The truth economists don’t want you to know: this is a big mess

Economics is sometimes described as “the painful elaboration of the obvious.” Due to the involvement of human beings, and our stochastic nature, it is not an exact science.

Lionel Robbins’ 1932 work “An Essay on the Nature and Significance of Economic Science” provided a definition still in use today: “Economics is the science which studies human behaviour as a relationship between given ends and scarce means which have alternative uses.”

Economists seem to invite ridicule, and jokes abound:

“Economists were invented to make astrologers look good,” “What happens when you put 10 economists in a room? You get 11 opinions;”

And “How has the French Revolution affected world economic growth? It’s too early to say.”

There are three different models for rebooting the global economy:

á Full reboot approach now being pursued by New Zealand — the government waits until new COVID-19 cases are at zero and then restarts social and economic activity;

á Hybrid approach similar to Sweden’s — the restarting of social and economic activity but continued strict isolation for vulnerable populations;

á Graduated approach being implemented in China — governments lift restrictions in a deliberate, phased, and incremental manner based on the progression of the disease, the readiness of the public health system, and the preparedness of the public.

In “Beyond the Curve: How to Restart in the Wake of COVID-19” Management Consultants the Boston Consulting Group (BCG) provide guidelines for governments. The current situation is novel, “Governments around the world have weathered economic shocks before — most recently the financial crisis and recession of the late 2000s. But the fallout from the COVID-19 pandemic is different. There is no modern analog for the shutdown of economic activity in most of the world.”

According to BCG, governments must ensure they are able to adjust their strategy as conditions change, by adopting scenario planning. It is not possible to accurately predict how the pandemic will resolve.

In the technical jargon of economists, this is known as a “big mess.”

The World Bank working paper “The Potential Impact of COVID-19 on GDP and Trade A Preliminary Assessment” analyzes multiple scenarios to predict possible economic impact. It concludes “Our illustrative scenarios indicate that the potential loss of income in affected countries could be significant, with global GDP declining by up to 3.9 per cent, and developing countries hit the hardest (4 per cent on average, but some over 6.5 per cent). Our analysis is likely to underestimate the potential economic costs of the epidemic. We do not fully capture several important channels, such as the uncertainty-driven contraction in demand and FDI, and other real effects of a financial shock.” A few disclaimers there, not surprisingly.

The complexity of the predictive model is apparent in the Envision Model below, and illustrates why economics is not an exact science.

Recently, over 300 lawmakers from around the world urged the International Monetary Fund and World Bank to cancel the debt of the poorest countries in response to the coronavirus pandemic, and to boost funding to avert a global economic meltdown.

Perhaps this actually makes sense. We could follow the universal advice of baffled IT guys everywhere ... try rebooting. Pretend it didn’t happen. Nobody knows how to fix this, and a do-over would be great. An engineer, an accountant and an economist go into a bar ...