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What Does It Mean to Have Predicted an Economic Event?

February 24, 2019

What Does It Mean to Have Predicted an Economic Event?

Consider the never-ending argument about whether certain economists did or did not predict the financial crisis in 2007-8. It raises all kinds of methodological questions in economics reaching back much further than Milton Friedman’s famous 1966 paper conceiving of economics as a predictive science.  

Here’s the fundamental conundrum: what does it mean to have predicted something in economics?

Intuitively, it ought to be something like: if you claim something about the future state of the world and that empirically turns out to be correct, you predicted it. 

There are a myriad of problems here:

  • If I rolled a six a moment before the power went out, did my die predict the power outage?
  • If I rolled a six two years before the power went out, did my die predict the power outage?
  • If I rolled a six and the power somewhere, at some time, went out, did my die predict that power outage?
  • If the power went out repeatedly the last few nights and I guessed it would go out that night again while rolling a six, did I predict that night’s power outage?

It is easy enough to spot many errors in these scenarios: there is no plausible relation between power outages and rolling of dice; including any outcome anywhere in my silly prediction is not evidence of success; making a correct extrapolation of the recent past and tying it to rolling a six does not vindicate the power of my rolling arm.

There are a number of criteria a successful prediction must meet:

  • It must be precise, not general. Predicting rain in London or earthquakes in California in general (or over some lengthy time period) is useless. By historical averages and common sense, we are fairly confident they will happen again.

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