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A sermonette on prediction and its discontents

by Robert Teitelman | Published March 28, 2012 at 1:50 PM

In the Financial Times today, Stein Ringen, a professor of sociology at Oxford, takes a lash to forecasting-happy economists, this time over the euro zone. Ringen believes economists "with remarkable unanimity" got it wrong, while "against the storm stood a remarkable woman, Angela Merkel, insisting no quick fix was available." (Ringen is a little promiscuous with his "remarkables.") He then goes on to decry, or perhaps defame, economists as a class, suggesting that some pent-up academic score setting is going on here. "They fell victim to an exaggerated confidence in themselves. Most of us in the social sciences are aware of our limitations. Economists, for their sins, have worked themselves into a frenzy about being 'scientific.' Overconfidence leads to hubris."

Now let us confess, this kind of attack does get the schadenfreude agitated. Many economists, perhaps even the mainstream of economists, do have sins to bear, like just about everyone else gathered around the bonfire of the financial crisis. I have complained about them regularly. Their belief in the underlying "science" of economics has led them astray, as a new and so-far provocative book by Harvard's Jonathan Schlefer, "The Assumptions Economists Make," points out (a review will follow once I get the time). They have proved, over many years and many crises, to be lousy (meaning just as fallible as everyone else) forecasting either markets or macroeconomies. When they are right, they are declared to be seers, until they get things wrong. They also demand -- and are often enough afforded -- a deep expertise into the political economy. Many of them trade off their technical skills and professional résumés to speak broadly about areas well beyond their expertise. Generally, they employ their rudimentary models, driven by their mostly financial -- and thus quantitative -- incentives to analyze, predict and shape the political economy. They are more like sociologists than physicists.

That said, Ringen may significantly overstate their advocacy role in the euro-zone crisis (and their unanimity) and may well exaggerate Merkel's salvational policies as well. I use the chickenhearted "may" because no one really knows; I certainly don't. Ringen, in fact, is indulging in the same error as economists: To criticize their penchant for certainty and prediction, he indulges in both himself. He assumes that the Merkel-led policies on Greece and the euro zone are both wise and effective; despite a few caveats tossed in at the end of his column ("Europe is still in deep economic trouble."), he insists that "Europe's leading politicians have performed admirably. They have done their job by staying levelheaded and trusting themselves. One lesson is clear: beware the experts who come bearing advice ... and in particular economic experts."

But is the euro-zone crisis really and truly over? Could Greece blow up? Could austerity drive Greek politics to greater extremes? Could Italy or Spain reject the enforced technocratic solutions to their woes? Could the markets, still fragile, drive up the price of sovereign debt again and put serious pressure on the European Central Bank and the various rescue mechanisms? And what about the seriously hobbled banks? How can anyone be confident that they know the European future? Can anyone know any future?

Moreover, Ringen's dichotomy between economists and politicians (he moves from Merkel to "politicians") is far too simple and sharply drawn. The euro-zone technocracy is a mix of both. Mario Monti in Italy is an economist, a technocrat and, now, a politician. Jean-Claude Trichet and Mario Draghi at the ECB and Dominique Strauss-Kahn and Christine Lagarde at the International Monetary Fund are both high-level technocrats and veteran politicians. Merkel herself is surrounded by economists and bankers as advisers; look at the gang from the Bundesbank. To draw conclusions about "economists" by reading the predictions of economists in the media is not to recognize how the demands of punditry tend to be self-selecting, exaggerated and often inflammatory. That said it's hardly unanimous. The FT alone, which provides a steady diet of euro-zone commentary, has featured a wide array of solutions and schemes and views, including Ringen himself -- so much it was often bewildering, particularly from an American perspective.

Ringen's column does provide a lesson in how difficult it is to resist the allure of prediction and the appeal of the simple dichotomy. That makes him just like the economists he decries. - Robert Teitelman

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