Yesterday two people (who are knowledgeable and important to me) implicitly “questioned” me the role of economists in the world. One of them, upon hearing that I’m taking a course on financial credit in the macroeconomy with Nobuhiro Kiyotaki, challenged me why economists could not predict the Great Recession; the other one simply told me “with the current situation, economists aren’t doing so well right now”. Well, there are certain truth in what was said, though there is also misunderstanding in what, in my opinion, economists actually do.
First, the myth about “prediction”. Much of the public believes that professional economists should be able to foresee the looming crises (financial crises, banking crises, currency crises, etc.), though, first of all, it must be said that predicting the future was never the specialty of economists. The complexity and the fast-pace innovations in the world leave economists with too little time to make any precise prediction. Before any careful models of the world could be formulated, new factors have already changed drastically the structure of the world. Not that they did not know the potential troubles that financial inventions like MBS, CDS or CDO could bring about; it’s just that no one could make a clear statement on WHEN the negative effects would actually arrive, and HOW BIG those effects are.
That leads to a further question “So what can economists actually do? Why bother studying economics at all?” It’s completely understandable why someone could ask this kind of questions, though asking them implicitly implies denying all the things that economists did in the past. While a not-too-small fraction of economists try to write articles about the future (and cross their fingers, hoping that if they are consistent with their ideas long enough, the future would EVENTUALLY arrive), I think a far more important and well-done job that economists did was to study the history and design suitable mechanisms to make sure that the bad history does not repeat. (Mechanism design here is the key purpose!). For instance, little did those who blame economists take into account the Quiet Period with little amount of financial crises, the mobile auctions that earn unbelievable revenue for many governments in Europe and the US, and other achievements that none other than economists engineered.
Like any other science, there is a limit to what economists can do, and of course, at times like this people are leaning towards blaming and accusing faults rather than making constructive statements. Realizing what economists are supposed to do (instead of fortune telling), however, may help adjust expectation to the correct direction.