I said yesterday that forecasting isn't part of proper economics at all. I should expand.
There is pretty much no reputable profession which rests its reputation upon forecasts. You don't expect a doctor to tell you what your next ailment will, or a mechanic to tell you the next fault your car will have. Why then, expect economists to have powers of foresight not vouchsafed to other professionals?
The question is especially acute because there are several strands of economic thinking - I'm thinking of complexity theory as much as the efficient market hypothesis - which tell us that both financial markets and economies are unforecastable.
You might object here that if economics doesn't make forecasts, it can't test its hypotheses against the evidence. This is wrong. We must distinguish between forecasting and predicting. A prediction is a conditional statement, a hypothesis, whereas a forecast is an unconditional one. "If you cut prices, then ceteris paribus, demand will rise" is a prediction. "Demand will rise" is a forecast. And predictions can be tested against actually-existing past facts - for example the hypothesis, "value stocks are riskier than others and so should offer higher long-run average returns" can (only) be judged against existing evidence.
From this perspective, the fact that so many tried and failed to predict the crash doesn't discredit economics, but actually vindicates at least three of its predictions:
- Complex emergent processes are almost impossible to forecast.
- It's impossible for most people to forecast asset prices correctly, because if they see a crash coming they'll sell up in advance and so prices would never rise so much as to crash later.
- People respond to incentives. If you give people incentives to do daft things - and economic forecasters are well-paid - then daft things is what they'll do.
It's worth noting here that some of those who are credited with forecasting the crash seem not to have actually done so; Steve Keen's precise forecasts for 2008 are hard to pin down, whilst Nouriel Roubini seems to have got a lot wrong as well as right.
Long before the crash - in 1990 - Deirdre McCloskey wrote: "The best economic scientists, of whatever school, have never believed in profitable casting of the fores." ( If You're So Smart, p109) Her comment stands.
As she points out, the belief that economists should forecast rests upon wishful thinking - of the same sort that's given us raindances, witchdoctors and ju-ju men. There's a hope that some arcane knowledge will bring us a fortune. But it can't. Worse still, there's a political urge here as well. The desire for economic forecasts is also a desire for a form of knowledge that will give us control over human events. As Alasdair MacIntyre noted in After Virtue, the claim that we can foresee and control the future is a claim to power. There's something deeply contradictory about the urge that economists both forecast the future and become more humble. You can't have both.
And herein lies a paradox. Usually, I call myself a Marxist and am in a minority. In this context, though, I'm in a minority by being anti-Marxist. Marx famously said "the philosophers economists have only interpreted the world, in various ways: the point, however, is to change it." For me, this is wrong; the point is merely to interpret the world - something we can do without forecasting it. In this sense, those who want economic forecasts are being more Marxian than me.