Australia, banking, budget, budget emergency, business, carbon pricing, deficit, Direct Action, easy credit, Ebola, economics, economists, economy, emissions, environment, extreme weather, forecasts, future, GFC, global financial crisis, Hong Kong, inequality, insurance, ISIL, models, rational man, regulators, revenue, temperatures, theories, turning points, Ukraine
(originally published to Bubblews writing site, now gone)
An article appeared earlier today (2 Oct 2014) in The Conversation and in Business Spectator here in Australia, “Building a new economics for the #Occupy generation” that talked about blaming economists for not predicting and preventing the global financial crisis in 2008 and how economics needs to reinvent itself, etc, etc. In response, I posted the following to Business Spectator …
The causes of the GFC are complex and can hardly be blamed on economists. Quite a few did predict it, but were often criticised by the banking, insurance and business sectors who were making a heap of money with easy credit and relaxed rules and who carried more weight with the regulators than any economists did. But predicting the future can be little more than guesswork. You can base forecasts on the best available data at the time and they can turn out to be wrong.
The article talks about economic or rational man. But people, businesses and governments don’t always behave rationally and perhaps increasingly so in an ever-more complex world. This throws out any forecasts for the future and makes predicting turning points in the economy very hard. A good example is the federal government with its talk of a “budget emergency” and then they go on a spending spree pushing the deficit up from $19 billion in 2012-13 to $48 billion in 2013-14 and it will probably get larger with various extravagant pet programs yet to kick in, little being done on the revenue side, and some overly-optimistic forecasts that look to be politically influenced.
Economics can keep adding new theories and models but it will probably never be able to keep up with irrational behaviour by people, business and government. The last few lines of the article mention the “financial crisis, growing inequality, and looming environmental catastrophe” but these sorts of things have been included in economics for ages. I studied environmental economics in the 1970s before the right even realised there was an environment. There was a survey of 35 economists in November 2013 with 30 opting for carbon pricing, two for direct action and three for something else. But the federal government abolished carbon pricing. This will now cost the budget $18 billion over four years and who knows how many billions as emissions and temperatures keep going up, causing untold damage, including to our coastal cities with an increase in extreme weather and rising sea levels.
Economists can produce all sort of theories and models and suggest things, but it’s hard if governments, business and people behave irrationally, and then who knows what will happen. Added to this are other issues that spring up and we often have no idea of the impact on the wider economy until it happens, e.g. Ukraine, ISIL, Ebola and now Hong Kong. How these things will play out and what effect they will have on the world and Australian economies over the next 12 months is anyone’s guess.