Wednesday, 12 September 2018

Theory and fact

There is one key element of the economic arguments put forward by Brexiteers with which I entirely agree, and that is that almost all economic forecasts are, ultimately, wrong.  Predicting the future is extremely difficult, not least because that future depends on an agglomeration of millions of individual decisions taken from individual perspectives by people who can learn from the past and therefore change what they do rather than following what economic theory says they should do.  And that’s without even factoring in completely unforeseeable events.  But the fact that the basic point is correct does not mean that all economic forecasts are valueless or equally wrong.  And it especially doesn’t mean that the one which gives you the answer that you want to hear can or should be given more credence than any others.
As we saw yesterday, it’s easy enough to produce a report showing that Brexit will be brilliant news for the UK.  But what matters in assessing the value of such a report isn’t the conclusions which it draws but the premises and assumptions on which it is based and the methodology applied to those premises and assumptions.  And to say that both the premises and the methodology have been strongly contested would be an understatement.  The proposal for something called a ‘World Trade Deal’ has been described by Jonathan Portes (quoted here) as “quite, quite mad”, who added that “… it's not a "World Trade Deal", it's unilateral abolition of all UK tariffs *and non-tariff barriers* - ie removing UK health, safety, environmental, emission standards on all imports”.  That abolition of standards is something which the Brexiteers have long been keen on.
Some LSE economists have looked in some detail at the underlying assumptions and have debunked many of them pretty effectively.  One of the points that they make is that the model showing how brilliant Brexit will be depends on an assumption that “all firms in an industry everywhere in the world produce the same goods and competition is perfect”, which is far removed from the truth.  It doesn’t matter, though because under this type of model, if the observed facts don’t fit the theory, it is the observed facts which must be disregarded.  And when it comes to the forecast derived from the model that a no deal Brexit would be worth £1.1 trillion to the UK economy over the next 15 years, well, I can’t put it better than Tom Peck in the Guardian, with his “There is not a single figure in the government, the Treasury or the economics analysis department of any major bank or investment firm who considers this to be anything less than deranged”.
And yet…  It doesn’t matter how effectively or comprehensively a report is demolished, the headline will persist in the minds of the true believers, who will trot these figures out time and again to justify what they want to do.  And the underlying truth of the inaccuracy of most economic forecasts remains.  Given an infinite number of economists with an infinite number of models and assumptions, one of them would produce a precisely accurate forecast for the future; but that’s a product of chance, not science.  What’s missing is a general understanding that that does not mean that all forecasts are equally likely to be a correct assessment of the outcome.  Whatever economists may claim, economics isn’t a science with clear and unchangeable laws.  But that doesn’t mean that selecting an outlier which is based on an obviously defective set of assumptions (and which also depends on ignoring any facts which don’t fit the theory) as a basis for decisions is equivalent to depending on a consensus view using more generally agreed and tested assumptions which fit the observed facts.   And the Brexiteers must not be allowed to get away with pretending that it is.

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