The World Economic Forum is held at the Swiss resort of Davos – they always pick the middle of winter and have interviews outside. Anyway there was a session with some leading economists as to why do they have such a bad track record for getting it right. Economists included were:
Robert Shiller – Professor at Yale University
Think how difficult it is to predict the weather – on the whole weather forecasters know their limitations and do quite well. Economists, in contrast, have to make long-range predictions. To make matters worse, like weathermen, economists rely on mathematical models. But weather follows established rules so experience is very useful. For economists the variables of the economy are constantly changing – rational/irrational behaviour, black swans, debt crisis, natural disasters etc. Below is an intereview with Shiller at Davos where he suggests a QE3.
Joseph Stiglitz – Professor at Cornell University and Nobel prize winner.
He said that the financial crisis did prove economics right, it is just that most people applied “the wrong economics”.
Paradoxically, while everybody knows that forecasts are mostly wrong, “everybody still demands them.” To make things worse economists – just like investors – were suffering from a very bad case of “group think” where “everybody is unwilling to stick their nose out” and challenge the consensus. “If you step outside the comfort band of the consensus forecast,” agrees Simon Johnson from the MIT Sloan School of Management and another former IMF chief economist, “you get beaten up, you can risk your career.”
The full report from the BBC can be found here: Dismal at Davos