By Mark Thoma
The opinions expressed are his own.
Roger Martin is unhappy with the state of economics. One charge is that:
[an economist] predicts a future that is based on the past. And when it is anything but, he returns to the same tools to do it again, believing that in doing so he is being meritoriously scientific. … Extrapolating the future to be a straight-line projection of the past is neither accurate, nor is it helpful in creating better understanding and newer ideas.
As I will discuss further below, I agree that macroeconomists need to fix their models. But I don’t think that predicting the future based upon “a straight-line projection of the past” is the problem. Let me explain why, first in a relatively narrow sense, and then more broadly.
This year’s Nobel prize award to Thomas Sargent and the previous award to Robert Lucas were partly in recognition of their development of the tools and techniques that economists need to go beyond simply trying to extrapolate the future from the past, a procedure that can lead forecasters astray.
Prior to Robert Lucas, economists analyzing policy interventions by monetary or fiscal authorities did exactly as charged above, they extrapolated based upon the past and an assumed unchanging future. But the (often false) assumption that the future would be like the past is at the heart of what is known as the Lucas critique.