I recently finished reading What's the Use of Economics, a collection of essays edited by Diane Coyle. Published in September 2012, the fourth anniversary of the bankruptcy of Lehman Brothers, the essays are meant as an inward-looking yet apologetic riposte to critics who feel that there has been a serious failure of Economics as it did not predict the financial crisis which began in 2007, and led to the "great recession" which has affected many high-income economies ever since.
Of course, the premise of such criticism is that one of the key tasks of Economics is prediction. This is something which I would personally refute. I am firmly on the side of legendary baseball player and manager, Casey Stengel, I never make predictions, especially about the future. (Niels Bohr similarly said "Prediction is very difficult, especially if it's about the future.") For me Economics is NOT about making predictions. That is not to say that aspects of Economics cannot be used to make predictions, but that they should be used like any predictions, cautiously and with judgment.
Economics is a social science: that is to say that it applies scientific method to understanding economic aspects of human behaviour and interaction. Unlike 'pure' sciences, when dealing with human activity we consider the probability of how things behave; there is no definitive. Thus, if the price of a product drops there is every likelihood that quantity of it demanded will increase. However, all such economic statements are subject to the assumption of ceteris paribus, other things remaining unchanged. Thus if the price of a product drops and at the same time people's incomes are reduced the likelihood of an increase in the quantity demanded is also reduced, if not negated.
When we look at the bigger picture, Macroeconomics, it becomes more fuzzy due to momentum effects. A cut in government spending will in all probability reduce employment in the public sector, leading to a lower aggregate level of spending in the first instance. This will lead to less income for shopkeepers and others, who in turn will reduce their spending, and so on. This is a classic example of Keynes' multiplier effect. However, while this is a fairly simple matter of deduction one of the key drivers of any economy is confidence, both among consumers and in business, about which it is far less easy to make inferences. This is not something new: back in the 1930s Joan Robinson famously discussed this under the heading of "animal spirits". Confidence can be boosted or reduced by factors which are obvious, and sometimes by factors which are not so obvious. It is not possible to make even the simplest of predictions about factors which are not obvious.
Back in the 1970s as an undergraduate at the University of Essex, I was taught that Macroeconomic prediction was quite simple when an economy was already on an upswing or downswing, but that it was impossible to make predictions about turning points: when an economy stops growing and enters recession, or when an economy stops receding and starts growing. That difficulty has recently been highlighted in the UK press with its interminable discussions on "double dip" and even "triple dip" recessions. Yet the data we need to determine where an economy lies in the business cycle lags well behind, making it difficult to know when (e.g.) an economy has turned the corner and come out of recession. To try and make predictions about such matters is akin to replicating King Canute: it can only end in tears. And, I would argue, it is not really the job of Economics to make such predictions. Those who argue they can accurately make such predictions are either charlatans or arrogant in their own judgment of their own skills and abilities.
It is time for Economists to take back our profession. If people desire predictions about the future they might well be better off turning to astrologers, tea-leaf readers and others of that ilk. That is not to say that Economics cannot offer predictions, but if they are true to the subject, they will remain slightly fuzzy and be used cautiously and with judgment.
