Most economists failed to predict the market crash of 2008–so many that it is hard to count them all. But how is this even possible? It’s on a scale of this hypothetical: 98% of meteorologists failing to predict a huge hurricane hitting the coast of Florida. Consider this description of the problem [1]:
Like everyone else, we wondered how could the world’s leading economy and its top economists, including the Federal Reserve Chairman, Ben Bernanke – a man who is surrounded by a network of smartest investors, scientists, and think tanks – miss the financial crisis and its impact on the US Economy?
The predictive failures by economists causes a friend of mine to argue that, as a general rule, economists are not scientists at all, and that they are “frauds.” In my opinion, he’s overstating the point because there were some economists who clearly predicted the burst of the housing bubble [2], but most of the economists who take to the airwaves don’t seem to be scientists like the scientists who develop vaccines or design solar panels. They are often terrible at making predictions, and their lapses can look cataclysmic in retrospect. They are like sportscasters, always looking forward to the next game, trying hard to divert attention from their previous failures. They seem more like lawyers or PR specialists than scientists. This article at Wharton [3] suggests that the economists who failed to predict the housing bubble lack “common sense”:
Among the most damning examples of the blind spot this created, [Wharton management professor Sidney G. Winter] says, was the failure by many economists and business people to acknowledge the common-sense fact that home prices could not continue rising faster than household incomes. Says Winter: “The most remarkable fact is that serious people were willing to commit, both intellectually and financially, to the idea that housing prices would rise indefinitely, a really bizarre idea.”
Here is more fuel for the fire. No matter what position a prominent politician takes, he/she can pull out 30 “economists” to “support” the proposed policy. Even worse, there is almost never a rival group of economists who will proceed to demolish what the first group has to say with understandable facts or theories. It always turns into a bunch of mush. This Huffpo article [4] on the types of economist “experts” used by the GOP merely fortifies my friend’s contention that much of what passes as economics these days is not scientific.
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In the meantime, on whose advice should one rely regarding investment strategy? It would seem that we should all turn to economists to be our stock-brokers. it would seem. Here’s something you can bank on: The financial “experts” (perhaps these aren’t exactly “economists”) who think that one can successfully pick stocks are frauds (so does Dan Smolin [6]). Unless you’ve got some good inside trader information, like many members of Congress [7], that is.
I’ll end this rant with some quotes on economists:
“Economists are pessimists: they’ve predicted 8 of the last 3 depressions” Barry Asmus
“Economics is extremely useful as a form of employment for economists.” John Kenneth Galbraith
“Economics has never been a science – and it is even less now than a few years ago.” Paul A. Samuelson
“Economics is a subject profoundly conducive to cliche, resonant with boredom. On few topics is an American audience so practiced in turning off its ears and minds. And none can say that the response is ill advised.”
John Kenneth Galbraith
Ask five economists and you’ll get five different answers – six if one went to Harvard.
Edgar R. Fiedler
Economists are coming to acknowledge that measures of national wealth and poverty in terms strictly of average income tell you little that is significant of the health or viability of a society.
Rowan D. Williams
I believe that economists put decimal points in their forecasts to show they have a sense of humor.
William Gilmore Simms
An economist is a man who states the obvious in terms of the incomprehensible.
Alfred A. Knopf
An economist is a surgeon with an excellent scalpel and a rough-edged lancet, who operates beautifully on the dead and tortures the living.
Nicholas Chamfort (1741 – 1794)
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