Why do we trust economists when they are so error-prone?

Which economists should be trusted when it comes to predicting the ramifications of a yes vote in the Scottish independence referendum, asks Sholto Byrnes.

Scottish First Minister Alex Salmond is citing economics when urging a yes vote in the succession referendum this month. Photo: Jeff J Mitchell / Getty Images

In the debates that have been leading up to Scotland's independence referendum this month, the leaders of the pro and anti sides have repeatedly clashed. Alex Salmond, the Scottish first minister, and Alistair Darling, a former Labour cabinet minister, have both accused each other of getting their sums wrong over the revenue from North Sea oil, the consequences of continuing to share a single currency if Scotland leaves the United Kingdom, and whether or not pensions would suffer from separation.

The two are both economists. Mr Salmond held exactly that job title when he worked for the Royal Bank of Scotland before entering politics, while Mr Darling may not have formally have trained as one, but it would seem a little churlish not to bestow that description on a man who served as an opposition Treasury spokesman and then in government as chief secretary to the Treasury and ultimately chancellor of the exchequer.

When an economist says something, we are all supposed to sit up and listen. If “a leading economist” warns a reporter that an administration’s policies are likely to tip the country into recession, it will almost certainly make headline news.

We freight their statements with an almost unparalleled authority, yet there is a contradiction about our doing so. How is it, if they are such fonts of wisdom, that they can disagree with each other so vehemently?

It may be said that scientists’ views differ, but that is generally in matters that are far from us in time, space or human comprehension. There is overwhelming consensus on most areas, such as the percentage of DNA we share with great apes, and complete unanimity on others, like the fact that the Earth revolves around the sun. Economists can’t agree on the most immediate of actions, from the lowering of an interest rate to the revenue likely to be raised by a tax hike. This is quite apart from the fact that the vast majority of these sages failed to predict the most cataclysmic economic event of our time, the financial crisis of 2007 and 2008. (A fact not lost on the UK’s Queen Elizabeth II, who asked on a visit to the London School of Economics that, given the meltdown was so large, “why did nobody notice it?”)

Still, faith in expert economists persists, which translates in global terms into the IMF assuming, and everyone else pretty much having to accept, that whatever it wants to do is right. And all too often that has resulted in one-size-fits-all solutions that are inappropriate for countries having to bend to its will and which benefit transnational capital at the expense of local economies.

The Nobel Prize-winning economist Paul Krugman has just condemned the French president Francois Hollande’s recent move towards even more of the austerity measures the IMF is usually keen on (although to be fair, in the case of France, the Fund warned last year that Paris was heading for overkill). Why did Mr Hollande, a socialist elected on the promise that he would end the cruel belt-tightening, alter course so drastically? As Krugman wrote in the New York Times: “France has a big government and a generous welfare state, which free-market ideology says should lead to economic disaster. So disaster is what gets reported, even if it’s not what the numbers say. And Mr Hollande ... appears to believe this ideologically motivated badmouthing. Worse, he has fallen into a vicious circle in which austerity policies cause growth to stall, and this stalled growth is taken as evidence that France needs even more austerity.”

The IMF itself admitted in a confidential report during the East Asian financial crisis of 1997 that an important part of its strategy to shore up Indonesia’s economy had the opposite effect. The fund’s insistence on the closure of 16 insolvent banks, “far from improving public confidence in the banking system, instead set off a renewed ‘flight to safety”.

As the subsequent acceleration in panic and currency collapse were a key reason why then President Suharto’s three decades in power came to an end, the IMF may deserve unintentionally earned credit for helping boot out a dictator – but at incalculable cost to the Indonesian people.

As the Foreign Policy contributor Rick Rowden noted in a recent essay, many developing countries are increasingly resisting demands from the IMF, the World Trade Organisation and the European Union for liberalisation and the opening up of their markets to unfettered outside access, believing that such economic models benefit wealthy nations but may hinder their own ability to build domestic industrial bases.

The obvious truth – one that economic partisans would reject – is that there is no such thing as an impartial economist. Despite their claims to scientific certainty, they all have particular ends in mind and only such foresight as is possible in what is, after all, one aspect of the study of human behaviour – with all the irrationality and stubborn refusal to adhere to the field’s “rules” and graphs that entails.

If most of the world’s weather forecasters had collectively missed the meteorological equivalent of the global financial crisis, they would all have been sacked. The economists got away with it, but perhaps in our hearts we know they are no more to be trusted than politicians. And that is why, I would guess, the Scottish referendum will not be decided by the economic arguments of the two clever men heading the opposing sides.

Passion, gut feeling and the appeal to nationhood will always have greater traction than the frequently inaccurate predictions of the practitioners of what Thomas Carlyle aptly called “the dismal science”.

Sholto Byrnes is a Doha-based commentator and consultant