Sunday, 22 March 2009

Dominic on Economics

Another note imported from Facebook. Written in early February.

I'll probably be writing a few of these over the next week or two, and they'll probably be about as interesting as each other (ie yes to me, and maybe to some of you). In other words, a blog-lite.

Anyhoo, what with economic crisis affecting much of the world (and providing my first retort to "why are you unemployed") the profession/science/study/field of economics has come under some criticism.

1) Why wasn't the crisis predicted?
Well, it was. There's an old line, that economists have predicted 87 out of the last 5 recessions. This is inevitable in any field of prediction: I personally like to compare it to meteorology. After all, we've had snow predicted for us many times and it doesn't always end up happening. Also, the 1- or 2- day forecasts are usually accurate, whilst the 10-day forecast is only a little better than saying it'll be the same as today's weather forever. In economics, the predictions go slightly longer, but are just as reliable. Not long ago, the predictions for 2009 indicated solid growth. Now they predict a long recession. 2008 was worse than predicted, some years end up better.

2) Internecine fighting.
Forgive me, I wanted to use a long word. Many economists have been suggesting a large "stimulus" package to boost demand across the economy. Others say that the resulting debt will cause more uncertainty and undermine the effort, rendering the stimulus impotent. Unfortunately, media organisations feel the need to report both sides of disagreements (global warming, anyone?) so those advocating little action, or criticising actions are given much media spotlight, regardless of the merits of their case.
Of course, that is not to say that I am in complete support of every action undertaken by the UK (and US, German, French, Japanese, etc.) government(s). However, the question: "was this the right thing to do?" is a tough one to answer. Firstly, as time goes by, more information is uncovered about quite how bad the situation is. Secondly, the counterfactual "what if we hadn't done it?" can never be shown. Imagine, if you choose, that the government had (as suggested by Vince Cable of the Liberal Democrats) nationalised Northern Rock at the first sign of customers queuing outside the building. This would have shown decisiveness, and might have helped. But ultimately, that can never be proven.

3) Economics is not a proper science.
This last point is important to consider when evaluating economics' claim to be a science. No double blind test can responsibly be run on any macroeconomic question*. Microeconomic questions can be studied, using techniques from psychology and so called "natural experiments". Policies can be partially implemented, trialled in certain regions, and the effects of the policy can be controlled against the area or group who felt none of the effects of the policy.
For how to deal with an economic crisis worse than anything in the past 75 years (at latest estimate) how can anyone expect a double-blind proven response? The study of rare medical conditions is probably an appropriate simile here. There are only so many countries, and so many recessions. In all cases, the causes of recession are different (even if similar - high commodity prices, collapse of an industry, war, famine, hyperinflation can happen too).
Ultimately, nobody knows what will happen next, nor do they know the consequences of certain policies in a situation where most banks are crippled by bad debts and Knightian uncertainty (Donald Runsfeld's unknown unknowns). However, some people are in a better positon than others to make "best guesses". These are the experts, the Nobel-prize winners, the professors of economics at the top universities and the chief economists/economic advisors of major organisations (OECD, governments, UN, World Bank, IMF, etc).
Their opinion should be given a stronger weight than that of generic backbench opposition MP. Not the other way around.

4. Study it at university?
I did. Which is why this note reads as it does (I've tried to avoid jargon, and probably failed) and probably why it is being written at all.
I thoroughly recommend it to anyone with the vaguest interest. The current crisis doesn't render all that has ever been learned before meaningless. It does, however offer a chance for more to be learned (and revisited - Keynes et al).
However, having studied it hasn't helped me as much as some other subjects might. Such is life. Given the information I had at the time, I made the right decision. However, I won't† study a Masters. This is because I think a specific professional qualification would be more useful to me now.

Final thoughts:
Like I said, the subject has come under attack of late. That is to be expected (Biology would come under similar attack if millions were mutating, instead of becoming unemployed). Bringers of bad news are seldom welcome, so those predicting disaster aren't usually welcomed (the phrase "don't shoot the messenger" exists for a reason). Discussion and debate are common in any field of study (especially in those so immature as economcs) but these facts do not render the answers brought forth worthless.

As I said at the beginning, there will probably be several of these, addressing fields vaguely related to my "expertise". Read at own risk, no responsibility is claimed for your wasted time, if you so feel. Correspondence will, however, be entered into, so feel free to comment.

* That I can think of, off the top of my head.

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