In my last post, I tried to explain why it’s economists’ perceived failure to predict the current economic crisis is not as reprehensible as it’s made out to be. I left off the biggest reason: the existence of governments.
Governments don’t follow economic rules. They are the only economic actor without a budget constraint, thanks to the ability to tax and print money; decisions are made by people using other people’s money; and the goal of these people is not to maximize profits but to maximize votes and get re-elected. Simply put, rules don’t apply to governments. Economists trying to make predictions in a world where governments not only exist but are also key economic actors in constant flux are similar to physicists around a god: anything you predict may come true, unless god changes his mind.
I’d bet that 100% of physicists would say that a body of water could not be spontaneously made to separate into two. All of those people would have failed to predict the parting of the Red Sea in Exodus. The same goes for resurrections, immaculate conceptions, and various other events in the Bible. The best trained scientists would have constantly failed to predict momentous events in the Bible – because god does not follow the rules. Physical laws simply don’t apply, and there would be little use in forecasting anything, other than hoping that god will stick to the rules he set forth [like gravity].
God and government can change their minds at any time, of course. God parts the Red Sea, and government spends a trillion it doesn’t have; god resurrects a dead man, and government sends thousands to their deaths. The former would confound any natural scientist; the latter confounds economists. Predictions in such a world should come with a huge caveat, and expectations on those making them should be low. With such an uncontrolled power loose in the economic world, it’s a wonder economists can make sense of the world at all.