If economists try to predict crises they will get it wrong

In their recent mea culpa to the Queen, apologising for a collective failure to predict the world’s recent spot of financial bother, a group of eminent British economists note that “many people did foresee the crisis”, but add, “What matters in such circumstances is not just to predict the nature of the problem but also its timing.”

I don’t agree. In fact, the reason that economists are now getting pilloried is precisely because they let people believe their job is to predict the future, and then ensure nothing bad happens. The detailed and specific forecasts produced by mathematical models – on which economists have lavished much time and love – are misused when they give the quite mistaken impression that this is possible.

“The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction,” the economists wrote, but it was ever thus: the economy is a dynamic system that changes with our attempts to manage it. Economists got plenty of things wrong – such as the dismal assumption that securitisation and credit default swaps were making the financial system safer – but it is compounding the error to say that they should have predicted how all this would add up to ‘the crisis’.

An aeronautical engineer may tell you that there is a one-in-ten-million chance of being killed on a given flight, but we don’t expect him to predict that the crash will happen on the 1515 from Narita to London Heathrow. A doctor will warn that smoking increases the risk of cancer, but we don’t expect her to foretell who will fall victim and when.

What we expect is that the doctor will tell us to quit cigarettes and the engineer will try to turn one-in-ten to one-in-100 million. That is the point of economists. They should try to identify policies that reduce the risk of big fluctuations in output, they should warn when the danger of such fluctuations is great and they should do so in a way the world can understand.

If economists try to predict crises they will get it wrong, and that will reduce their credibility when they try to warn of risks. It was in their warnings that economists failed: plenty talked of ‘global imbalances’ or ‘excessive credit growth’; few followed that through to the proximate sources of danger in the financial system, and then forcibly argued for something to be done about it.

Robin Harding is an FT correspondent in Tokyo and a former member of the editorial writing team