Knowing and Making

So, let's say I claim that all swans are white. Prove it, you insist. Well, say I, here's a white swan - here's another one - and here's another. Therefore it's quite likely that the rest of them are white too. You probably wouldn't consider that to be much of a proof. Quite rightly, you'd insist on the scientific standard. Make clear what a counterexample would look like (a black swan) and show that a reasonably comprehensive effort to find black swans has failed. Second best might be a detailed biological analysis of swan DNA and physiology to convince you that they simply don't have the capability to produce black pigment - but even that is not very reliable. After all, by definition I am only analysing the white ones. So why in economics do we accept the equivalent of white swans as "evidence" for macroeconomic theories? If a Keynesian wants me to believe her theory about government borrowing resolving the paradox of thrift, she should tell...

Anthony J. Evans (who kindly linked to my camel story earlier in the year - or as he notes, perhaps not all that kindly) has written a paper about economic counterfactuals . He confirms what's now becoming a mantra among economists (if not their public): economists can't make predictions. However, he says, rather than giving up completely on exploring the future, they should do so with two tools of the economist's imagination: counterfactual analysis and scenario building. Counterfactuals are stories about the past - a retrospective prediction if you will - considering what might have happened had a different decision been taken at a key moment. For example, what if the financial sector had not been rescued by governments in 2008? Or what if governments themselves had defaulted on their debts? Scenarios are possible alternative futures - constructed not so that you can predict which one will happen, but so that you can prepare to understand events as they unfold. Each sce...