The Free Market 18, no. 3 (march 2000)
In at least one area, the US economic expansion has left a trail of destruction in its wake: on it are members of the profession that pretends to forecast future economic conditions. Gene Epstein of Barron’s, speaking at a Mises Institute conference, cited as an example the famous Wall Street Journal survey of economists, published on a regular basis. It represents ten years of solid failure.
Now, to anyone with common sense, this may not be a surprise. Good parents teach their children to not waste money on crystal ball gazers and palm readers, and most people look at the horoscopes with a bemused distance rather than as guides to behavior. There’s nothing more goofy than antique science fiction films; they-like economic forecasts-tell a lot more about the times in which they were made than the future they purported to predict.
Why? Because the future is uncertain. Sure, some people are better at making forecasts than others, but this is not due to amazing psychic powers but rather something even more intangible: a good sense of judgment. People with extraordinary intuition about future conditions make the best entrepreneurs, but this is not a talent that is scientifically discernable or distributed evenly among all people.
The details of the future will remain forever veiled to us. But give a gypsy seer a PhD in economics, and arm her with statistics and mathematical models, and people suddenly start taking her seriously. She will be invited to testify before Congress and held up by State TV as an expert in business forecasting. But from an analytical point of view, what she does is no different from what she did as Sister Sarah at a roadside stand.
Consider the Phillips Curve, one of the few “economic laws” to come out of the Keynesian tradition. Examining the data of a few decades, Keynesians concluded that there is a strict tradeoff between inflation and unemployment. Too brisk a job market touches off inflation; similarly, to reverse inflation requires throwing people out of work.
Now, this theory offers no real causative explanation of human affairs. Its only merit is as a predictive device, and it stands or falls based on whether the data bear it out. Hence, it should have been discredited in the 1970s when inflation and unemployment rose in tandem. It certainly faced total death in the 1990s, when unemployment hit rock bottom while productivity was high and inflation relatively tame.
And yet, bad theory has ninety-nine lives in the world of economics. When Alan Greenspan spoke at a conference in January 2000, he suggested that the Fed would raise rates in the future, to counteract the “pressure on prices” from-you guessed it-low unemployment and robust growth. And this is from a man who claims to be wedded to the data!
The problem is that the continual failure of mathematical-predictive economic models has not imparted lasting lessons to its partisans. They have yet to understand what Mises said at least fifty years ago: Nothing in human affairs is quantifiable, and economics deals with human affairs and unpredictable choices in an uncertain world.
That means that nothing in economics can be predicted with the accuracy of the physical sciences, which deal with an inanimate physical world that does not exercise freedom of will.
The Austrian economist has an intellectually honest position on the nature of economic science. He sees it as a qualitative science that fleshes out laws that govern the relationship between cause and effect in human affairs. It doesn’t forecast what people will choose, only the consequences of certain choices provided that people decide to go that path-all other things being equal.
The main lesson is that government is seriously constrained in what it can and cannot do to alter the social and economic landscape. It cannot, for example, print enough money to make the whole world prosperous because printing money necessarily robs the existing money stock of its value and causes distortions in the capital structure.
No Austrian worth his salt would invoke “science” to predict a six-figure Dow or a depression the day after tomorrow. On the other hand, only the Austrian economists have been consistently correct about the failure of government intervention to do what government partisans claimed it would do. And only Austrians have been consistently correct that government management of the economy produces cataclysmic results.
Llewellyn H. Rockwell, Jr., is president of the Mises Institute. Further reading: Human Action, chapter 38.
