Social scientists predict the future
It is well established that investors with a diversified portfolio of index funds can do just as well (if not better) than “professional fund managers.” Now comes a new study that shows that consumers predict inflation as accurately as professional economists.
Thomas and Alan Grant of Baker University in Kansas analyzed surveys of U.S. and Australian consumers collected from 1978 through 2005. For the U.S. data they used the Michigan Survey, which involves monthly telephone interviews with 500 households. The U.S. respondents were asked several questions, including how much prices will go up or down in the next 12 months.
On average, the consumers predicted inflation rates that were off by 1.1 percentage points. The researchers compared the results with those found with the Livingston Survey of professional economists, finding a similar error in predictions.
We would be very surprised if a study found that the average person understands engineering or chemistry as well as a professional engineer or chemist. In the case of the social sciences, however, examples where a random person seems to have a better grip at reality than academics are plentiful.
In the 20th century, philosophers associated with logical positivism and critical rationalism were instrumental in highlighting that a lot of what is considered “social science” (or philosophy) does not satisfy the most basic criteria for investigating a scientific hypothesis. Economics has largely escaped such criticism, partly because mainstream economics relies heavily on mathematics, which can hide methodological errors (or intimidate non-mathematicians).
Even when (macro) economists employ sound methodology and research design, the complexity of the phenomena they study seriously frustrates attempts to use their models to predict the future. This issue is not confined to economics. Climate science seems to suffer from this problem as well, which has not prevented scientists and non-scientists from making very strong claims for one position or another.
So why are such scientists employable, even excessively rewarded? One reason may be because we would rather perceive ourselves as “doing something” than admitting that we don’t know. Increased government intervention in the lives of people has increased the demand for social scientists and economists to confer credibility to what otherwise would be considered as arbitrary coercion. Another reason may be because most people are not aware that the emperor wears no clothes. People such as Alan Greenspan or Ben Bernanke are rarely challenged on general methodological grounds.
One effect of the impressive progress in the physical sciences is that it conferred credibility to the “social sciences” as well. Knowing that a person is a scientist has become meaningless. The first question one needs to ask is what this person studies and how. The philosopher David Hume said it best when he said:
“When we run over libraries, persuaded of these principles, what havoc must we make? If we take in our hand any volume of divinity or school of metaphysics, for instance, let us ask, Does it contain any abstract reasoning concerning quantity or number? No. Does it contain any experimental reasoning concerning matter of fact and existence? No. Commit it then to the flames, for it can contain nothing but sophistry and illusion.” David Hume ‑ An Inquiry Concerning Human Understanding,1748, Section XII, Part I
