What’s wrong with economics — 3 (Prediction)
We can’t predict football matches, so why think we can predict the economy? The outcome of a match depends on so many factors: the teams’ structure and support, the players’ motivation, skill health, energy, confidence, ability to spot opportunities, and luck in taking them — and more. Yet a football match has only 22 players. A national economy embraces millions of actors, the world economy billions; and their actions are far less constrained than the players on a football field. We cannot possibly know everything that shapes their actions and interactions.
Economics textbooks suggest that entrepreneurs pitch their price according to the demand curve. But an entrepreneur introducing a new product cannot predict the shape of that curve. It is more of a demand fog. For guidance, they may look at how previous produces have sold, but customers may react quite differently to theirs. Customers may prefer known brands or existing technologies, the product marketing may be badly targeted, influencers may sink the product with poor reviews, and much else can go wrong. Why should economists — or economic planners — fare any better?
Another problem for prediction is that the choices people make are contextual. Which of us has not gone into a shop for one thing, and come out with something completely different. We do not know with certainty even how we ourselves will react when presented with particular economic choices between products, quality, and prices. Or again, each year there is a sellout, must-have Christmas toy; though it sells out precisely because its suppliers cannot predict the demand. And yet it is such unpredictable choices that determine the outcomes that economists aspire to predict.
Accidents happen. Fires, floods, pandemics, wars and mass migrations scupper all our certainties about our economic future, as did, more happily, the discovery of wireless and penicillin. On the day before the death of Diana, the former Princess of Wales, who could have forecast the enormity of the demand for floral bouquets that was about to happen?
Technological change is unpredictable too. Futurologists in the 1950s thought that by now we would all be commuting in flying cars, but none predicted the internet on which you are reading this. Meanwhile, manufacturers of slide rules, steam engines and typewriters, publishers of dictionaries, atlases and encyclopaedias, crossing-sweepers and owners of livery stables have all experienced the fact. But changing technologies have significant impact on employment patterns and other measures that economists hope to forecast.
Government policy can also change unexpectedly, ad can have unexpected results. Few people would have predicted the Brexit referendum, or how little changed after it; and few predicted Donald Trump’s election and the large changes in events that it brought. And when economists recommend policies to governments, these can go awry too. Their recommended tax increases may cause entrepreneurs to work less, sell up or move themselves and their businesses abroad. Their recommended increases in public spending may crowd out private investment and replace it with less responsive public projects. Their attempts to stimulate the economy through easier credit and monetary expansion may produce only inflation and malinvestment that cannot be sustained.
Prediction is not easy. In terms of everything that really matters, it might even be impossible. Economists, and those they advise, should understand that.
Eamonn Butler