In his Washington Post column today Robert Samuelson is fretting about the limitations of economists:
As an economic journalist for roughly half a century, I have slowly and somewhat reluctantly come to the conclusion that many economists (and this applies across the political spectrum) often don’t know what they’re talking about — a shortcoming that is sometimes acknowledged and sometimes isn’t.
Before I appear unbearably arrogant, let me state the obvious. Most economists I’ve dealt with over the years are extremely smart and well-informed. They’re a lot smarter than I am. I’ve learned much from them; it has been one of the rewards of the job. Most are also public-spirited and generous with their time. With a few exceptions, they generally elevate the level of public discussion.
Still, the record is what it is, and it’s not pretty. Time after time, economists have failed to foresee major economic trends. In recent years, global interest rates have plunged to historically low levels. (A 10-year Treasury bond fetches 2.5 percent.) Given the importance of interest rates in economic decisions — they affect everything from housing to the stock market — this is a big deal. But most economists did not anticipate the declines and still can’t fully explain them.
I think there are several prospective and even conflicting explanations for that. My preferred explanation is that economics is a descriptive science like anthropology rather than a predictive one like physics. Economists claim otherwise because what impelled them into economics was political as much as intellectual.
It is a commonplace for economists to acknowledge that their motivation for becoming an economist in the first place was Asimov’s Foundation trilogy. In that now 75 year old work of science fiction a “psychohistorian”, Hari Selden, is able to predict the future thousands of years from his own time and puts factors into play that, in the fullness of time, will alter events in the direction he prefers.
But economics is not psychohistory, there are hundreds billions more people in the future world of Foundation, and the information available to Hari Selden is much better than the information available to today’s economists.
Which brings me to the second prospective explanation. Is it possible that globalization and, in particular, the rise of China that is confounding economists’ predictive abilities? Our economy is not closed and China is not open. We have very little idea what’s actually happening in China and what happens in China doesn’t stay in China any more.