When I think about economics, I divide the discipline into five types of statements. Here are the five types:
- Statements about what economic policy should be
- Statements about historical economic phenomena
- Statements about current economic phenomena
- Statements about future economic phenomena
- Statements about universal economic phenomena
The first four types have to do with specific real world situations, while the last type has to do with universal theories. Here is an example of each type of statement:
- The U.S. government should raise taxes on highest income earners.
- On October 24th, 1929, the Dow Jones fell over 11% marking the start of the Wall Street Crash of 1929.
- Current inflation in France is estimated to be about 1.3% annualized.
- I predict that there will be a recession in the United States starting in the fourth quarter of 2018.
- All recessions are preceded by a fall in housing prices.
I believe that an economic model would fall under the fifth type of statement because it describes the exact relationship between variables. A model can be used for prediction in the real world (fourth type), but without data input, a model is merely a statement about abstract variables.
The failure of economists to predict the 2008 financial crisis would fall under the fourth type of statement. In The Big Short by Michael Lewis, hedge fund manager Michael Burry predicted the financial crisis long before anybody else. As early as 2004, Burry was analyzing the subprime mortgage market and made some significant discoveries. This is a great book and I believe it provides a glimpse into how economists can predict the future.