In de­fence of good eco­nom­ics

Don’t lis­ten to self-pro­claimed eco­nomic gu­rus who claim to know the fu­ture – rather pay at­ten­tion to what gen­uine econ­o­mists are say­ing.

Finweek English Edition - - FUND FOCUS -

i’ve been in­trigued, if not an­gered, by the way some “high priests” and others pre­sent­ing at fund road­shows and com­ment­ing on TV in­vest­ment shows so of­ten see fit to rail against some of the coun­try’s most pro­fi­cient econ­o­mists.

Plainly, these “whizzes” base their own think­ing and fore­cast­ing on pre­cisely the work con­ducted by ex­cel­lent econ­o­mists at larger in­vest­ment houses such as Old Mu­tual, Al­lan Gray, Stan­lib, Pru­den­tial and In­vestec.

Yes, I con­cede that many lead­ing eco­nomic fore­cast­ers get it wrong. But that’s no crime. The prob­lem is twofold, as Philip Joyce, pro­fes­sor of pub­lic pol­icy and ad­min­is­tra­tion at Ge­orge Wash­ing­ton Univer­sity, pointed out.

“First, it’s hard to pre­dict the fu­ture. Sec­ond, it’s re­ally hard to pre­dict the fu­ture when so many parts of the econ­omy are in flux. Our mod­els aren’t re­ally de­signed for pre­dict­ing mas­sive changes.”

And these aren’t nor­mal times, he adds. “In re­ces­sions, even the short-term num­bers aren’t very good, be­cause many fac­tors that go into fore­casts are based on as­sump­tions that the econ­omy will be­have within some nar­row band of re­al­ity, and the way it be­haves is out­side the band.”

These ar­gu­ments have con­sid­er­able va­lid­ity, and the an­swer to read­ers, I’d sug­gest, is to pay at­ten­tion to a broader range of fore­casts.

It’s also claimed that main­stream eco­nom­ics is in de­nial, in which many ex­perts refuse to look at the big pic­ture, and sim­ply prop up world elites. Maybe. The flip­side, of course, is that there are others that do in fact un­der­pin al­ter­na­tive so­cial struc­tures. Most, of course, are so­cial­ists and have their own agen­das which are also highly sus­pect.

Also crit­i­cal, one an­a­lyst noted, is dif­fer­en­ti­at­ing be­tween good eco­nom­ics and bad. First, good eco­nom­ics tests it­self against the facts. Just be­cause some­thing is con­sis­tent with a the­ory does not mean that it’s valid.

Sec­ond, good eco­nom­ics asks: which model, mech­a­nism or the­ory fits the prob­lem at hand? And here there could be an ar­ray of an­swers.

Another of the big things that get lost is that there are many ways of try­ing to as­sess er­rors in fore­casts, says prom­i­nent Amer­i­can eco­nomic re­searcher Robert Eisen­beis: “For in­stance, it’s pos­si­ble to think about fore­casts not as US GDP go­ing to be 2.4% this year, but 2.4 plus or mi­nus some­thing. What’s rel­e­vant is how big that plus or mi­nus is.”

Per­haps the most com­fort­ing view on the sub­ject as far as I am con­cerned, was that of US econ­omy No­bel Prize win­ner, Paul Sa­muel­son, who warned: “A lit­tle knowl­edge may be dan­ger­ous; com­mon sense may prove to be re­ally non­sense; and the world is com­pli­cated enough with­out in­tro­duc­ing fur­ther con­fu­sion and am­bi­gu­ity. Even words can be­come treach­er­ous if we don’t re­act in a nat­u­ral man­ner to them.”

Good eco­nom­ics tests it­self against the facts. Just be­cause some­thing is con­sis­tent with a the­ory does not mean that it’s valid.

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