The other day on Facebook, a friend of mine wrote:
Kudos to my friend economist Jon Murphy for calling out the instability in the Chinese economy several years ago. Turns out building entire cities that no one is interested in, isn’t sound economic policy.
He is right that I had been calling for instability in China for several years. But can it really be said I predicted it with any accuracy? The problem is, if you make a statement long enough, it may eventually come true. You keep saying a recession is coming, it will eventually come and you will be “right.” China, just like any real world economy, would eventually face recession and my prediction would have been “right.”
This is the important thing to remember with economics: it is a social science. It is not a precise measuring and modeling system, no matter how much some people want it to be. We create models and theories to help understand situations and guide our thinking. We’ve observed a relationship between price and quantity and call it “Supply and Demand.” We observe a relationship between production and consumption and call it “trade.” But, at the end of the day, we are talking about humans. There is a certain level of randomness involved. This limits the predictive abilities of the Dismal Science.
No matter what side of the debate you’re on, there will likely be any number on anecdotal data to support one’s point. For every study showing minimum wage has no effect, I can find one that says it does. For every study showing free trade causes net harm, I can find one that shows net benefit. This is why solid reasoning must always triumph and why myself, and so many other free-marketers, are skeptical of arguments (such as minimum wage is good) that attempt to overthrow the current reasoning. The greatest lesson economics taught me is to ask “does this make sense?” I fear the increased mathematization of economics is reducing the importance of that question in the minds of many.
To bring this about full circle, my prediction about China was based off of good reasoning (and ABCT), but is the situation in China really a vindication of ABCT and a refutation of Keynes? I think so, but one could also argue the opposite, that China’s situation is more a reflection of a weak global economy weighing on exports and not malinvestment (which would be a vindication of Keynes and refutation on ABCT). So, ask yourself: which makes sense?