Is the economics profession in crisis after Bank of England chief economist Andy Haldane admitted Brexit warnings were its Michael Fish Moment?

Here, Dr David Chivers examines the issue for The Northern Echo

ANDY HALDANE said economists had experienced their Michael Fish Moment – a term used to describe public forecasts which are embarrassingly wrong – due to criticism for failing to predict the financial crisis and for misjudging the short-term impact of the EU referendum.

He added the economics profession was “to some degree in crisis”.

Economists are hounded every time events don’t follow the most likely outcome of a forecast and I think this could reflect a deeper issue: misunderstanding of what a forecast is.

A forecast is an informed estimate about the likelihood of future events; it is not saying something will definitely happen.

For example, someone looks outside and sees dark clouds in the sky and says it is likely to rain.

If it doesn’t rain, does that mean we should stop listening to this person?

Of course the way we forecast can be improved – but the alternative would be to close your eyes, put your fingers in your ears and say it is always going to be sunny.

The main forecast, which did not turn out as expected, was a dramatic drop in consumer spending directly after the Brexit vote.

There are a number of reasons why consumers may not be reacting to Brexit uncertainty.

They simply don’t think Brexit will be bad for the economy or they are buying now before inflation kicks in.

In fact, the economic reality of the pound weakening and inflation increasing were outcomes that were in line with most forecasts and what economists were saying would happen before the vote.

Mr Haldane stated there may be a deeper problem with economic forecasting as the great recession was caused by individuals not acting rationally.

One of the few things people know about economics is that we model people as rational beings.

The problem with this is the way we think of rational behaviour in everyday language.

“You are not thinking rationally”

is not what economists mean by rationality in the everyday use of the word. For example, is it rational to smoke?

People who smoke know it is bad for them, but why do they still do it?

However, when smokers have a cigarette they do not think about future health issues but think about the current pleasures that the cigarette brings.

Under economists’ definition of rationality, smokers are acting rationally, as they are simply obeying their preferences.

In the same way, one could argue the credit crunch was caused by rational behaviour: bankers wanted to get rich and took excessive risks, which they would not be held responsible for.

The outcome of both scenarios is negative (some would say, irrational), but it is consistent with rational behaviour at an individual level.

In short, dismissing a whole field because of a forecast that didn’t turn out to be the most likely outcome is completely irrational.

Dr Chivers is a lecturer in economics at Durham University Business School