Ha-Joon Chang says:
Economics is not a science...Very often, the judgments by ordinary citizens may be better than those by professional economists.
He doesn't provide any empiricial evidence for this - that would be too scientific. But I suspect it is true in one sense, and false in others.
It's true in that citizens' - or at least consumers - judgements can do a better job of economic forecasting than the experts. My chart shows how the ratios of consumer spending to house and share prices have done a decent job of forecasting stock market returns over the last 30 years*; this is a simplified version of the famous Lettau-Ludvigson result (pdf), as corroborated by some Bank research.
The idea behind this is a wisdom of crowds one. If individuals anticipate better times, they are likely to spend more and so consumer spending will be high relative to wealth. If they anticipate bad times, spending will be low. Whilst any individual might be mistaken, their errors cancel out, with the result that aggregate spending forecasts share prices and economic growth. This is a Hayekian finding: there's wisdom in the dispersed, fragmentary knowledge of millions of people.
1-0 to Chang.
But in other respects, he's wrong. Brad Barber and Terrance Odean have shown that, around the world, most individual equity investors under-perform the market.This tells us that ordinary citizens know less than the experts - because expert advice is to invest in trackers. The efficient market hypothesis of economists might not be perfect, but most individuals would do better if they heeded it.
This poses the question. If ordinary people do worse than experts when they are investing their own hard cash, won't they be even stupider when they don't have skin in the game. Three facts make me think so:
- Many people want benefit cuts, in ignorance of how mean they really are.
In these respects, I prefer professional economists' judgments to those of citizens. And I suspect Mr Chang and his readers would too.
This is not (just) a conservative, orthodox opinion. One famous heterodox economist cautioned against relying upon people's opinions of appearances and demanded a scientific approach which looked behind them. "All science would be superfluous if the outward appearance and the essence of things directly coincided" he said.
In truth, I'm not sure Mr Chang believes what he's saying. When Cambridge's economics exams are marked, I suspect it will be by professional expert economists and not by ordinary citizens. But then, radicalism usually stops when it challenges one's own ego and power.
**There's always a danger of falling into "no true Scotsman"-type thinking in defining orthodox economics, but I reckon that if something's taught to first-year Oxford students, then it's orthodox.