 1863, he published The Weather Book, which tried to make the weather comprehensible to people of average education. However the attempt to popularise the subject only further annoyed elitist scientific institutions like the Royal Society.

Two years later, FitzRoy took his own life at the age of 59. He may have been affected by his association with Darwin’s theory of evolution, which, as a creationist, he considered blasphemous. However it appears that the primary cause of his depression was being caught between the so-called astro-meteorologists on the one side and the scientific establishment on the other.

After his death, a committee chaired by Darwin’s cousin, Sir Francis Galton, released a report which claimed that his forecasts were ‘wanting in all elements necessary to inspire confidence’ and storm warnings were suspended. However FitzRoy was not without supporters; fishermen, maritime insurers, and the Navy had actually found the warnings useful, and they were reinstated in 1867. And today of course we rarely head out on a trip without checking the forecast.

Deniers

Now, one might think that astrology and creationism would have little to do with a debate over the scientific legitimacy of modern economic forecasting, but it seems that not much has changed. Indeed, in recent years – when most people have found economic forecasts ‘wanting in all elements necessary to inspire confidence’ – economists have been as anxious to draw distinctions between what they see as science and non-science as FitzRoy once was.

Diane Coyle for example writes that Reed’s piece conforms to a list of ‘bad’ criticisms helpfully compiled by Auld, which begins: ‘Every mainstream science which touches on political or religious ideology attracts more than its fair share of deniers: the anti-vaccine crowd v mainstream medicine, GMO fearmongers v geneticists, creationists v biologists, global warming deniers v climatologists. Economics is no different.’ Economist Pieter Gautier similarly explained the existence of heterodox approaches by saying that ‘You also see this happening in the other sciences; in biology you have intelligent design, in climate science you have the climate skeptics.’ Pontus Rendahl told the Financial Times in 2016 that calling for more pluralism in economics is ‘the same argument as the creationists in the US who say that natural selection is just a theory,’ while Michael Ben-Gad said that student groups want to be ‘liberated from neoclassical economics’ dogmatic insistence on internal logic, mathematical rigour and quantification … Still, we do not teach astrology or creationism in our universities, though some students might enjoy them more than physics.’ According to Simon Wren-Lewis, the problem with pluralism is ‘obvious once you make the comparison to medicine. Don’t like the idea of vaccination? Pick an expert from the anti-vaccination medical school.’ Or as the IFS economists put it, ‘We are not astrologers’.

Just as Robert FitzRoy had to defend the Met. Office against astrologers (though not creationists, since he was one), so economists are in a battle for what counts as science – which as Feynman noted has always been associated with the ability to predict. The difference is that, while FitzRoy was distancing himself from actual astrologers, mainstream economists tar a broad range of critics as ‘ill-informed’ and ‘dangerous’ deniers, regardless of their background or experience, in what looks like a kind of Hegelian ‘othering’.

Reality check

However, the issue is not ‘political or religious ideology’, it’s science. Predictions are obviously an important part of the scientific method, and when predictions do go badly wrong, it should serve as a reality check. While providing storm warnings is far from being the only job of economists (and expectations are much lower than in something like meteorology), it is surely one of the most important, which is why central banks for example devote considerable resources to it. And reflexively stamping critics and heterodox economists as anti-scientific deniers doesn’t seem very scientific – especially when some of them actually seem to be better at the prediction stuff.

Of course, as I point out in my forthcoming book Quantum Economics, economics should not be compared directly with weather forecasting. For one thing, the fact that economists’ predictions and models affect the economy (the financial crisis of 2008 for example was in part caused by faulty economic risk models) means that their responsibility is more like that of engineers or doctors. Instead of predicting exactly when the system will crash (no one has ever asked for a precise ‘date’), they should warn of risks, incorporate design features to help avoid failure, know how to address problems when they occur, and be alert for conflicts of interest and ethical violations. The profession’s failings in these areas, rather than any particular forecast, are the real reason so many are calling for a genuinely new paradigm in economics, as opposed to a rehashed version of the old one.

In the meantime, perhaps economists should just follow FitzRoy’s lead and invent a new word for their predictions. Econo-prognostications?

The post Storm warnings appeared first on New thinking for the British economy.

In recent months, there has been a lively public debate between mainstream economists and its critics. Newspapers such as the Guardian have declared that economics needs a ‘reformation’, while there have been a number of response articles from mainstream economists complaining that the economics profession is misunderstood, and that it has been the victim of ‘dangerous’ and ‘ill-informed expert bashing’ for both failing to predict the 2007/8 financial crisis, and failing to take on new approaches.

The main points of contention seem to be:

1. Forecasting is very difficult
2. Most economists are not involved in forecasting or macroeconomics
3. A more pluralistic approach would dilute economists’ influence over policy makers
4. Economists are not right-wing as commonly portrayed
5. Economics has become increasingly empirical
6. Critics misinterpret the use of mathematical models
7. Economics is no longer based on simplified assumptions such as rational behaviour
8. Criticism is dangerous because it erodes the authority of experts

We believe that the critics have a point, one which many economists’ responses have failed to address. Nonetheless, the critics often get some things wrong about the discipline, which only serves to muddy the waters and put economists on the defensive. Below we will discuss each of these eight issues in turn to see what the critics have right and wrong.

1. Forecasting is very difficult

The point that forecasting is hard is obviously true, and it does play a smaller role in economics than it does in something like meteorology. However economists, and not just those who work for central banks, do regularly make forecasts which have enormous influence over policy makers, the private sector, the public – and therefore the economy. When in 2004 Alan Greenspan responded to suggestions that housing was in a bubble by saying ‘a significant decline in consumer incomes or house prices could quickly alter the outlook; nonetheless, both scenarios appear unlikely’ he was making a forecast that would have a profound effect on the subsequent course of events.

Forecasting also has a special role to play in the scientific method, as a way of falsifying theories. This is more difficult in the social sciences than in something like physics, but one reason the 2007/8 event gets so much attention is because it seemed to falsify many of the key assumptions of mainstream economics, such as the influential idea that markets are generally efficient and self-correcting, while heterodox approaches that have traditionally been marginalised did better.

The real problem though is not that mainstream economists failed to predict ‘the timing, extent and severity’ (as the London School of Economics put it) of the crisis – economists have never been held to any such standard of forecasting skill, and no one asked for an exact date. It is that they could not have predicted or warned of the crisis, even in principle, because their models didn’t allow for such events. Furthermore, the models directly contributed to the crisis by enabling the financial sector to develop increasingly risky and dangerous products.

2. Most economists are not involved in forecasting or macroeconomics

It is also true that most economists are not involved in forecasting (nor are most meteorologists). However the fact that #WhatEconomistsReallyDo involves lots of things other than warning of #MajorEconomicCatastrophes is not much comfort to the many millions of people who have been affected by such events; or to those who worry that economists are still not using the appropriate tools to model the economy.

3. A more pluralistic approach would dilute economists’ influence over policy makers

On plurality, it is often pointed out by economists that offering diverse viewpoints makes it harder for economists to shape policy. As Simon Wren-Lewis puts it, ‘The point is obvious once you make the comparison to medicine. Don’t like the idea of vaccination? Pick an expert from the anti-vaccination medical school.’

This is an interesting – but not unusual – choice of analogy, given that mainstream economists were the ones who saw no need to vaccinate the financial system against crisis. But to stay with the medical comparison, surely a bigger issue than plurality (doctors don’t always agree either) is rebuilding credibility with the public; a 2017 UK survey by YouGov asking which experts could be trusted when talking about their own areas of expertise showed that doctors were trusted by 82 percent, and economists by 25 percent. This isn’t just the fault of the media, or a public relations issue: according to Dean Baker (who presciently warned in a 2005 paper with David Rosnick that for economists to miss the US housing bubble would be an ‘act of extraordinary negligence’) the crisis cost each person in the US around $27,000 in lost earnings.

Comparing economics to a well-established science like medicine simply assumes the conclusion: that economics is a science. The all-too-common corollary comparison of heterodox thinkers to anti-vacciners – or climate-change deniers, or creationists, or all three – also points to the fact that mainstream economics, or at least the part of it with influence over policy, remains too much of a monoculture with little real interest in reinventing itself, despite numerous well-publicised initiatives to do just that. It seems that economists’ interest in the benefits of competition and new ideas breaks down rather quickly when it comes to their own field.

4. Economists are not right-wing as commonly portrayed

On politics, it is correct that economists aren’t all the free-marketeers they are so often portrayed as by the media. At the same time, one reason for this perception may be that economic models incorporate various assumptions that tend to lead to unequal and unfair outcomes. For example, mainstream economists have traditionally aimed to optimise economic growth and paid less attention to distribution, in part because their models make what amount to symmetry assumptions which don’t fit easily with things like extreme inequality. Another concern is that many influential economists have been captured by the financial industry through things like lucrative consulting contracts, one cause of ‘regulatory capture’. For instance, one study found that whenever none of a paper’s authors worked in a business school, it was ‘significantly less likely to be positive on the level of executive compensations and significantly more likely to be negative.’

5. Economics has become increasingly empirical

On the use of data, it is again true that economists have been incorporating more empirical data into their research, which is an encouraging development. However, while most economists who speak of a data-revolution lean on a 2013 paper by Daniel Hamermesh that makes this discovery, what they don’t mention is that Hamermesh himself concludes his paper cautiously, suggesting it is too soon to be confident that this development will do much to change the discipline. Besides, the real test is whether the data is being used to falsify key assumptions and modelling approaches. One data point, for example, is that the main macroeconomic models all failed during the crisis. But according to Paul Krugman, writing as part of the Oxford Review of Economic Policy’s Rebuilding Macroeconomic Theory Project, ‘Neither the financial crisis nor the Great Recession that followed required a rethinking of basic ideas.’ What then would it take?

6. Critics misinterpret the use of mathematical models

Economists claim that critics do not understand their mathematical models. However, it seems that non-economists are beginning to understand these models all too well – for example the Nobel-winning techniques used to evaluate complex derivatives, which blew up so spectacularly during the crisis. In fact, some of the most vocal critics include people with a training in mathematics or physics, who simply believe that the mathematics used by economics is inappropriate for the problem at hand.

And while it is regularly said that mathematics acts as ‘a powerful lie detector’ because it forces the economist to clarify their assumptions, the reality is that complex mathematics is often used not to clarify, but to obfuscate; something that even prominent mainstream economists – Paul Romer being a case in point – now recognise (though this will come as less of a surprise to people with a training in media than to those trained in abstract theory). One of the main criticisms of models used in everything from environmental economics to quantitative finance is that, in the wrong hands, they are easily adjusted to give whatever answer the modeller wants.

7. Economics is no longer based on simplified assumptions such as rational behaviour

A related claim from economists is that their popular critics are attacking a simplified impression of their models. Lionel Robbins for example wrote back in 1932 that if it were ‘commonly known, if it were generally realised that Economic Man is only an expository device … it is improbable that he would be such a universal bogey’ (today, economists prefer to use the term ‘straw man’). It is true that areas such as behavioural economics have grown in influence, and economists have never relied exclusively on simplifications such as rational economic man. However, these modifications generally take the form of small adjustments to existing models rather than a wholesale rethinking of the approach, something which has been left to other disciplines such as psychology.

Economists rightly criticise those who repudiate their work without reading it; curiously, though, they do not always abide by that same standard: among all the social sciences, economists are by far those least likely to read outside their discipline. One benefit of having economics discussed in the media is exactly that they can pull together ideas from different experts.

8. Criticism is dangerous because it erodes the authority of experts

Finally, there is the oft-repeated claim that criticism is ‘dangerous’ (or even ‘anti-intellectual and dangerous’ as a piece in Times Higher Education said) because it erodes public trust in experts. But how could public criticism of mainstream economics possibly be more dangerous to society than something like the complete failure of orthodox economic tools during the crisis?

To summarise, the problem we believe is not so much that economists are misunderstood by critics or by the public; it is that they have failed to adapt following the crisis, other than to come up with new ways of defending their tired paradigm. Heterodox economists and people from other disciplines, including those working in the media, have already played a useful role by contributing new ideas and advocating for alternative approaches from areas such as biology and complexity theory. But if further progress is to be made, mainstream economists and policy makers need to engage more seriously with alternative viewpoints, and realise – as many in the public and the media have already done – that the days of monoculture neoclassical economics are over.

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