Why Economies Suffer Recessions Despite Classical and Keynesian Theories
Economic theories such as Classical and Keynesian are often hailed as the pillars of modern economic thought, providing comprehensive frameworks for managing and understanding the global economy. However, despite their widespread acceptance, the reality is far more challenging. Why do economies still experience recessions, and why can't economists accurately forecast or manage economic growth? Let's delve into these questions and uncover the psychological and methodological challenges that plague the field of economics.
The Pseudo-Science of Economics
Contrary to popular belief, economics is more of a pseudo-science than an exact science. Unlike chemistry, where a chemist can reliably predict and replicate chemical reactions, economists struggle to make accurate predictions on economic outcomes. This is a harsh reality that industry experts often avoid addressing, as it challenges the credibility of their field.
Imagine asking a chemist to create water using hydrogen and oxygen. With a minimum of a million tries, they would succeed reliably. However, ask a group of economists to predict GDP growth for a country, and they will often fail, even when asked to predict within a narrow margin of error. The failure rate is so high that any person or organization that could do this consistently would amass wealth beyond imagination.
The Challenges of Predicting Economic Variables
The complexity of the global economy is staggering. A country like the United States has over 200 million adults, each making hundreds of decisions that have economic consequences every year. This results in approximately 200 billion decisions annually. To effectively manage and predict such an economy requires an unimaginable number of variables and a level of computational power that is currently beyond our reach.
No existing economic model can capture even a fraction of these variables. The most sophisticated models may account for around five thousand variables, but even these are monumental in their complexity. Just the task of setting up a program to model 200 billion variables could take decades, if not centuries, to complete.
The Limitations of Economic Theories
The challenges in predicting economies extend beyond the limitations of current models. Classical and Keynesian theories, while providing valuable insights, are nonetheless theoretical frameworks. These theories often fail to account for real-world complexities and the dynamic nature of human behavior.
Classical economics, rooted in the ideas of Adam Smith and David Ricardo, emphasizes laissez-faire principles and the invisible hand of the market. These theories focus on long-term equilibrium and assume that markets will self-correct. However, in the short term, economies can experience significant fluctuations and downturns, making accurate predictions challenging.
Keynesian economics, formulated by John Maynard Keynes, emphasizes government intervention to manage economic cycles. Despite its emphasis on demand management and fiscal policies, the theory still struggles to account for the sheer unpredictability of human behavior in a diverse and interconnected global economy.
The Role of Human Behavior and Decision-Making
A significant portion of economic activity is driven by human behavior and decision-making. Decisions ranging from consumer choices, business investments, and government policies all contribute to the complex and ever-changing economic landscape. The vast number of individual and collective decisions, each with its own unique set of variables and outcomes, makes it nearly impossible to accurately model the entire economy.
For example, the choices a consumer makes about what to buy, when to invest in the stock market, or how to save for the future are influenced by a myriad of factors, including personal circumstances, external events, and psychological biases. These variables are highly unpredictable and can change rapidly, making it difficult for economists to formulate accurate predictions.
Conclusion
While economic theories like Classical and Keynesian provide important insights and frameworks, the reality of managing and predicting the economy is far more complex. The pseudo-scientific nature of economics, the sheer complexity of the global economy, and the inherent unpredictability of human behavior all contribute to the challenges faced by economists and policymakers.
So, the next time you hear an economist making grand promises about predicting economic outcomes, take it with a grain of salt. Instead, consider consulting your horoscope or Tarot cards. They, too, may provide better and more accurate insights into the future of the economy.