One of the most amusing business reports to cross the desk in the past couple of weeks was the one highlighted in The Manila Times last Thursday (“WB, StanChart see opposite growth directions for PH”, June 12). Two different, eminently credible sources—the World Bank on the one hand, and banking giant Standard Chartered on the other —on the same day published two very different outlooks for the Philippine and regional economies in the second half of 2014.
Citing a number of factors, the World Bank forecast is for “flat” growth; not exactly stagnation, but slowing of economic expansion to much more moderate levels. Standard Chartered, by contrast, cited a completely different set of factors to arrive at the much more upbeat conclusion that the Philippines will remain one of the region’s fastest-growing economies in 2014.
So who’s right?
Because the question is one of economics, the answer may be “both” or “neither.” The World Bank noted slowing growth in China—its economy grew by just 5.8 percent in Q1—the slow pace of structural reform in developing economies, capacity constraints, and serious instability in Ukraine and other middle economies as factors that would slow growth in countries like the Philippines.
Standard Chartered saw a completely different outlook, however, based on the performance of strong sectors such as vehicle sales, the government’s increase in infrastructure spending, a string of sovereign ratings upgrades, export performance, and healthy international reserves.
But for every one of those indicators, some kind of counter-argument or qualifier can be presented. For example, the assessment based on gross domestic product (GDP) that Chinese growth has slowed might very well have been refuted by figures released late last week that showed that both manufacturing output and domestic consumption in China has ticked upward in the last two months. Another example is the Standard Chartered view that Philippine export performance is strong, a conclusion that was apparently made before the alarming extent of the coconut scale infestation—which is well on its way to destroying one of the country’s biggest export resources—received widespread publicity.
The ambiguity in economic forecasts is a result of the discipline being mistaken for science. Economics is not a science. A true science may, as economics routinely does, rely on idealizations to describe phenomena, but with the constant objective to improve is predictive ability; economics, on the other hand, despite being considered a formal discipline for more than two centuries and using many aspects of the scientific method, has never improved its predictive ability. The reason for this is that there are no constants in economics; the “science” is attempting to empirically explain the behaviors and interactions of purely social constructs—markets, institutions, even the concept of money itself. There are no unalterable factors—no constants like “the speed of light,” or “gravity,” or “the boiling point of water at mean sea level.” And as a consequence, the results do not often meet the criteria for true scientific output—falsifiability (or refutability), repeatability, and predictability.
Other social sciences suffer the same handicap of ‘excessive variability,’ for lack of a better term, but what makes economics unique is that the manner in which its teaching and practice has evolved over the last 200 years has made political orientation an inseparable component of it. Any perceived (or more accurately, contrived) constant in an economic problem has any number of operational effects depending on one’s ideology.
To illustrate, let’s say a particular country sets a goal of a yearly growth rate of 5 percent in its GDP, and asks a variety of economists two questions: First, what growth rate will the country achieve if nothing is changed? And second, what has to be changed and in what manner in order to achieve the target growth? The monetarists will base their analyses and recommendations on the effects of government monetary policy on the behavior of financial markets. The mercantilists will base their analyses and recommendations on the impact of government intervention on commerce, but will argue about what degree is beneficial depending on whether they have more libertarian (Austrian) leanings, or more protectionist (Philadelphian) perspectives. And the Keynesians will base their analyses and recommendations on the scope and size of government spending.
A single economic puzzle can then have four or five (or more) solutions, and according to what passes for scientific validity in economics—which, essentially, is nothing more than whether or not someone actually believes the results are valid—they could all be correct. Or not.
So what does that actually make economics? Perhaps the most accurate way to describe it is as a very complex methodology for the management of behavioral data. Data and information management, after all, does not really exist unless it has some context: Application to the operational objectives and requirements of the enterprise using it. So in that sense, economics becomes slightly more difficult for the average non-biased, non-economist regular citizen to use; unless the perspective behind the economics is understood, the analytical results and predictions will be at best divergent to some degree from the observer’s reality, or worse, completely incomprehensible.
When people, or businesses, or entire governments act on something they do not understand well (or not at all), that’s when the trouble begins; that’s when things like housing bubbles, over-inflated stock prices, and a stubborn insistence that trickle-down economics is actually a thing that works happen, and the results, more often than not, are not pretty. The opinion of any one economic “expert” can and should be received with skepticism; he is not, after all, a soloist but merely one voice in the chorus.