While reading some background material for an economics course, I ran across the following:
“But for the monthly or quarterly time spans that economists usually deal with, it seems unlikely that a particular consumer’s tastes would change radically” [Source: Intermediate Microeconomics A Modern Approach 5th Edition by Hal R. Varian, 1987; 1999; p.118]
This is, of course, proven incorrect when economic conditions change rapidly. Witness the shifts in consumer behavior after $4.00 gas a few years ago as well as some shifts post-Great Recession. Now, I am not making a value judgment regarding the inability of economic models to accurately predict consumer behavior after various tipping points were passed. What I am doing is pointing out that economic models weren’t designed to handle situations in which extreme forces are exerted quickly on the economic system. Economic models were designed to handle conditions that are much more often found: stable and slowly changing.
By way of analogy, climate models aren’t necessarily designed to handle situations in which extreme forces are exerted quickly on the climate system either. There is chance (a significant one?) that important aspects of the system will not be well captured by the model. That is just as alright for climate models as it is for economic models – no value judgment need be made.
Finally, I will point out again that a key feature of any model is to evaluate how well its projections perform by comparing them with observations. To that end, climate models have historically demonstrated skill; that skill has increased over time as climatologists have made models more sophisticated. Similarly, economic models have historically demonstrated skill. What is different about them in this case is that they have failed spectacularly when the situation demanded the most of out them: as rapid change has taken place. So how prevalent are non-economist comments that economists don’t know what they’re doing and they’re only working because of the incredible amount of money involved and economic models are all bunk because they don’t include fundamental aspects of their system and economics is all a big hoax? I would say they’re not very prevalent, but then I don’t blog about economics. I would sure like to know the answer to that question though.