One group of those involved in the present financial crisis has so far escaped notice--the economists. They are masters in the science of prediction, but as a group, if not to a man, they failed to predict a crisis that has wiped out nearly half the wealth invested in the stock market and elsewhere (measured of course from the peak). The economists did no better than their unscientific rivals, the stock pickers, who are in the business of prediction.
Perhaps we need a second look not merely at the existing models by which economists predict but at the very idea of prediction as the goal of social science. Economists had been in the habit of asserting that they had come a long way since the Depression, that such an event could not happen again. Yet people are now actually speaking of another Depression as possible. Maybe we know how to avoid the Depression we had, but what about a new one with a new character we do not recognize? Isn't our present crisis new? Isn't every crisis new--since surprise is the essence of crisis? If prediction were reliable, we would be prepared for every chance, and our lives would be crisis-free and much duller.
We can approach the idea of prediction by asking the economists a question they do not usually have to answer, which is this: In the present crisis is it better for citizens to spend or save? Or more generally, how do you economists recommend that we live?
To spend seems the civic thing to do--that's what the various proposals of stimulus are for--but to save seems more prudent, since most people will likely be receiving less income in the near future, perhaps considerably less. Which is better?
Already, readers who are economists will have given their reflex response, which is to say that our goal is to predict, not advise. But we mustn't let them dodge the question in this seemingly modest way. It's not really modesty to proclaim a goal, fail spectacularly to achieve it, and then disclaim the consequences. What they did in advance of this crisis was to make available mathematical models that promised to predict the risks of certain investments but actually obscured those risks. Did not this bad prediction constitute a recommendation of such investments? Isn't this what is called "enabling"?
Let us set aside blame, and see how the economists, despite what they often say, do actually advise us, not merely on particular investments but also more generally on how to live. We know that economists are not politically neutral; they are all either liberal or conservative or in-between. Either their analysis is politically driven from the beginning or it just comes out as political in one direction or another. It doesn't matter which, because a certain analysis harmonizes with a certain politics. The same is true of morality; economists are not morally, any more than politically, neutral. The moral tendency of economics has to do with prediction itself, and it is common to liberal and conservative economists.
The economists I know are generally, as individuals, sober and cautious, the most respectable of all professors and in their honesty and reliability representing the best in bourgeois virtue. But when they get together as economists, they give way to boyish irrational exuberance over the accomplishments and prospects of economics as a science.
What has happened in the last few months should give them pause. It should make them consider the necessity of looking at economics from the outside, at how it looks and behaves as a whole. There's no way to do this from within economics--no way to formulate an equation that will correctly predict the failure of equations to predict. The idea of prediction itself has to come into question. Prediction is designed to reduce the role of chance in our lives, eliminating unpleasant surprise and replacing it with gratitude and satisfaction. But somehow it doesn't have this effect.
The very measures we take to anticipate the future make us more dependent on others and less dependent on ourselves, because those measures consist in spreading the risks to which we are subject. Spreading the risk seems to reduce it by sharing it with others, but the sharing enlarges the network of an individual's involvement to encompass other agents, other factors beyond his ken. Without realizing it he joins a market, in which he may feel riskless but also feels weightless, no longer having influence of his own. His livelihood, his wealth, his life come to depend on the state of the "economy," even the global economy.
The economy is not under an individual's control. If it were, or to the extent that it is, he would face the risk of controlling it well; this is the risk governments take when they try to take control of the economy on our behalf. Yet the economy does not control itself in steady or stable fashion. It does not control itself at all without episodes of great volatility such as we are now going through. Economics (like all science perhaps) aims at the reduction and control of risk. But who now has the sense that risk has been diminished and control over our lives vindicated by the science of economics?
One can see, on the contrary, that economics tends to aggravate our sense of feeling subject to chance. Return to the question of whether in present circumstances it is better to spend or save. Perhaps the correct economic answer would be, that depends on what is in your interest. It is sometimes in your interest to spend, sometimes to save, and you should calculate which it is just now. You should be flexible because the calculation may change and you must be ready to start saving and stop spending and the reverse.
The trouble, however, is that people look at others to see how they are calculating, and indeed they must do so in order to calculate correctly. What is in your interest becomes confused with what other people think is in their interest, and your calculation becomes shared, no longer yours. When choosing a stock, as Keynes said, you have to think not of who is the most beautiful girl at the ball but who will be considered the most beautiful by most people. Thus does your economic interest come to be determined by collective passions, by greed and fear. Hence follow crises of over- and underestimation, of bad calculation based on bad prediction.
Economics wants to be able to intervene to prevent such crises. Its notion of your economic self-interest would advise dampening both your fear and your greed, which is nothing other than buying low, when others are afraid, and selling high, when they are greedy. Fear and greed are not in your interest, and yet the recurrence of crises shows that consulting your interest will not stop them. The market is too fragile and too complicated to be controlled, and your interest is too subjective and too obscure to be known. The pursuit of self-interest with the general purpose of making yourself less subject to chance leads to your falling under the sway of fear and greed, thus more subject to chance. Government cannot prevent this result any more than can an individual; it is the common condition of civilized life in our times.
Thus the predictions of economists tend to give the impression that the economy can be predicted. Economists are intelligent people, well-connected and well-educated, gainfully employed in prestigious institutions. Although they rarely reach the top offices, they are often the top advisers to the top officers. So they seem to know what they are doing. They impart confidence in their predictions, which are often or mostly in the ballpark. Except when they are not, as at present. In a crisis the confidence they impart most of the time is exposed as overconfidence, a delusion that sets us up for surprise and disillusionment. We are not so surprised by the delusions of crowds and mobs--who does not know they are unreliable?--but that their delusions should be supported and promoted by scientists of the rank and caliber of economists might easily shake our confidence in the reliability of our elites and even of our scientific civilization.
Overconfidence in overcoming chance is the way of life recommended by economists. It is the way of life known as progress by liberals and as growth by conservatives, who are secretly united by overconfidence in their knowledge of the future which they describe diversely and call by different names. This recommended overconfidence transforms the predictions of economists into overall advice--not advice with a condition, such as if you want to get rich, do this, but advice on how to live while getting and being rich. Of course economics has been known as the dismal science because it confronts human necessities with the fact of scarcity, and in theories of overpopulation like that of Malthus, it may find that we will not get as much as we need. But it could also be called, whether dismal or promising, the triumphal or hubristic science for what it claims to be able to predict.
Now, the main consequence of living the over-confident life is to believe that virtue is not necessary. Perhaps this is the main cause as well as consequence of that life. Virtue is a chancy quality because you may not have it or live up to it. It seems less reliable than self-interest with its allies, fear and greed. Everybody has self-interest, which is not true of virtue. But at least virtue does not depend on predicting the future. On the contrary, virtue is a resource for everyone when bad times come--something to fall back on, to give cheer, to restore. On top of that, virtue will save you from being corrupted by good fortune as well. This is the great truth taught by the Stoics.
Virtue is a habit, not a calculation. It reflects the fact that human beings live in an overall way of life, in diverse ways of life; it is not possible for us, or most of us, to live perfectly flexibly, always ready to calculate anew in fresh circumstances what it is in our interest to do. Thus the ideal of calculated self-interest posited by economics is not a human possibility. We will get in the habit of being spenders or savers and will not be able to turn on a dime, changing our behavior when our interest changes. Indeed our selves are not independent of our ways of life, and it is not possible to calculate your self-interest without knowing your way of life.
Economics needs to stop trying to duck responsibility for what it recommends. It needs to examine the whole of life and to focus on the virtue or virtues of different ways of life. It should give over talk about "preferences," as if human desires were given facts unaffected by the science of economics. It should abandon the crude positivism that claims that one can study facts without giving advice, or that one can confidently predict without causing people to believe in one's predictions. It needs to replace its false modesty with true moderation.
Harvey C. Mansfield is a visiting scholar at AEI.