Everyone loves to poke fun at economists. It's almost as enjoyable a pastime as poking fun at attorneys. You've heard the jokes: If you laid all the economists end to end they still couldn't reach a conclusion. And this oldie but goodie: Economics is the only field in which two people can get a Nobel Prize for saying exactly the opposite thing. Or the classic: Why did God create economists? In order to make weather forecasters look good. (1)
Of course, as a group, they do have a dismal record as forecasters so some of the jokes are, to a point, deserved. But why do economists have such a poor record with their prognostications? Are they simply less intelligent than the general public? Is the field of economics just a guessing game rather than a science? Or are other factors involved which tend to make most economists wrong most of the time?
For arguments sake, let's rule out the possibility that economists are less intelligent than everyone else. After all, have you seen the math you're forced to confront when you study economics at an advanced level? It strains credibility to think you're lacking at least more than the average brain power if you can come close to comprehending the math required to earn a graduate degree in economics.
Although economics may be more of a guessing game than a hard science since the vagaries of human nature play such a strong role in the economic arena, it also seems reasonable to assume there are other factors involved in the inability of economists to beat the average weatherman in accuracy. Let's consider two of those factors.
The first factor is a basic error on the part of economists. Economists tend to extrapolate current trends into the future so their forecasts tend to look a lot like the recent past and the present. They might look at GDP growth over the last 10 quarters, run a regression study on those numbers and come up with a formula that can forecast the GDP at points in the future. Only problem with that method is what happened in the past and what is happening now may or may not be indicative of what's going to happen in the future. As a matter of fact, by the time a trend is obvious, it is usually over. The economy may have been growing at an average annual rate of 3.26% per quarter, but now that that fact is accepted as the fate of the future it's unlikely the rate of growth will be maintained. You can pretty well count on this: Current trends won't be future trends.
So if current trends won't be future trends, why do economists tend to base their forecasts on what has been happening? The answer to that question brings us to the second reason economists tend to miss their predictions more frequently than they get it right.
A basic human tendency is to try to avoid looking foolish. If you forecast a recession with enough lead time so a business owner can take action and protect the business from the negative effects of the downturn, you're talking downturn when the only thing everyone else, including the business owner, sees is a boom. You look like a nut. You might be vindicated in the end if the recession becomes a reality but by then, with the short attention span of the general public, most people will have already forgotten your forecast. So if you stick your neck out and make a forecast which bucks popular opinion, you're laughed at for making such a nutty prediction and then forgotten even if you're eventually proven right. That provides little incentive for going against the popular opinion.
John Maynard Keynes, as brilliant an economist as any to ever walk this earth, had this to say about bankers back in the 1930's: "A "sound" banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him." It's the same situation with economists. To paraphrase Keynes: "A "sound" economist, alas! is not one who accurately foresees the future, but one who, when he is wrong, is wrong in a conventional and orthodox way along with his fellows, so that no one can really blame him."
(1) Jokes borrowed from the website, "Jokes about economists and economics",.
The author has been a student of economic theory and economic statistics for over thirty years. He is the editor and publisher of Van Schaik's Economic Outlook, a website forecasting business cycles in the U.S. economy. You can see the website at http://jpetervanschaik.googlepages.com
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