Thursday, July 22, 2010

Economists vs. Economics

For me, one of the more interesting aspects of economics is the interest in economic forecasts. People frequently ask me what I think of some recent event. Sometimes I can offer an opinion. Lots of times I can't or won't. In those cases it's usually because there's not enough information to base even an opinion on.

It's more interesting because people will also ask me what I think is going to happen (forecast). While I'm flattered they think I might know, I frequently tell them I don't. It's the truth. I don't have any special power to divine the future. I have a different way of looking at things than many of them. Doesn't mean it's right or wrong, just different. And when people ask, I often tell them about something I remember Louis Rukeyser writing many years ago. He was talking about calling the market, but it applies to the economic forecasting just as well. Rukeyser said something like, "If you're going to tell them a direction, don't tell them when or by how much. If you're going to tell them when, don't tell which direction or by how much. And if you're going to tell them by how much, don't tell them when or which direction."

That came to mind when I ran across this post on EconLog earlier today. Paul Samuelson may be one of the most influential economists of the 20th century, if only because so many people learned economics out of his textbook. (I think I'm one of a few in my generation who didn't.) He made some predictions about the shape of the post World War II economy that I found startling. They were all the more so because the largest ramifications didn't happen.

This was further reinforced when I was speaking about Irving Fisher to a group of students recently. While I think Fisher's crowning achievement is the equation that appears at the top of this blog; some of the students only knew that he had predicted a "permanently high plateau" for the U.S. stock market shortly before the 1929 crash. (As in so much of life, timing is everything.)

So what's the point? This article from The American Spectator (HT to Cafe Hayek) brought everything together. The gist of the article is that while economists may "fail", economics still has value. It tells us much about human behavior, both on a micro and a macro level. It is often more difficult to understand the macro level, but I think it's because we ascribe too much "knowledge" to economists. Economists know much. They understand a lot about human incentives and response. But like anyone else, it's really hard for them to see into the future.

I welcome your thoughts. I also hope you have a nice weekend.

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