Critics often infer that the discipline failed because it didn't foresee the crisis.
It's certainly the case that few people saw the crisis coming. For example, only one forecaster of those surveyed by the Treasury in March 2008 foresaw a fall in GDP in 2009 - and he had also, wrongly, forecast weak growth in 2005 and 2006. UK economists weren't alone here: US forecasters also failed to see the recession coming, as did those in other countries.
Nor even was the failure confined to the Great Recession. Back in 2000, the IMF's Prakash Loungani wrote that forecasters' failure to foresee recessions was "virtually unblemished."
This tells us that the failure to predict recessions was not confined to DSGE models. Forecasters use a variety of methods, including a heavy dose of judgment. Pretty much all these methods failed.
I'm not sure that heterodox economists did much better. Steve Keen's Debtwatch focused mainly upon the Australian economy which did not suffer a recession in 2009. And even Wynne Godley didn't do much better than others. In April 2007 he wrote (pdf) of the US:
output growth slows down almost to zero sometime between now and 2008 and then recovers toward 3 percent or thereabouts in 2009–10.
That's better than most, but still some way off.
Does this near-universal failure tell us that macroeconomics is useless? Maybe not. Perhaps there's another explanation. Maybe recessions are just not predictable at all. The 2009 recession originated, to a large extent, in a micro failure, not a macro one - the collapse of banks. This is consistent with Xavier Gabaix's vew that recessions have granular origins and with Acemoglu's theory that they are propagated by network effects.It could be that the economy is so complex that forecasting is, as David says, just a mug's game*.
Many of macro's critics are begging the question: they are assuming that the economy could be predictable, if only we had a good enough theory. I doubt this**.
Now, this is just a hypothesis - albeit one consistent with lots of evidence. If you want to show I'm wrong, point me to some forecaster who foresaw both the recession of 2008-09 and the growth either side thereof. Or, failing that, show me forecasts for future years which successfully predict both growth and recessions.
It's not good enough to say "macro failed to foresee the crisis, therefore we need a new theory." Come up with the theory, and test it against the data.
Nor is it good enough to simply point to the risk of recession. Forecasting a recession that doesn't occur is as bad as not forecasting one that does; both lead policy-makers to make bad policy and investors to make bad asset allocation decisions.
We should not, however, infer that just because macroeconomic forecasting is impossible (at least, given the present state of our knowledge) that we are at the mercy of crises. At least two pieces of economic knowledge would have protected investors from the 2008 crisis, both of which were available at the time:
- the tendency for foreign buying of US equities to predict annual returns: this hit a record in 2007, warning us of trouble.
- the seasonality of the stock market. "Sell in May, buy on Halloween" would have gotten you out of the market well before Lehman's collapsed - albeit at the price of missing out on some of 2009's recovery.
Of course, these two hypotheses told us nothing about banks, debt, real GDP or monetary policy. But this tells us two things: that economics can be useful even if macro is not; and that there's a big difference between explanation and prediction. As Jon Elster said:
Sometimes we can explain without being able to predict, and sometimes predict without being able to explain. (Nuts and Bolts for the Social Sciences, p8)
Macroeconomics - when done well, which is only some of the time - does the former. This might be all that can be expected.Whatever else is wrong with macro theory, the inability to foresee recessions is not the problem.
* Macroeconomics is not unique here: Gene points out that, for everyday purposes, the natural sciences lack predictive power too.
** I don't think we have good enough data either, but that's another story.