Good Sense on Economists and Dentists
Chris Dillow at his “Stumbling and Mumbling” Blog writes HERE
“ECONOMISTS AS DENTISTS”
Is the "crisis" in economics one of the content of the discipline, or rather of its social function? I ask because of a point made by Ronald Coase:
‘The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate (hat tip to Paul).’
It's certainly unfortunate, because the economics that can help people with the "ordinary business of life" is actually thriving. As I've said in the IC, there's a tremendous amount economics can offer to investors. We know the distribution of asset returns and therefore their risks. We know the cognitive biases that can lead to widespread poor investment performance, and we can both quantify their effects and identify some of the stock market anomalies they generate. And we know about the maths of how to diversify. All this, and more, allows us to give useful investment advice.
Of course, we can't predict the future. But perhaps we don't need to: those investors who had used the Halloween and May Day indicators in 2008 would have avoided the worst of the 2008 crash.
In this regard, economists are indeed living up to Keynes' famous ideal:
‘If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.’
Like dentists, we can't greatly enrich people's lives, but we can offer reasonable advice on how they can avoid a few nasty problems.
Why, then, should we think economics is in crisis?
The obvious answer is that we didn't see the crash of 2008 coming.
But is it even logically possible to foresee the future? G.L.S Shackle thought not, because individuals' choices, which are what determine economic outcomes, are not forecastable - and his argument has been ignored rather than rebutted. And Gary Gorton has said that "Financial crises are not predictable", in part because they arise from cascade-type behaviour which cannot be foreseen.
Put this another way. Imagine economists had widely and credibly warned of a financial crisis in the mid-00s. People would have responded to such warnings by lending less and borrowing less (I'm ignoring agency problems here). But this would have resulted in less gearing and so no crisis. There would now be a crisis in economics as everyone wondered why the disaster we predicted never happened. The point is that forecasts can only be right if they are not believed.’
I agree with these remarks by Chris Dillow (though I do not always agree with him on Adam Smith). I interpret Adam Smith’s approach to predictions similarly – he rarely made any; his sole prediction that in just over 100 years (1876) North America would produce more wealth than Britain came true.
Economists started giving advice to government from the 19th century. Smith too, gave direct private advice to UK government ministers (at their request and occasionally unsolicited) on specific matters like taxation and when publicly advising them to desist from intervening in entrepreneurial matters for which they were unqualified. In the very last few lines of Wealth Of Nations he advised readers to cut their spending on defending the colonies which wouldn’t pay for it and to withdraw, but unfortunately they, and successive Victorian governments, did not heed him). Smith saw the role of philosophers throughout history as “doing nothing, but observing everything” and his entire life’s work was mainly spent doing just that.
Keynes was right about lowering the ambitions of modern economists from their high vanity-driven roles to that of more "humble dentists”. Read the rest of Chris Dillow’s post by following the link. [Fellow economists would do well to reflect on their reaction to the idea of being less pretentious about what think they can predict about the future.]