Prospects Not Forecasts

A dismal note has pervaded much of this book and this is, sadly enough, a fair reflection of my current assessment of the outlook for the world economy. But this is not because I am confidently expecting disaster. The course of the economy cannot be sensibly forecast and the fact that attempts to do so occupy such a large proportion of the money spent by governments and central banks on economic analysis is simply an example of waste. It would be desirable for more resources to be devoted to risk assessment and less to forecasts of future output. The physicist David Deutsch claims that poor philosophy is today at the root of much bad science1 and this is, I think, particularly true of economics. The attention given to economic forecasting is an example of this. Deutsch writes that “some philosophers – and even some scientists – disparage the role of explanation in science. To them the basic purpose of scientific theory is not to explain anything, but to predict [the] outcomes”.2 It is common to read claims that economics is not a science because it is unable to make correct predictions. This claim can be shown to be wrong in many ways, one of which I have illustrated with the relationship between growth and real exchange rates. But it is in any event nonsense to assume that reliable predictions are the test of whether an activity falls within or outside the boundaries of science. Economics can be conducted scientifically or unscientifically, but predictability ...

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