Economists cannot predict

Chris Dillow has an interesting post on mechanisms and why economists cannot make good predictions. But first of all, he uses “mechanism” in a different way than I like to see it used. In my mind, a mechanism is as described in the Mechanisms page of this web site. Dillow follows Elster in using a more generic sense of the word: for him, a mechanism is a step-A-leads-to-step-B-to-step-C… story.

Economists have many mechanisms, in Elster’s sense, that may be behind what we see happening. However, the typical stories that these “mechanisms” embody are only good for giving some insight on what happened after it has. There are always too many dormant “mechanisms” waiting to be activated, and we cannot predict what triggers their activation, so we cannot make predictions safely.

A commenter identified as “Mr Art” says, in reference to Dillow’s post, that if a theory offers explanations but not predictions, it is not science. This is a tired criticism, hardly worth addressing, but I will try, briefly. A theory starts with some assumptions and then generates conclusions. You can test, in principle, whether these conclusions occurred or not while the assumptions held. This allows falsification of the theory, in principle. But who says that these conclusions have to do with the future, thereby making them predictions in the sense that Wall Street wants to have predictions?

I am reminded, for the Nth time, of the comment by, I believe, Kenneth Boulding (please correct me if I misremember) that economists predict because they are asked to, not because they can.

H/T to Mark Thoma for bringing me to the Dillow post.

2 thoughts on “Economists cannot predict

  1. I think you are correct about the Kenneth part of the quote. But there's a certain glibness about it.. I'm going to forecast its John Kenneth Galbraith as the source. On the topic of poor forecasting, you may be interested in James Montier's "The Folly of Forecasting: Ignore All Economists, Strategists, and Analysts." The thesis: people stink at forecasting. Why? Overconfidence. What's your view of the prediction markets like Intrade, for example? The site is nteresting. I hope you generate readers. I'll keep checking back.


    • Sorry it took so long to approve your comment. I was away for some days and did not have my Intense Debate credentials with me:( I will check out the Montier book. Thanks for the good words and the suggestion about the Kenneth part. I am pretty sure it was not Kenneth Arrow, at least.


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