Inside Story: Economists? Who Needs 'em: Brian Cathcart on the sad state of the prophecy business

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The Independent Online
ON SATURDAY 5 September, the Daily Mail's astrologer told Taureans: 'You may cut a dash with your ideas. It's all a question of having confidence.' The Express urged them: 'Do not be too cautious or indecisive. Follow your whims.' The Sun said the weekend would 'have an enormous bearing on your future happiness'.

Norman Lamont is a Taurean, and on the weekend in question he chaired a meeting of European Community finance ministers in Bath at which the president of the Bundesbank told them all they must realign the currencies in the European Monetary System or face disaster.

Perhaps if Mr Lamont had read his horoscopes he would have set aside caution, cut a dash and had confidence. Perhaps he would have said: 'OK, let's do it. Let's devalue. It will be ugly in the short run, but it will spare us a humiliation later.'

But the Chancellor of the Exchequer does not take his advice from astrologers. Instead, he enjoys the services of an army of economists, led by two men highly distinguished in their field.

One is Terence Burns, knight of the realm, former professor of economics, former director of the London Business School centre for economic forecasting, vice-president of the Society of Business Economists, former head of the Government Economic Service and now Permanent Secretary at the Treasury.

The other is Alan Budd, former professor of economics, former economic adviser to Barclays Bank, author of The Politics of Economic Planning, former consultant to the OECD, former economics columnist for the Independent and now chief economic adviser to the Treasury.

If anyone knows about the economy, you might think, it must be these chaps. And yet here we are in late September with the pound through the bottom of the graph and a humiliated government heaving overboard years of fixed thinking on what will put things right in Britain. Last week in the Commons the Chancellor announced, more or less, that he would explain his new economic policy to us when he had thought of one.

Is it time to give the astrologers a go? That might be excessive. And yet . . . It so happens that the baffled public is not alone in its doubts. Even among economists there is growing scepticism about the usefulness of economics as currently practised.

This has been described as the Age of the Economist. Ideas and religions matter less to us now than material things; money makes the world go around, and in the modern faith economists are the high priests.

They are pouring out of the universities at a rate of 4,000 a year and flooding into politics and the City. They are always on television. Their words make headlines and can affect sterling, stocks and house prices alike.

And yet they are not often right these days. We are at present suffering the longest recession since the Thirties, a pretty big event by economic standards, but one that a comfortable majority of the country's main economic forecasting bodies failed to see coming.

Of the 41 forecasters, only 12 accurately predicted in 1990 that the following year would see economic downturn (the Treasury was not among them). Astrologers would probably claim a better score.

The result, for many, has been to discredit the whole business of computer forecasting. The Treasury 'model' - which also failed to predict the 'Lawson boom' of the late Eighties - has become a particular laughing stock. The implications of its failures, however, are serious: if the Treasury can not predict something so big, then those trying to manage the economy are in effect flying blind.

What is the problem with these forecasting models? The product of decades of research and refinement, they are inevitably extremely complex.

The 'model' is in effect a vast series of mathematical formulae intended to replicate the behaviour of the British economy. It employs masses of statistics relating to the past and present - wage levels, import figures, savings rates and so on.

But the economy is made up of people. In making predictions, those who run the models also have to factor in certain assumptions about human behaviour, be it mass activities such as Christmas shopping or foreign holidays, or more limited matters such as political change. ('Assumptions' are important in this business, by the way. The joke is often told of the economist stranded on a desert island with a tin of baked beans. How does he get it open? He assumes a tin opener.)

The critics say that today's forecasting methods fail because neither the statistics nor the assumptions on which they are based are good enough.

'My strong impression,' wrote Wynne Godley, a Cambridge professor, recently, 'is that neither the Treasury nor any of the other main modelling teams has made any progress at all with their forecasting during the last 10 or 20 years . . . huge quantities of money and research expertise have gone into the enterprise over the decades and it is disconcerting if there is nothing to show for it all.'

Model makers, he says, are having to feed so many of their own judgements into the process that the computer results are more subjective than scientific. The search for an accurate model, he concludes, 'is a search for the philosopher's stone'.

Another critic of computer forecasting is Doug McWilliams, the senior economist at the CBI. 'All we are talking about here is a process of projecting past trends on to the future. It only works if history repeats itself, and it doesn't seem to be doing that.'

Prediction is vital to economics; if economists cannot tell us what is likely to be around the corner, then their discipline is no more useful than stamp collecting.

They are quick to point out, however, that in this prophecy business the computer people are just one tendency. But the truth is that the malaise affecting the forecasters is affecting the other tendencies too.

Among the most troubled economists is one of the forecasters, Paul Ormerod of the Henley Centre. In a paper presented to the British Association last month, Mr Ormerod unburdened himself of his doubts.

There was, he said, 'a range of important questions of political economy to which economics does not have an effective answer. For example:

Why has unemployment risen so strongly in many Western economies in the past 20 years?

Why has the unemployment experience of Western countries been so diverse?

What determines economic growth in the long term?

What will be the rate of growth of the British economy over the next year?'

Mr Ormerod places a good deal of the blame for this failure with the theoretical economists, of whom he found a paradigm in a Restoration comedy, The Virtuoso, by Thomas Shadwell. The virtuoso believes himself to be an expert in everything, and declares himself the world's best swimmer. 'But he never actually swims in water. He simply lies on a table and follows to perfection the movements of a frog which is dangled on a string in front of him.'

There is a widespread view that this abstract approach has too tight a grip on university economics. Chris Pond, at the Low Pay Unit, feels that in the academic world 'economics has become a refuge for drop-out mathematicians. All they are interested in is elegant mathematical conclusions.'

This may seem an exaggeration, but 10 years ago it was calculated that more than half the articles appearing in the American Economic Review concerned research that was purely abstract - employing no information drawn from the real economies of the real world.

Doug McWilliams shares the gloom about the universities. 'There are not enough facts, not enough history; they have taken the mathematical stuff too far. The people who come out with degrees take quite a long time to learn how the world really works.'

The economics world has another problem. It is ideologically divided, and not, it seems, in a fruitful or dynamic way, but in an arid polarisation where name- calling has replaced debate. In the past decade, vitriolic exchanges of letters in the press involving the country's leading economists have provided eloquent proof of this. 'There is not really a dialogue at all,' says Chris Pond. 'It's not a matter of 'Ah, but don't you think . . .', but of 'This is the way things are; you are completely off the wall.' '

The split, in crude terms, divides those wedded to the free market in its purest form from those who believe that markets need some kind of regulation. Chris Pond and Paul Ormerod look with dismay at the way in which the emerging countries of Eastern Europe are being force-fed with one side of this argument - the free market one - when the other side might suit them better. Whole populations, they say, are being employed in risky ideological experiments.

Paul Gregg, of the National Institute for Economic and Social Research, believes the ideological split has cast a pall on economics. 'It is not just that there is no room for compromise; the atmosphere is sterile in generating new ideas. There is a danger of a complete lack of innovation.'

In Britain things have moved on, but after the events of recent weeks it would be a brave man who said they had moved forward. The bumpy ride of the Eighties led to the emergence of something approaching a majority view - that EMS membership should be the anchor for the economy.

It makes a sorry picture. The economists who guide the Government have got it wrong; most of the freelance forecasters have got it wrong; many universities are getting it wrong and there is little real debate about how to get it right. Should this discipline really be helping to run the country?

The economists' answer is that economists (even Marx and Friedman) never claimed they could read the future to perfection.

It is not a science, but a social science, with all the uncertainties that involves. This is the weatherman's argument: we make mistakes, but until you find something better, you have no choice but to use us.

It is not often that we see this modest side to the high priests, but then nobody ever got anywhere by stressing the limitations of his craft. In the job market, even economists have to sell themselves and keep the small print for when things go wrong.

And just in case something better does come along (or we simply switch to astrology), the economists have an idea about improving their act.

Paul Ormerod and Doug McWilliams do not agree on much, but they both believe that economics must now borrow skills from another discipline which for many years it despised: sociology. If they are to make assumptions about human behaviour, economists must first learn something about the subject.