More On: Economic Prediction
What Economics Can Learn from the Worst Economic Predictions in History
Are economists capable of foresight? Hardly.
To demonstrate our sense of humor, economists anticipate the trajectory of future economic events. If we could do so precisely, we would all be very wealthy, but we're not; we're comfortable, but not fabulously wealthy (except in our enjoyment of the dismal science).
Why are we unable to anticipate the future? Because the world is complex and millions of events are occuring simultaneously. For instance, we know that if the government raises the money supply and nothing else changes, price increases are guaranteed. However, we cannot rely on the ceteris paribus assumption that this is the only economic change that will occur. People may purchase less in order to save for a rainy day. If so, the propensity for higher prices to result from more money pursuing the same number of goods and services will be substantially mitigated.
By how much? This is dependent on the rate of drop in purchasing, and we have no insight into this. We cannot even predict whether the Federal Reserve or the central bank will boost the money supply. The future path of inflation will depend on which side of the bed Fed officials wake up on, and we have no idea which side they will choose. Quite possibly, they may not know themselves. Economic law is a blessing, but it can only lead us so far.
Consider another illustration. If nothing else changes, economic law dictates that a rise in the amount at which the minimum wage is set will increase unemployment among low-skilled workers. However, things are ever-changing. As the minimum wage rises, it is feasible that an innovation will emerge that boosts the productivity of unskilled workers. If so, and if this force is sufficiently potent, and if the increase in the level prescribed by law is minor, there may not be a single worker who loses their job due to the increased minimum wage.
I must admit that I am approaching this issue from an Austrian economic standpoint. The majority of economists would disagree. According to Milton Friedman, winner of the Nobel Prize in Economics (who was not an Austrian), "the only meaningful test of the validity of a hypothesis is the contrast of prediction with experience." In other words, if a claim is correct, it must result in accurate forecasts.
However, the history of economics is a history of inaccurate forecasts.
Paul Krugman is another Nobel Prize winner in economics. His 1998 prediction was, "The Internet's development will decrease dramatically." Ha!
There are further cases.
Irving Fisher foresaw a stock market boom, but he made the error of making this prediction just prior to the Crash of 1929.
In 1968, Paul Ehrlich, the author of The Population Bomb, projected widespread hunger in the years to come. Mass obesity turned out to be a significantly greater issue.
In 1987, Ravi Batra's book of the same name anticipated the Great Depression of 1990. Didn't happen.
No, I believe the Austrians' unwavering reluctance to make economic forecasts is consistent with our restricted capabilities. We can explain and comprehend much of economic reality, but until "everything else is constant," which is never the case, we cannot foresee, at least not as economists.
Intellectual modesty is highly prized.
Do I anticipate that mainstream economists will one day recognize their wrong in this regard? As an Austrian economist, I make no forecasts in any direction.
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