Scott Sumner  

Thank God economists cannot predict recessions

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Civil engineers are rarely able to predict the collapse of US highway bridges, at least to within a period of 12 months. How should we feel about that fact? Maybe I'm biased, as my grandfather was a highway engineer in Michigan, but I feel much better knowing that civil engineers are unable to accurately predict highway bridge collapses.

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One reason they are so unsuccessful is that they are responsible for both predicting and preventing bridge collapses. So while their conditional forecasts of bridge collapses may be excellent, their unconditional forecasts are lousy. Thus civil engineers may be able to say, "If you don't fix the crumbling 3rd avenue bridge overpass, it's likely to collapse within 12 months". But then other civil engineers in the state highway department go out and prop up the bridge. So it doesn't end up collapsing. Conditional and unconditional forecasting ability---they are very different concepts.

Economists have lots of good models of the economy, and would probably be able to make pretty good conditional forecasts of recessions. "If you let the price of NGDP futures contracts fall by 8%, a recession is likely."

But economists don't just predict, they control monetary policy. As soon as a recession is predicted, the Fed tries to prevent it. They raise NGDP growth expectations. Thus while conditional forecasts of recessions might well be excellent, unconditional forecasts of recessions are lousy. And that makes me feel much better about the economics profession, just as the inability of civil engineers to predict bridge collapses makes me feel much better about civil engineering.

Engineers and economists, creators of the modern world. Without either you are in the Stone Age. Add engineers and you get up to North Korea, with its 300 meter high skyscrapers and its atomic bombs (and starving people.) Add engineers and economists and you get to South Korea.

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COMMENTS (18 to date)
Philo writes:

North Korea doesn't have economists?

Unlearning writes:

A rather impressive non-sequitur at the end, considering (a) engineers and lawyers largely designed S. Korea's economic policies and (b) plenty of other countries industrialised without economists at the levers. In fact, as far as I can tell it was almost all of them.

Anyway, the problem with the recession was that the models used by central banks didn't even allow for the possibility of such an event emerging (external shocks don't count). Engineers' models can obviously account for bridges collapsing.

Ben H. writes:

Wait, did you really just claim that the key difference between the fates of North and South Korea is that South Korea has economists?

mobile writes:

As an example of a regime that was top heavy with economists but lacking in engineers, might I suggest the Khmer Rouge?

PeterP writes:

which economist predicted a recession based on fall of NGDP futures?

bill writes:

Reading Courage to Act. In the period after Bear Stearns and before Lehman, Bernanke speaks about thinking a recession would be likely and how he didn't want the Fed Funds Rate to fall below 2%. Kind of like an engineer noticing that the bridge was overstressed, but only wanting to use 2 by 4's to try to fix it.

HL writes:

Hi, unlearning, what I can tell you as a proud son of former South Korean democratic dissident is that lawyers were effectively irrelevant in the early stage of Korea's rapid development. As a matter of fact, it was a classic case of conditional convergence where "authoritarian" policymaking that gets the job done quickly was actually helpful, even though I would have liked otherwise. The country spent an entire decade (1970s) under "permanent" presidency (General Park made himself the ruler of the entire country forever). But even in these periods there was basic respect for private property and sensible development policy (family planning, urban infrastructure, education). The core agenda of so-called "Sogang University" gang that dominated policymaking isn't too different from orthodox Chicago macroeconomists. Sound money. Importance of supply side expansion. etc.

Scott Sumner writes:

Philo, It probably does, but obviously doesn't use them.

Bill, I noticed that too.

Thanks HL.

Everyone, By "economists" I was referring to people who understood economic concepts and were in positions of power to implement those ideas. I didn't necessarily mean to imply that had to have some sort of formal economics degree. Check out HL's post.

Ditto for engineers. I have no idea whether James Watt had a degree in mechanical engineering. I think some read the post too literally.

Charlie writes:

For some reason, I'm reminded of this short speech by Robert Lucas.

http://homepage.ntu.edu.tw/~mjlin/lucas.pdf

Do you know this one?

Cheers,
Charlie

Unlearning writes:

HL/Scott,

It's not quite the same to claim that respect for capitalist institutions was present and successful, vs that ideas from economics were present and succesful. That is a political claim about the efficacy these institutions, rather than an intellectual claim about the usefulness of economics as a field.

My understanding of S. Korean policy, based largely on Ha-Joon Chang's work (http://hajoonchang.net/wp-content/uploads/2012/01/ABCDE2009-Changpaper.pdf) and other similar authors, is that it was characterised by a great degree of pragmatism. So there was private property but also industrial policy. The state helped directly in some areas but not in others.

Anyway, I'm not here to debate the details of S. Korea's industrialisation policies. I just think the point at the end of this post was lazy and basically unrelated to what came before.

A writes:

I've got to agree with HL. Many older koreans would be surprised to hear someone argue that economists were unimportant to korean development. Won-Chul O is generally regarded as one of the more influential figures in post war society. And, for a long period, economics and business administration were the most competitive undergraduate spots.

Jukebox writes:

Reminds me of a great quote from an engineering professor:

"the art of engineering consists of taking materials we don't fully understand, forming those materials into shapes we can't fully analyze, and subjecting them to forces we can't completely predict, and doing so with enough confidence that the public never knows the depth of our ignorance."

Probably applicable to economics, at least somewhat.

Floccina writes:
Engineers and economists, creators of the modern world. Without either you are in the Stone Age. Add engineers and you get up to North Korea, with its 300 meter high skyscrapers and its atomic bombs (and starving people.) Add engineers and economists and you get to South Korea.


What great sentences.

Scott Sumner writes:

Charlie, Thanks, I didn't know about that one, but it's great. I recommend everyone read it.

Unlearningecon, Take a look at A's comment. I certainly know less about Korea than either HL or A, but I was also defining "economist" more broadly than you might be.

That's not to say you are wrong, but I am pretty sure that sound economic thinking played a significant role in Korea's public policy formation, even if not always done by those with a formal economics degree.

I'm not sure the point of your comment about "industrial policy." It just so happens that industrial policy was a popular idea WITHIN the economics profession during the 1950s and 1960s. So that certainly cannot be used as evidence that economists were not influential.

If differing economic policies do not explain the difference between North and South Korea, I would like to know what does.

As an analogy, if someone successfully performs brain surgery, using techniques right out of the textbook, I count that as a success for doctors, even if the person lacks a medical degree. They are certainly a "doctor" in a behavioral sense, even if not a legal sense.

Jukebox, Nice quote.

Thanks Floccina.

Unlearning writes:

I would like more information from HL and A about the role of economists in S. Korea, but I am confident that its economic policies were pragmatic and were steered by more of a drive towards national self-sufficiency than adherence to a particular economic doctrine. I've encountered a fair number of economics textbooks and none of them have recommended policies along the lines of those followed by S. Korea.

My broader point is that you don't need economists to have an economy. Without engineers, we wouldn't have bridges; without doctors, we wouldn't have brain surgery. But many nations have industrialised without using economics, simply by designing policy in response to their own national needs. You can call it 'sound economic thinking', sure, but I really doubt that without economists we'd be in anything like North Korea, or the stone age.

HL writes:

Hi Unlearning

These (what made Asian tigers unique? Was Korea's industrial policy special?) are debates that will likely take 100 hours, so I will simply recommend some quick non-wikipedia searches on Duck-Woo Nam (Econ PhD from Oklahoma State), Manje Kim (Econ PhD from U. Missouri - Kansas), and Jae-ik Kim (Econ PhD from Stanford).

Let's not talk about Chang's work. I like him (actually I know him and his brilliant scholar brothers in person, and I could have ended up working for one of them). And I know his work inside and out. Every developing nation dreams of building world-beating industry and creating robust, employment-generating industrial agglomerations. What allowed only few of these states to succeed in that endeavor? Was that because Korea had a better game-plan and more tightly knit policymaking cabal? The combination that somehow took place in Singapore, Taiwan, Hong Kong, and Chile at the same time? How come Indonesias, Turkeys, South Africas, and Brazils of the world can't do the same? Is it all because of politics? But the tigers had authoritarian leaders just like the others...

Anyway, my writing always sounds shrill due to my horrible writing skills. I was reacting in usual Korean fashion to any intellectual item on the country. We Koreans (a bit of generalization here) love being discussed by foreigners! Yeah it was a bit of non-sequitor, but come on. He writes an insane amount on a daily basis. Let's cut Scott some slack here. =)

Mark writes:

One might rephrase it to say that a country's success is largely conditional on the extent to which its policymakers (down to the bottom wrung, mayors and city councilmen) understand economics. It might be said then that among world leaders,Kim Jong Un is the worst economist of all of them.

And having all the great economists you could want is useless if policymakers lack economic wisdom. East Germany had a great many economists. In fact, several influential East German economists (like Fritz Behrens and Gunther Kohlmey) essentially tried to (somewhat unwittingly) Trojan Horse free market ideas into their policy recommendations under the auspices of 'cybernetic theory.' Ultimately they were sanctioned by the state and had to shut up or risk persecution because the regime would tolerate nothing that flew in the face of orthodox Marxism.

Though one could argue that the Ulbricht's New Economic System, with it's modest pro-market reforms, was in part brought about by the complaints of 'revisionist' economists about the old system. The New System of course was aborted when the Soviet Union declared it to be too heterodox, so in the end, economists are only as effective as the policymakers are willing to listen.

Scott Sumner writes:

Unlearningecon, You said:

"more of a drive towards national self-sufficiency than adherence to a particular economic doctrine."

I never claimed South Korea adhered to any single doctrine. Where did you draw that implication?

And as far as self-sufficiency, nothing could be further from the truth. They pursued a trade-oriented strategy, it was North Korea that explicitly followed a self-sufficiency doctrine.

When South Korea first started booming there were two major models being discussed, import substitution and export oriented. The later model was more consistent with mainstream economic theory throughout the past 200 years, and it's the one South Korea chose. Argentina chose import substitution.

As far as having economists, I thought the reader would understand that if they are in jail, as in North Korea, it does no good. You need to use their ideas. I think you read it too literally.

HL ands Mark, Good points.

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