Economics tells us what we can and can’t afford. It would be nice to be able to travel back and forth between France and Britain in comfort, regardless of the weather – so let’s build a railway tunnel under the Channel. Can we afford it? Economics will tell us.
Will we be better off overall if we build that tunnel, or will it cost more than it’s worth? Economics will tell us.
That’s the official story, anyway. Economics will tell us, but it won’t tell us the truth. They say “lies, damned lies, and statistics”, but “lies, damned lies, and economics” would be an even sharper observation.
In our culture, it’s common to laugh at the way the ancients – and people in some contemporary cultures – consulted astrologers, seers and oracles. What infernal, arrogant cheek – in our culture it’s common to consult economists. *
Democratic politics is supposed to ensure that what the majority of people want is what will happen, but of course what the majority of people want is often not actually physically possible. Even when it’s physically possible, it’s often not economically possible – “you’ve got to accept economic reality”.
Economics predicts whether we can afford something or not, whether the benefits of some project will outweigh the costs. It measures both the costs and the benefits in pounds sterling, euros, dollars, or whatever kind of money you like.
Its predictions are very important. They decide what we can afford and what we can’t afford, and we can’t do the things it says we can’t afford. What’s perhaps worse is that we must do the things we can’t afford not to do. Democratic politics be damned; economics decides everything that matters.
Economic predictions don’t have a very good record. They’re as often wildly wrong as they’re anywhere near right.
There are quite a lot of economists, and their predictions are not all the same. A good economist is an economist who’s got all their predictions right so far. But really that just means they’ve been lucky so far. There are enough economists to ensure that some of them have been lucky so far. History is littered with economists who had got all their predictions right – up to but not including the first one they got wrong.
But you’ve got to accept economic reality.
Was the Channel Tunnel worth building? Economic prediction said yes. Oh, they’ll try to tell you they never expected it to actually be profitable – but they sold shares in the company on the basis that it was expected to be profitable. Of course it isn’t, that’s history.
Should we build new nuclear power stations, or wind turbines? Economists tell us nuclear power stations are more economical, and that wind turbines can’t compete economically. †
Decisions like this, if made purely on economic grounds – and you’ve got to accept economic reality – depend on predictions of the costs and benefits. Some of those costs are up-front – capital – costs, and some of them are ongoing costs. The benefits are ongoing. The costs of capital depend on interest rates, which will vary in the future. The ongoing costs will be subject to inflation. The value of the electricity produced will be subject to inflation.
So the economists’ predictions are entirely dependent on their predictions about future interest rates and future inflation – indeed, not simply general inflation, but the future behaviour of particular prices. Pure guesswork, in other words. Interest rates and inflation may be only a few percent per year (although sometimes they can be a lot more), but over the decades-long lifetime of projects like these, variations in them can – and consistently do – make complete nonsense of economists’ predictions. (For more about this, see Discounting.)
But you’ve got to accept economic reality.
What does “you’ve got to accept economic reality” mean? What it really means is “you’ve got to do as the rich tell you”. Democracy is all very well, but the real power isn’t in the vote, it’s in the wallet. What the economist calls a prediction is really just a statement of what they think the powerful – the wealthy – want. (Or, more difficult still, what they think the wealthy will want in the future!)
* “The only function of economic forecasting is to make astrology look respectable.” – frequently attributed to J K Galbraith (1988) but also attributed to Ezra Solomon (1984). I don’t claim priority on those exact words, but I was certainly comparing economic forecasters to astrologers, seers and oracles as early as the late 1960s, and I’m sure I wasn’t the first.
† Update 2015: many economists are changing their tune on this question now.