Why did so many economists fail to predict the financial crisis? Why is there such a vicious debate over something so seemingly simple as to whether fiscal stimulus is good or bad? Why do some economists seem to get it so wrong? These are the family of questions that a lot of people have been asking for a long time, especially following major economic catastrophes. A failure of precision has taken a toll on the economist’s credibility. I don’t think this is fair. I think there’s a lot of confusion on what an economist does, and a lot of the ambiguity is due to how economists think of themselves.

To me, asking an economist why the profession has failed to provide a suitable answer to cyclical fluctuations is akin to asking a political scientist why she hasn’t found a solution to war. These are complex problems, with no straightforward solutions. We, of course, have some general ideas on what the problem more-or-less is, but the process by which these problems arise and how “solutions” will affect this process is still shrouded in quite a bit of uncertainty. One is tempted to ask why, if we can build something like a nuclear reactor, are these “basic” economic questions still largely unanswered?

One well-worn route is that of distinguishing between the natural and the human sciences. Just like with every other issue, every economist holds a slightly different view on this distinction (some don’t see it at all). But, the basic idea is that whereas in the natural sciences we deal with predictable events, the social sciences — which revolve around humankind — are significantly different. The belief is, more-or-less, that in the natural sciences the basic units (say, the atom) have a constrained set of possible actions which are timeless, which means that these relationships don’t change over time. With humans this isn’t true, because the set of possible behaviors is endogenously constrained, meaning that it’s a function of human ingenuity and creativity. How can we predict how an individual will act if the range of possible actions is decided directly by the individual herself? The common summing up of the position is that “humans aren’t automata.”

I like the distinction, but since I’m mostly unfamiliar with the natural sciences I’m not comfortable with it. But, I think there’s at least some important element of truth in it. Historically, econometricians have struggled to build a permanent testable model of the economy, because they have failed to model the underlying “structure.” These have been problems since the birth of econometrics, but it culminated in the 1970s with Robert Lucas’ now well-known “Lucas critique.” The problem with basic economic policy on econometric analysis is that because econometricians lack a good, basic model of the structure, once policy changes the structure will adapt and the outcomes will change, and past data cannot offer us any clues on the direction of change. This is similar to the above distinction between the natural and social sciences in that it shares some vague idea of non-predictability. More importantly, it hints at the endogeneity of the economic process: structures adapt on their own, and if we don’t know how structures adapt, then our ability to predict changes will be much more limited.

I prefer a related explanation for the non-predictability of the human sciences: complexity. This isn’t a distinction between natural and social sciences, but between simple and complex phenomena. It’s a problem that besets the natural sciences, as well. The idea is that events like business cycles are influenced by a large number of variables, whether these variables are subject to endogenous change or not. The more complex something is, the more difficult it is for us to completely understand it. At some point, the best we can do is to point out typical features and build theories of relatively general character. If we make predictions at all, it can only be about these typical features, because more specific phenomenon require us to understand a larger proportion of the complex event (and, again, as the event becomes more complex, the less of it we’ll understand).

Economists have made a lot of headway in understanding the more general aspects of the economy. We have a pretty good understanding of how humans coordinate and why ordered events emerge at all out of the chaos of undirected human activity. We now know much more about institutions and their role in constraining the range of human choice. There is a healthy debate on the business cycle, but more than ever there is some consensus on the basic characteristics (credit booms, risk adjustments, et cetera). But, all of this knowledge is still more-or-less useless in the realm of exact prediction, because we have no idea how the smaller, but more numerous parts of these larger events operate — and even when we have an idea, it’s much more difficult to assign probabilities to different outcomes amongst these smaller parts. What’s more, we often don’t know what these smaller parts even consist of!

There’s a tendency to think of the economist as an engineer. An engineer builds a system and can solve its problems, most of the time. Why can’t the economist solve the problems of the human-built system that is the economy? But, the human economy is more complex than some people realize. It didn’t come about from the head of a single person, but is an ordered, structured process designed, over time, by all the individual agents that partake in exchange. What we know about it only scratches the surface. And, like with all complex phenomena, there is a paradox to the process of learning. Usually, the more we learn about something we realize that there’s more to what we don’t know than we previously thought.

The lay public may think of economists as engineers because they are interested in seeing major social problems solved. Business cycles hurt the majority of people. We are worse off because of them and it would be nice to get rid of them. Or, we’d like to find ways of maximizing economic growth and benefiting all in the best possible way. But, it’s not just the lay public’s fault. Economists are responsible for selling an image, and for as long as economics has been a field, many scientists of this profession have sold themselves as engineers. Beyond the merits of fiscal stimulus, one of the deepest rivalries within the profession is between those who think they can help control the system and those who believe we don’t know it well enough to intervene. The image of the science has been built around the former, but it should become increasingly clearer that the latter are in the right.

People expect too much from economists, and maybe economists expect too much from themselves. We cannot predict major events and we cannot know how different interventions will impact the multitude of agents and variables that decide major economic outcomes. Even the best predictions prior to the most recent crisis were vague and general: they were predicting the “typical features.” We are not doctors, engineers, or car mechanics. We can only hope to better understand social phenomena. In this sense, maybe people would have a better picture of what it is we do if they assumed that economics is mostly a retrospective science.