Economists' blind faith in mathematics has dented their credibility. Some humility will serve the world better
Too many debates in the media about economic growth have deteriorated into babbling speculation about numbers. “What will be the GDP growth this year?" “What will be the GDP growth for last year?" Such questions are frequently posed by interviewers to economists. Answers to the first generally have a ring of certainty: “I am confident that the growth will be…" To the second, there is hesitation: “Let us wait till the final numbers come in."
The American statistician Nate Silver points out, in The Signal and the Noise, that forecasts of GDP growth since 1968 by the Survey of Professional Forecasters—a quarterly survey of forecasts for the US economy—have been right only 50% of the time. This is no better than tossing a coin. Further, economists have predicted only two out of the 60 recessions in the world since 1990 a year ahead of time. Should we keep turning to economists for guidance if they do not seem to know what is going on, was Queen Elizabeth’s concern when she asked why economists could not predict the recent global recession? The problem is that while economists do not have a good model to explain relationships between the many forces shaping societies and economies, they nevertheless want to sound like experts by adding decimal points to their predictions.
Some economists admit they suffer from physics envy. They aspire to model complex socio-economic phenomena in the way physicists model natural phenomena. Kenneth Arrow and Brian Arthur, Nobel laureates in economics, arranged a meeting of economists in 1987 with physicists, including Nobel laureates Murray Gell-Mann and Phil Anderson, to understand what economists may learn from physicists about the formulation of theories and models. The economists presented their models. M. Mitchell Waldrop gives an account of the meeting in his book, Complexity: The Emerging Science at the Edge of Order and Chaos.
“And indeed, as the axioms and theorems and proofs marched across the overhead projector screen, the physicists could only be awestruck at their counterparts’ mathematical prowess—awestruck and appalled. They had the same objection that Arthur and many other economists had been voicing from within the field for years. ‘They were almost too good,’ says one young physicist, who remembers shaking his head in disbelief. ‘It seemed as though they were dazzling themselves with fancy mathematics, until they really couldn’t see the forest for the trees. So much time was being spent on trying to absorb the mathematics that I thought they weren’t often looking at what the models were for, and what they did, and whether the underlying assumptions were any good. In a lot of cases, what was required was just some common sense."
The pursuit of numbers has become the bane of economics. Many forces that shape societies and economies cannot be easily measured, such as the trust of citizens in institutions. Such substantial forces must not be excluded from a model which seeks to explain the behaviour of an economy. Many economists insist on equations and numbers because that is all that computers can compute, whereas economists should study human behaviour as it is, not as they find easy to model.
British economist Adrian Turner, delivering the 2010 Lionel Robbins Memorial Lectures, said the time has come to reconstruct economics. Too much reality was being left out of economists’ models for them to explain the world. These flawed models are incapable of predicting the future behaviour of an economy. With a twist of John Maynard Keynes’ famous statement, that “practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist", Turner warned, “the great danger lies with reasonably intellectual men and women who are employed in the policymaking departments of central banks, regulatory bodies, and governments, who are aware of intellectual influences, but who tend to gravitate to simplified versions of the dominant beliefs of economists who are still very much alive".
Economists have been the emperors of government policy in most countries in the last 20 years. There is plenty of evidence that their models and calculations are inaccurate. The recent expose of the flaw in a famous paper written by Harvard University economists Kenneth Rogoff and Carmen Reinhart on the relationship between deficits and growth is one more sign that the emperor is not well clothed.
The reconstruction of economics will require the inclusion of many disciplines of social and ecological sciences in a collaborative inquiry. Human societies and economies are complex systems. To see the whole elephant, those who have blinded themselves to others’ points of view by their conceptual and ideological differences, must come together. The first step in building a better model, before writing equations and running the computations, is to prepare a diagram—a map of the whole system. Mathematical maps of economies that give the exact sizes of the few features they can measure, leaving out all others, are not useful.
The discipline of scenario-building, which the Planning Commission has used for the first time, with multiple inputs from diverse points-of-view, follows these principles of map-making and model-building. It may be worthwhile for our policymakers to use and refine these rough scenarios to discover the best path for the country’s holistic development until economists come up with more complete and reliable models.