Brexit has humiliated Britain’s failed economic soothsayers
The Trojan prophetess, Cassandra, was given powers of foresight by Apollo, the Greek god of culture, in a bid to seduce her. She refused him and, as one version of the legend goes, he spat into her mouth to inflict a curse that no one would ever believe what she said.
She prophesied doom and bad times ahead, but nobody believed her. Her prophecies all came true.
Last year, by contrast, a large number of economists predicted doom and gloom, if the UK voted to leave the EU. Our modern Cassandras predicted an “immediate shock”, not as a consequence of Britain leaving the EU in 2019, but rather as an instant result of the referendum. An “immediate shock“ does not relate to an event three years into the future.
George Osborne’s so-called punishment budget was threatened to mitigate the devastating impact a vote for Brexit was supposed to inflict immediately on our economy. It was not a budget for 2019. The Bank of England predicted a recession, not in 2019, but in 2016. Many City economists foretold the same thing.
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Of course, nothing happened. While it is true that sterling depreciated, the economic forecasts of recession in 2016 were all proved false. The Bank of England has undergone the humiliation of revising not only its growth figures for 2016, but also upgrading its 2017 forecast from 1.4 per cent to 2 per cent. This new revision is understood to be the biggest upward correction the Bank has made to its economic growth forecast in recent years.
Andy Haldane, the Bank’s chief economist, has now thrown his hands up in the air and cast doubts on economists’ ability to get these predictions right. The problem, however, is with the nature of economics itself.
Today’s subject is a far cry from the political economy recognised by Adam Smith and John Stuart Mill. Modern economics is really a form of applied mathematics. The subject pretends to have the authority and precision commonly associated with physics or mathematics. But since it deals mainly with human behaviour, economics has no such precision.
Human behaviour is notoriously difficult to predict. Newton’s laws of motion cannot be applied to the propensity of human beings to save or spend. The great economist John Maynard Keynes, in his wisdom, spoke of “animal spirits” to describe the psychology of business, investors and consumers. You cannot construct a mathematical model for “animal spirits”.
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The British people, as a whole, saw through many of the doom-laden threats of economists and politicians. A turning point in last year’s referendum campaign was when Sky News reporter Faisal Islam asked David Cameron, “what comes first – World War Three or the global Brexit recession?” The audience laughed. They could see the threats from the Prime Minister were overblown. Cameron looked embarrassed, and I can’t remember a moment when a British Prime Minister was treated so derisorily by an audience of voters.
After unsuccessfully attempting to frighten the wits out of the electorate, Cameron and Osborne promptly left the political big league. In a sense, they were punished for getting things wrong.
By contrast, our modern economic soothsayers are still plying their trade in banks, think tanks and the venerable Bank of England itself. Apart from Haldane, no other economist has breathed a word of contrition or remorse. They haven’t even publicly admitted their mistakes.
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We can ask ourselves, why did they get their immediate prophecies wrong? Were they victims of a group-think that simply couldn’t countenance Britain leaving the EU? Or did some of them try to curry favour with their political masters by trying to scare the electorate into staying in an increasingly dysfunctional EU?
We will never know. What we do know is that the British economy was probably the best performing in the G7 in 2016. Many dangers lie ahead. It would be wrong to suggest that all risks have simply disappeared. There is always a degree of risk in any economy. We can’t abolish that.
We should be able, however, to view those risks in a humble and dispassionate spirit. We can safely ignore our modern Cassandras and their doom-filled utterances. Unlike the original Cassandra, their prophecies do not even have the merit of being true.