In case you have missed it, a few months ago it was widely reported in the media that half a dozen Italian seismologists were convicted for manslaughter after being accused of not being able to predict (and giving false assurances prior to) the earthquake that struck L’Aquila and led to the death of 300 people. Reactions varied greatly: from the Royal Society and US National Academy issuing brief statements and simply condemning the decision of the Italian court, to individuals claiming we are moving back to “the medieval ages” and “the Spanish Inquisition model” to harshly worded articles claiming that scientists need to be held accountable : “those who claim the title “scientist”, be it natural or social, expect to combine the immunity of diplomats and the infallibility of popes.” (1)
By now you are probably wondering what does any of this have to do with a finance-related blog and when will the economists mentioned in the title show up. Besides, unlike seismology or meteorology, finance and economics are hardly the scientific fields that can be connected to catastrophic events that may lead to the loss of human lives.
Or are they?
For the last three years or so, when the term “economic disaster” is mentioned, one cannot help but make an immediate connection: Greece. According to official statistics, suicidal attempts have increased at a rate of 37% between 2009 and 2011 while suicide helplines have been receiving 4 times more telephone calls in the period after the eruption of the financial crisis.(2, 3) Studies based on World Health Organization data have demonstrated that “The financial crisis almost certainly led to an increase in suicides across Europe”.(4) Indeed, it is hard to argue that with an unemployment rate of 27% (youth unemployment in excess of 57%) and approximately one-third of the country’s population living near or below the poverty line (5) the physical and mental health of Greek residents would not rapidly deteriorate. The same argumentation and even more gruesome statistics can be put forward for a number of countries and areas around the world. I am only using Greece as the notoriously exemplified focal point of our days.
So the question that can then be raised is, should economists acting as functionaries of state, participants of “expert” panels and committees, advisors to elected officials, employees of national or international bodies be held legally accountable for either not predicting an economic catastrophe or misadvising on how to get out of it?
Let’s start by stating what should be obvious: As far as economics is concerned, predicting is irrelevant. Forecasting is possible but pretty tough. It is often based on data that may not be fully up-to-date and is painfully hard to collect from “the real world”. It is almost invariably based on a set of assumptions that may be reasonable but are commonly unrealistic exactly because their purpose is to be simplifying. And the more complex the nature of the phenomenon of interest, the more intricate the methodological details of forecasting become. No wonder the results of forecasting prove to be –ex post– very imprecise on most occasions. This is true not only for economics but also for fields such as meteorology and seismology where the factors influencing the phenomena are many and they are very hard to measure accurately; the effects of these factors are hard to quantify and the may change rapidly; and there may yet be additional, unknown variables with unspecified effects on top of those.
Economists however are actually in a tougher spot compared to natural scientists for one additional reason that has to do with the way they communicate their views: Assuming a seminal seismologist does not have in his possession any conspiracy-theory-powerful earthquake initiating machinery or superhuman abilities, his cautionary words concerning the prognosis of seismic activity will not actually cause the earthquake to happen. On the other hand, a well- respected economist that strongly and publicly talks about an imminent financial/economic crisis may to some degree incite it or at least strengthen and accelerate it by motivating individuals and institutions to proactively behave in light of something that may have actually never happened in the first place. This is of course a phenomenon commonly referred to in economic studies as “self-fulfilling prophecy”. To put it a different way, suppose Nouriel Roubini warned of a looming deep recession about to occur in the great country of Banania. Wouldn’t many investors attempt to get rid of the their holdings in corporate and sovereign financial assets thereby rapidly increasing the cost of equity and debt and in this way creating liquidity and solvency issues in Bananian business? That is exactly the reason why the vast majority of economists are hesitant in making grand public statements of impending destructions: They may prove to be right by being wrong. On top of everything else, greater clarity is needed on deciding where advice (usually provided by scientists) ends and decision making (usually in the hands of elected officials) begins.
So given all the above, should economists be legally liable for making poor forecasts and giving equally poor advice to officials based on these forecasts? Assuming that the assumptions and difficulty of their endeavours is outlined, the degree of confidence in their forecast clearly stated, the wording they use is carefully chosen and no ulterior motives have driven their judgement I would think not. Interestingly enough, a more careful consideration of the L’Aquila case published in Nature journal (6) shows that to a significant extent, the seismologists were held accountable not so much for being unable to predict the earthquake but for, arguably, giving public reassurances as to the small likelihood of the earthquake happening after some modest seismic activity that had previously occurred in the area.
Do I therefore argue that economists should not be held accountable no matter how miserable we can be in forecasting future evolutions? Not at all. I am simply trying to outline a framework that could be used in assessing the extent to which they could be held morally and legally responsible. I have no trouble in joining my voice with those who support that science cannot be left to the hands of charlatans or to those conceited individuals that presume to be infallible. It needs to be claimed by the majority of true scientists that appreciate the boundaries of their intelligence, the limitations of their field and the responsibility that comes with the power of their authority.
In the words of the most famous prisoner of Reading, everyone needs to understand that “To expect the unexpected shows a thoroughly modern intellect”. And it is jolly hard to do.
3 http://eurohealthnet.eu/sites/eurohealthnet.eu/files/press-release/News%20suicide%20rate%20Greece%20- %20%2020111006.pdf