By Spencer P. Morrison:
Ask 10 physicists where an asteroid will be in one year, and you’ll get one answer, and it is likely to be correct. Ask 10 economists where the economy will be a year from now and you’ll get 10 answers—all wrong. The disheartening truth is that economists are notoriously bad at prediction. We saw this recently with the 2008 financial crisis: very few economists saw it coming, and fewer still knew when it would hit.
There are many reasons for this: the time-horizon is often too long to provide economists with adequate feedback, meaning they cannot learn from their mistakes. Paradoxically, economists have too much and too little data, ensuring they either lose the signal in the noise or have nothing to work with; and many economists are paid to profess certain positions.
But that doesn’t mean we’re helpless. Economists may not be able to predict the next crisis, but they can make forecasts. The difference is important. A physicist can predict, with certainty, where a billiard ball will travel if struck. Economists traditionally liken themselves to physicists: the economy is a giant pool table governed by laws like supply and demand, and if we have enough information we can predict its behavior. This is a terrible analogy, and it explains why economists are often wrong. The economy is more like earth’s atmosphere or the human mind because it is a complex system, governed by second-order causality: its emergent properties tangle cause-and-effect chains to such a degree that prediction is impossible.
Read more: American Greatness
