From Project Syndicate:
Is the economics profession “in crisis”? Many policymakers, such as Andy Haldane, the Bank of England’s chief economist, believe that it is. Indeed, a decade ago, economists failed to see a massive storm on the horizon, until it culminated in the most destructive global financial crisis in nearly 80 years. More recently, they misjudged the immediate impact that the United Kingdom’s Brexit vote would have on its economy.
Of course, the post-Brexit forecasts may not be entirely wrong, but only if we look at the long-term impact of the Brexit vote. True, some economists expected the UK economy to collapse during the post-referendum panic, whereas economic activity proved to be rather resilient, with GDP growth reaching some 2.1% in 2016. But now that British Prime Minister Theresa May has implied that she prefers a “hard” Brexit, a gloomy long-term prognosis is probably correct.
Unfortunately, economists’ responsibility for the 2008 global financial crisis and the subsequent recession extends beyond forecasting mistakes. Many lent intellectual support to the excesses that precipitated it, and to the policy mistakes – particularly insistence on fiscal austerity and disregard for widening inequalities – that followed it.
Some economists have been led astray by intellectual arrogance: the belief that they can always explain real-world complexity. Others have become entangled in methodological issues – “mistaking beauty for truth,” as Paul Krugman once observed – or have placed too much faith in human rationality and market efficiency.
Despite its aspiration to the certainty of the natural sciences, economics is, and will remain, a social science. Economists systematically study objects that are embedded in wider social and political structures. Their method is based on observations, from which they discern patterns and infer other patterns and behaviors; but they can never attain the predictive success of, say, chemistry or physics.
Human beings respond to new information in different ways, and adjust their behavior accordingly. Thus, economics cannot provide – nor should it claim to provide – definite insights into future trends and patterns. Economists can glimpse the future only by looking backwards, so their predictive power is limited to deducing probabilities on the basis of past events, not timeless laws.
And because economics is a social science, it can readily be used to serve political and business interests. In the years leading up to the financial crisis, global economic growth and profits were so strong that everyone – from small investors to the largest banks – was blinded by the prospect of bigger gains.
Economists employed by banks, hedge funds, and other businesses were expected to provide a short-term “view” for their employers and clients; and to dispense their “wisdom” to the general public through interviews and media appearances. Meanwhile, the economics profession was adopting more complex mathematical tools and specialized jargon, which effectively widened the gap between economists and other social scientists.