As the financial crisis continues to evolve, the Queen’s question at the London School of Economics – why have academic economists so little to contribute to predicting the course of events – continues to be all too pertinent.
Robert Lucas, professor of economics at the University of Chicago and Nobel Prize winner for his seminal contributions to macroeconomics, proffered an answer in 2009. The crisis was not predicted, he explained, because economic theory predicts that such events cannot be predicted. Faced with that response, a wise sovereign will seek counsel elsewhere.
Still, Prof Lucas’s assertion that “no one could have predicted it” contains an important insight. There can be no objective basis for a prediction of the kind “Lehman Bros will go into liquidation on September 15”, because if there were, people would act on that expectation and Lehman would go into liquidation straight away. The economic world, far more than the physical world, is influenced by our beliefs about it.