Saturday 19 February 2011

Ex post predictions?

Roger Bowden writes in the print edition of the National Business Review:
The reason economics is called the dismal science is a purported predilection for making ex post predictions, or being wise after the event.

A bank economist should be able to rationalise at the drop of a hat, with a different story from one day to the other. But one test of a good economist is that he or she calls it right in advance, even when the world really wants them to be wrong.

We have had an example recently with the explosion of youth unemployment from 2008 onward, even relative to other OECD countries.

Eric Crampton, of the University of Canterbury, has claimed that this is fallout from the previous Labour government's realignment of the youth minimum wage and ratified by the National-led government. The argument is based on a threshold effect: things don't matter very much when times are good; but when they're bad, it's last in, first out. Moreover, the young who lose their jobs never quite catch up thereafter.
I'm not sure whether I'm here meant to be one who's ex post predicting or who called things in advance. I wasn't blogging in 2008. But I think the students who took my Economics and Current Policy Issues course in 2006, when I spent a week on labour markets and spent time covering the youth rate elimination proposals then on the table, wouldn't find any inconsistencies between what I was saying then and what I've been finding now.

I'd quibble on a couple of points with Roger Bowden. I think it's more than just "last in, first out"; I'd expect firms are also failing to hire young workers when positions are created and are creating fewer positions that could be filled by young workers. I doubt Roger would disagree with that though.

As for why economics is called the dismal's the secret history. Nothing to do with forecasting, or with the Iron Law of Wages (the usual explanation). Anyone who doesn't know how the dismal science got its name ought read David Levy and wear the badge with pride.


  1. Besides which, economics isn't called The Dismal Science because of its predictive accuracy, its called that because the abolitionism of the early economists offended Thomas Carlyle. Personally, I consider it a badge of honour.

  2. OK, that's what I get for not reading the article carefully enough.