Are economists overconfident, unrealistic and political? Why are those few, who defy the conventional wisdom, ignored?
Why don't we listen to critics like Nassim Nicholas Taleb, the scholar of rare events who wrote Fooled by Randomness and The Black Swan, who says: "We have to build a society that doesn't depend on forecasts by idiotic economists." Says Paul Wilmott, a quantitative finance expert: "Economists' models are just awful. They completely forget how important the human element is."
Because they are trained to think of financial markets as efficient, most economists weren't primed to spot the dangers posed by lax mortgage lending, overleveraged financial institutions, and impenetrably complex derivatives. The easiest criticism of macroeconomists is that nearly all failed to foresee the recession despite plenty of warning signs.
In early September 2008, the median growth forecast for the fourth quarter was 0.2%, according to a survey by Blue Chip Economic Indicators. The actual outcome was 6.3% annualized decline.
Every idea your can think of for coping with this crisis is based on some supposition about the way the world works. Whether you realize it or not, all of those suppositions come out of one school of economics or another. As the British economist John Maynard Keynes wrote: "Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist."
So, we had all better hope that the profession can get its act together. It won't be easy, because this crisis is rubbing salt in old wounds. It is reopening debates about one of the most contentious questions in macro, namely, the ability of the government deficit spending (i.e. fiscal policy that does more than give people hope) to stimulate demand and get people back to work.
The truth is, even backers of stimulus can't be sure it will work. As World War II ended, many economists worried that growth would lapse as military spending fell. Economists still aren't sure how the postwar economy surged, so they can't say reliably whether fiscal stimulus will end this recession or just interrupt it.
Taleb, the scholar of unpredictability, notes that nature achieves robustness through a redundancy that economists would consider wasteful: two hands, two eyes, etc. Blake LeBaron of Brandeis University suggests preventing huge crisis by tolerating small distrubances, the way foresters use controlled burns to eliminate flammable underbrush.
Did World War II, begun by Hitler to lead Germany out of a countrywide depression after World War I, ignite the solution to the Great Depression here in the U.S.?
Source: BUSINESSWEEK, April 27, 2009
