We love economics. There are two reasons we keep banging on about it in this blog: first, because it’s the main topic in the Brexit debates, if not necessarily the only key issue; second, it’s very rational and we love a structured argument.
But the ‘dismal science’, as economists themselves love to call it, is not really a science at all, except in the sense of ancient natural philosophy. The Greek physician Galen’s ‘four humours’ theory, for example, influenced medical practice from the third century until the mid-seventeenth Enlightenment and beyond. That is where economics is today.
There was no better theory than Galen’s for doctors to go on so they continued to prescribe leeches to balance these ‘humours’ until modern science matched theory with evidence to find real cures. No doubt leeches were an effective placebo and of course the body cures many illnesses itself in time (‘return to the mean’). Economic ‘cures’ are often unreliable too, for the same reasons and because normal scientific practices, which nowadays most of us learn a little about at school, cannot be applied to macroeconomics (for example, there are no control samples).
Remember lessons in the school’s science labs? We had to carry out experiments then write a description of our method and our results plus (at advanced levels) our error analysis to show the range of uncertainty the method produces. Science journals use the same approach so that ‘peer reviews’ can check the work to see whether the method justifies the conclusions, often overturning the previous results. Robert Chote, head of the Office for Budget Responsibility, suggested that the recently-leaked civil service Brexit forecasts be published together with all the assumptions so that others can review them. Quite right.
In aggro-chemical and pharmaceutical laboratories especially their work is typically sponsored by companies wishing to launch new products. The scientists intend to maintain their professional integrity but also want to attract further work. They also have an expected result in front of them, that which the company believes in (or it wouldn’t have asked). ‘Confirmation bias’ frequently results and ineffective or harmful products can get launched with official approval.
At least with actual science outcomes are checked, eventually. A vital aspect of our school-learned procedures was to isolate the factors not included in the theory that might otherwise affect the results, for instance by shielding equipment from electromagnetic radiation that might affect instrument readings. In macroeconomics the environment cannot be isolated but over the short term this may not matter provided it is fairly stable. At present stock markets are plunging, probably because the market is anticipating that central banks are quitting Quantitative Easing (QE) and beginning Quantitative Tightening (QT) by raising interest rates to head off inflation and stopping buying sovereign bonds (government loans).
This is not a stable environment for forecasting and in fact presents a far greater threat to the future of the European Union than Brexit, which we are obsessed with (this blog’s authors and the UK generally). Most central banks are free to react as they think necessary to stabilise the economies they oversee, but not the European Central Bank (ECB). There are rules about what proportion of a nation’s debt the ECB can buy and it must be proportionate to other nations’ rescue packages. Also the Germans in particular have a deep, cultural fear of inflation since the time of the Weimar Republic (1920s) and its disastrous outcomes. There is zero chance that they will permit interest rates to stay at zero percent if inflation takes off, regardless of the fact that an appropriate increase would probably sink the Italians, whose debt is only just sustainable under the present benign regime. Other central banks don’t have these limits, usually they manipulate the currency to ease the debts and avoid crashing the economy. The Eurozone is on a bed of economic nitro-glycerine.
We just mentioned that Brexit is probably a second-order problem for the EU but it still poses threats to the Project’s unity. Michel Barnier told the press in London after his latest meeting there that unless the UK complied with all ultimatums planes would not be permitted to fly into the EU, amongst other nasty threats. The Spanish were probably not consulted because they would need to replace the British pensioners, lager louts and the rest with German equivalents, of whom they have plenty already. It’s doubtful that many were consulted because others would be seriously harmed by his threats; he has probably exceeded his authority. There is much sympathy abroad for the British, facing conditions that no country can accept.
Juliet Samuelson in the Daily Telegraph (read King John) drew an interesting historical analogy with King John who, under immense pressure, paid to be subjected to rule and extortion by Rome. But the church in England and the landowner barons did not care for the resulting treatment and the kingdom rebelled. King John also lost his absolute authority to the rebels at Runnymede, where he signed the Magna Carta. This began a millennium of British resistance to tyranny that is likely to foil the malicious intentions of the Brussels’ Wise Men; they are fools because even if they were to succeed temporarily the damage to both sides would be immense. Furthermore the whole world would see that the EU is not a union of the willing but a prison with lethal fences; all remaining pretence of moral purpose would be quickly lost. Even if the EU subjugates the UK for a while with outrageous demands it will have overreached itself, we will rebel at some point and the world will see the wrong it does clearly.