Welcome to our A-Z of Faith Series: articles written by Peter Mansfield, an insurance litigator and member of our church leadership team. We hope you find these reflections on faith and religion insightful!
Football pundits have two roles. Before the match, they make predictions. After the match, they explain what happened. There is no link between these two roles.
Macroeconomists are like football pundits.
In April 2007, shortly before the beginning of the 2007-2008 financial crisis, the International Monetary Fund's report on World Economic Output stated: "Notwithstanding the recent bout of financial volatility, the world economy still looks well set for continued robust growth in 2007 and 2008".
The October 2007 report, written just after the beginning of the financial crisis, amusingly said: "Throughout a turbulent summer, the World Economic Outlook team has worked hard to stay ahead of developments." Just to prove how 'ahead of developments' the team was, the report stated: "Still, the situation at present is one with threats rather than actual major negative outcomes on macroeconomic aggregates. At this point, we expect global growth to slow in 2008, but remain at a buoyant pace."
So, it won't be too bad then.
A year later, the October 2008 report was published and all had changed. "The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s."
Ooops.
There was no apology. There was not even a recognition that the IMF had singularly failed to "stay ahead of developments". Just like a football pundit, it had made predictions and now it was explaining what had happened, but there was no link between the two.
Is that unfair on macroeconomists? Well, it seems to be what they themselves say.
Adriene Hill, host of Crashcourse Economics, says: "Macroeconomists make predictions based on data, theoretical models and historical trends, but in the end they're just predictions... If you ask three economists the same question, you're likely to get three different answers."
Paul Samuelson, an American economist speaking after the 2008 financial crisis said: "What we know about the global financial crisis is that we don't know very much."
This is not very encouraging.
But I am getting ahead of myself. Let's return to the beginning.
Macroeconomics is the study of the Big Stuff - unemployment, production, inflation, tax, interest rates, spending, booms and busts and so on. This is the stuff that affects us all. Because macroeconomists advise governments, they have the potential for great good or to ruin our lives. As Andrew Sheng of the China Banking Regulatory Commission says: "A real engineer builds bridges; a financial engineer builds dreams. And, you know, when those dreams turn out to be nightmares, other people pay for it."
So, call me churlish, but it would be slightly more comforting if three economists gave answers that approximated to the same thing. Or, in an ideal world, were correct.
But macroeconomists cannot even agree on which theory to use
In the blue corner, we have the Classical Theory, which dates back to Adam Smith (1723 to 1790). This argues that the markets are self-correcting. Government should keep its nose out.
In the red corner, it's the Keynesian Theory, developed by John Maynard Keynes (1883 to 1946). He argued that markets are not always self-correcting. As such, Governments may sometimes need to intervene through fiscal policies (tax and spending) and monetary policies (controlling the quantity of money). Keynes was the father of macroeconomics, which is why this blog is named after him.
In the very blue corner, voila, we have monetarism, which is closely linked to Milton Friedman (1912 to 2006). Monetarism emphasises the use of monetary policy over fiscal policy.
And then, in the red and white corner, you have the Austrian School of Economics, most recently represented by Friedrich Hayek (1899 to 1992), who believed... oh I don't know... something else.
Throw in a few neoclassical theorists and neo-Keynesians and basically you might just as well have Graeme Souness, Ian Wright and Gary Neville.
Macroeconomics is a faith system masquerading as a science.
Economics Online defines economics as "the scientific study of the ownership, use and exchange of scarce resources - often shortened to the science of scarcity". And it is very good at graphs. I have seen lots of graphs and read lots of jargon. But, as Nassim Nicholas Taleb says: "Economics is not a science". The equations in economics, unlike in science, do not contain universal truths, but principles that can be broken. Steve Keen, author of Debunking Economics, writes: "It would be an insult to the other sciences to give economics even a tentative membership of that field."
More importantly, macroeconomics should not pretend to be a science. The economy is not a machine; it is an organism. It cannot simply be explained on an x and y axis. Macroeconomics is a belief system - or a series of belief systems - and its insights (of which there are many) should be valued as insights, not as laws.
To be fair, Keynes understood this, perhaps more than most economists. So, perhaps we should end with a quotation from Keynes himself: "The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems - the problems of life and of human relations, of creation and behaviour and religion."
Written by Pete Mansfield
