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Thursday 17 Aug 2017 | 08:06 | SYDNEY
Thursday 17 Aug 2017 | 08:06 | SYDNEY

Reader riposte: Economic predictions

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2 June 2009 15:39

Caroline Pearce is not entirely happy that I let economists off the hook for failing to predict the financial meltdown:

The point here is not that economists were unable to pinpoint the exact time or flavour of the economic crisis, but that their theories actually predicted that such crises would not happen. Their philosophy was such that, by following their prescription for greater market freedom and less regulation, we would be developing a much more stable system, one that was less risky, not more so and not one that would have to be bailed out using trillions of dollars of taxpayers money.

Of course there were plenty of economists who did foresee at least some of the problems, but these people were sidelined in favour of those who followed the herd and argued for the policies preferred by those in charge who were raking in the cash.

The difference with doctors and swine flu, is that it is well understood in medicine that we can and will have such pandemics — we just don't know the details of when, how and from what cause. That is why many countries (including Australia) have implemented very extensive plans for handling such a situation, whereas no-one planned for the global financial crisis.

I'm not going to defend the entire discipline and profession of economics here, but isn't it a pretty standard part of economic theory that bubbles always happen and that they always burst? Who, exactly, thought we'd solved that problem?

But if economists did succumb to a herd mentality, then I'd like to know what makes economics peculiarly vulnerable to such a phenomenon. Having observed the way the intelligence community worked in the lead-up to the Iraq war, my strong suspicion is that this is a human failing, not one confined to economics. And if the medical profession has avoided this failing in relation to swine flu, that ought only to make us suspect there's something else they've missed.

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