Wednesday 20 November 2019

Maeve Dineen: Creative thinking is the magic we need to plot recovery

Maeve Dineen

Last week, Pope Benedict XVI urged people not to believe in predictions by economists or magicians. "He's being a little harsh on magicians," one of my colleagues joked, referring to the fact magicians are now considered by some to have a better grasp of economic forecasting than economists themselves.

Of all the economic bubbles that have burst during this financial crisis, none have burst more spectacularly then the reputation of economics itself.

I accept that there is a lot of pressure on economists, especially around this time of year. They are expected to tell the nation what will happen over the next 12 months, even though most of them here at home failed to predict last year's collapse in GDP.

This January comes with a heavier burden that usual. It is also the start of a new decade, so they are expected to take a stab at predicting what will happen over the next 10 years.

So less than two weeks into the new year, we are already being told that the best bet for 2010 is that we will start bad and end well.

While most analysts do not expect the recession to end until the second half of the year, last week one set of analysts predicted that the economy should begin to grow again during the first six months of the year, despite the fact that recent data had been "slightly disappointing".

They estimate that, by then, real national income (GNP) will be 16pc less than its peak in the first three months of 2008. Falling prices mean actual (nominal) GNP will drop by even more.

However, this bright spot does come with some caveats and the researchers said that it was worth noting here that nominal variables mattered greatly for credit growth and for tax revenue.

For the economy to grow, we will need a fall in the level of household savings to compensate for deflation and to add domestic growth to the economy.

This is despite the fact that it is getting harder and harder to see anything other than a period in which growth is held back by deleveraging consumers (we are now saving more as a percentage of our disposable income than we have for more than a decade) coupled with rising unemployment, pay cuts, strained public finances and the ongoing scarcity of credit.

The failure to predict the biggest economic calamity in 80 years does not mean that all economics is useless, but the thought processes behind the forecasts have to change.

Let this be the decade that economic forecasting moves away from quantitative forecasts produced by computers and returns instead to qualitative reasoning about society and human nature.

Man is not, and never has been, a purely rational economic thinker.

We need the insights of behavioural economics if we are going to chart a way back for the economy.

This is how the word economics was understood by Adam Smith, Joseph Schumpeter and Maynard Keynes and why the subject was called "political economy".

These great economists never claimed to be able to predict the future. What they tried to do instead was to shed light on the social processes and political and psychological pressures that lead to the creation or destruction of wealth.

Creative thinking must begin again in economics before theories from a crystal ball really do replace those of the dismal science.

Irish Independent

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