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Economists Are the New Astrologers

August 29, 2017

Economists Are the New Astrologersastrology.PNG

When Christopher Nolan was promoting his previous film Interstellar, he made the casual observation that “Take a field like economics for example. [Unlike physics] you have real material things and it can’t predict anything. It’s always wrong.” There is a lot more truth in that statement than most academic economists would like to admit.

Alan Jay Levinovitz recently put forth the provocative argument that economics is “The New Astrology.” He notes that “surveys indicate that economists see their discipline as ‘the most scientific of the social sciences.’” But unfortunately “real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy.”

Indeed, Levinovitz goes on to observe that,

The failure of the field to predict the 2008 crisis has also been well-documented. In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics … has succeeded: its central problem of depression prevention has been solved’. Short-term predictions fair little better — in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.

There are, of course, many other examples of the failure of mathematical models in economics. The model Christina Romer put together during the height of the Great Recession concluded that unemployment could go as high as 8.8 percent without the economic stimulus bill. With the stimulus, unemployment went over 10 percent. The spectacular failure of Long Term Capital Management, which was built solely upon investing on mathematical models, is another great example.

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