Macroeconomics 'Experts' Apply Astrology, Not Science
In the early 1980’s, the Wall Street Journal asked liberal economist John Kenneth Galbraith and conservative economist Milton Friedman to predict the macroeconomic trends over the next two years. Both agreed that inflation would rise above 10%, and both accused the other of obtaining his prediction by reading chicken entrails. Both were wrong about inflation, but both were right about the chicken entrails.
Galbraith and Friedman were two of the leading late twentieth century experts in macroeconomics --- the study of the national or global economy. They applied different macroeconomic theories to make their predictions. Both predictions were completely wrong, which indicates that the theories from which the predictions were made were also wrong. Today, the United State government is about to embark on a vast macroeconomic experiment to prevent the global economy from collapsing into depression. How can we tell if the course of action recommended by a given economist today is any better than reading entrails? Basing an action on a macroeconomic theory that is wrong is acting at random: the action may make matters worse, much worse that doing nothing. If you don’t know how a machine works, don’t mess with it.
The most authoritative macroeconomic theories are those advanced by Nobel Prize Winners in Economic Science, to use the official title of the prize. The Economics Nobel Prize is awarded at the same time as the Nobel Prize in Physics, Chemistry, and Medicine, the three hard sciences. The implication is that macroeconomics has the same predictive power as the theories of physics, chemistry, and molecular biology. Indeed, we should judge the validity of macroeconomic theories in the same way we judge the theories of the hard sciences. If anything, we should demand even more rigor and reliability from macroeconomics, because it is far more important than any hard science. The failure of macroeconomic actions in the Great Depression led to World War II, in which many millions were killed, to say nothing of the vast misery caused by the Depression itself.
Years ago, I had a dispute on the comparative rigor of astronomy and macroeconomics with Harvard economist H. Gregory Mankiw, who from 2003 to 2005 was Chair of President Bush’s Council of Economic Advisors. Mankiw admitted that the predictive power of modern macroeconomic theory was abysmal. But he argued that astronomy was no better in the late sixteenth century, when astronomers were debating whether it was Ptolemy or Copernicus who was correct.
Mankiw claimed that the decision for Copernicus over Ptolemy, for heliocentric astronomy over geocentric astronomy, was based on the personal biases of the astronomers rather than on the superior predictive power of the Copernican model of the Solar System. According to Mankiw, in the beginning, the bias of Ptolemy’s conservative supporters was naturally dominant, but later, the younger, progressive Copernicans were able to take over the astronomy departments. Mankiw concluded that we should therefore not be too hard on macroeconomists, who are at least no worse than Renaissance astronomers when they base their predictions on personal (political) biases rather than objective observation obtained from experimentally verified theory.
I have studied the actual comparative predictive power of Ptolemaic and Copernican planetary theory between 1543, when Copernicus published his great book, and 1609, when Kepler published his first two laws of planetary motion. In actual fact, Copernicus was on the average twice as accurate in predicting the positions of the planets as Ptolemy. But Copernicus was not always superior to Ptolemy: the older theory gave more accurate predictions of the positions of the inner planets Mercury and Venus.
I have gone over the writings of the sixteenth century astronomers, and they were completely aware of this relative predictive power. These astronomers were not yielding to their biases either for or against Copernicus. They were paying careful attention to the observations, which did not give a clear victory to either theory. They concluded that more and better observations were needed. The Danish astronomer Tycho carried out these observations, and his German assistant Kepler used Tycho’s better data to create a theory whose predictive power was a factor of a hundred better than either Ptolemy or Copernicus. This settled the debate, and Kepler’s work led to Newton’s mechanics upon which all modern physics and chemisty, indeed modern technological civilization, are based.
The moral of the story is simple. Macroeconomists should realize that the inability of their theories to make accurate predictions means that they do not know what they are talking about. We non-economists should realize this also, and realize that our leaders, who are being advised by macroeconomists, haven’t got a clue where they are leading us. Their actions may lead us out of the current recession, or they may lead us into a depression as bad as the Great Depression.
Franklin Roosevelt is often given credit for experimenting with the economy in a scientific manner. He did nothing of the sort. Any experiment involving human beings has to be a controlled experiment, as in medicine. Half the patients are given the new medicines and the other half, the controls, either the old medicine, or a placebo. Then, and only then, can one tell if the medicine actually improves the condition over doing nothing (the placebo), or is making matters worse. In contrast, Roosevelt — and today’s economic advisors to the President, unfortunately — propose to apply their economic medicine to the entire economy. This is astrology, not science. The professors of economics have no true, experimentally confirmed knowledge of macroeconomics.
The widely touted macroeconomic “experts” are no experts at all.