Thursday, July 29, 2010

On the economists' failure to predict crises (amv)

Excellent statement by Stephen Smale, in: Dynamics in General Equilibrium Theory, The American Economic Review, Vol. 66, No. 2, Papers and Proceedings of the Eightyeighth Annual Meeting of the American Economic Association (May, 1976), pp. 288-294:
A criticism commonly made of economic theory is its failure to make predictions of crises in the country or to anticipate correctly unemployment or inflation. One must be cautious in the social sciences about looking toward physics for answers. However, some comparisons with the physical sciences seem profitable in connection with the above criticism. In those sciences, where theory itself is in a far more advanced state, limitations can be seen in a similar way. For example a given individual human body functions according to physical principles; however no physical scientist would predict a heart attack. The physical theory gives understanding of aspects of what goes on in the human body only under very idealized conditions. The physical theories eventually play some role in the education of medical doctors, who can then say some things, some times about a patient's susceptibility to a heart attack, preventive measures, and cures.

The economy of the world or even a nation is a very complex phenomenon, like a human body, involving a number of factors, both economic and political. It is no more reasonable to expect economic theorists to predict a nation's economic future than for a theoretical scientist to predict the future health of an individual.