Economics, human nature, and history

If I were to tell you that I can predict the future, you would think I’m a madman or a charlatan, and probably both. As the future is not something that can be predicted. For example, I might predict that I will be writing this article, and drinking coffee for a while. Yet, it’s also possible that I might finish neither this article nor the cup of coffee next to me. Perhaps a plane will fall out of the sky and kill me, which is fanciful, but within the realm of the imaginable given that I live quite near a flight path to Heathrow. More likely, perhaps, I have a stroke or a heart attack. Even more mundanely, I can spill the coffee on the computer, thus not drinking the coffee and also destroying the computer hence not finishing this piece.

The future is impossible to predict, and we usually brush aside people who claim to know what lies ahead of us, except, it seems, for economists. Of course, not all economists predict the future, but many do present us with prognoses, and we take them seriously, even if the main positions can be summarized as:

1) There will be a depression;

2) There will not be a depression;

3) Who cares? The world as we know it is going to end in 2012.

Economics, to someone like me who has never really studied or understood it, makes two preposterous assumptions: that human nature is static and universal, and history repeats itself usually as cycles. For economists to predict the future, however, these two assumptions are vital. Put it bluntly, many economists seem to assume that human nature is immutable to the extent that people will react in the same manner, if faced with the same sets of problems. I do not think people react in the same way if faced with the same situation, since human beings are not completely rational agents who base their decisions on logic alone: different cultures and peoples react differently to many social or political situations, so why would it be any different for economic decisions? Also, believing that history repeats itself is not the same thing as history actually repeating itself. The argument may be that history is nothing but one big wheel constantly rotating in circles, but at the same time moving forward, and that the outward expressions may be different, but the essentials are the same. However, I just do not accept that history is that kind of mechanical movement.

A further serious problem lies with interpreting the past, where there are no reliable data. The assumption that people will respond in a predictable manner and therefore it’s possible to predict, broadly speaking, what is going to happen in the future relies on the data from the past. In other words, history is their guide. Economists can predict when they can see the same situation happening now that had already happened at some point in the past. So, even if history does repeat itself (which I do not believe to be the case), the past experiences must be very well-documented. However, it is well-known that statistics, or at least reliable sets of statistics do not stretch back that many years.

It’s not only the past that presents problems in terms of statistics. Even today, statistics cannot cover all human activities in a meaningful way. Some things are hard to quantify: how does one measure sentiment or confidence? Placing a numerical value seems so pointless and it is likely to mislead. Economists often use numbers for unquantifiable data, and do fancy calculations, to predict the future. The formulae may be right, but it won’t produce an accurate prediction if the numbers fed into them are wrong.

Having caricatured economists, do I think they are totally mad or a bunch of charlatans? No. Predicting the future is a hazardous thing to do, but at the same time, some kind of planning is essential. Perhaps it’s a curse on humanity: we are keenly aware that the future exists, but we don’t know what will happen in the future. While economists might not predict things right, or agree on the interpretation of the past, they still have perform a useful function in shaping, through discussions and arguments, a better roadmap for the future. Some knowledge is better than none, however, what economists say must not be treated as an oracle that will invariably turn out to be true.