Buiter on the Failure of Economics

For those who enjoyed Paul Krugman’s attack on modern economics last Sunday, Willem Buiter goes him one better in yesterday’s FT:

The essence of his argument is that once you take away all the mathematical mumbo jumbo, there’s really very little solid empirical data upon which to base a forecast.

Of course, all economists know there are problems with the data they use on a daily basis–just look at how often they are revised. As a friend once put it after one of BEA’s periodic revisions of the GDP, “Not only can’t economists forecast the future, they can’t even forecast the past.”

The classic book on this topic for those interested in the gory details is Oskar Morgenstern’s On the Accuracy of Economic Observations. There’s a gem on practically every page. For example, on page 21, I read this:

“When the Marshall Plan was being introduced, one of the chief European figures in its administration (who shall remain nameless) told me: ‘We shall produce any statistic that we think will help us to get as much money out of the United States as we possibly can. Statistics which we do not have, but which we need to justify our demands, we shall simply fabricate.'”

I have no doubt that a vast amount of data from Africa falls into the same category. Even countries that do not need aid, like China, produce data that is deeply suspect. But economists still use it because they assume that any data is better than no data.

Recently I came across a blog entry by someone I know that made use of a 50-year old GDP data series to make his point. As far as I could see, his only reason for doing so is that the old data proved his point while the newer data didn’t.

The point is simply that mathematical elegance and precision does not necessarily translate into accuracy or understanding of economic phenomena. Remember the advice given to a young economist working in India many years ago:

“The government are very keen on amassing statistics–they collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But what you must never forget is that every one of those figures comes in the first instance from the chowty dar [village watchman] who just puts down what he damn pleases.”

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