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The Actuary The magazine of the Institute & Faculty of Actuaries

No existential crisis for economists claims Vicky Pryce

The profession of economists is not in crisis for failing to predict the financial crash in 2007-08, or the resilient performance of the UK economy following the Brexit vote.

Extent of financial crisis "wasn’t the fault of the economists" ©iStock
Extent of financial crisis "wasn't the fault of the economists" ©iStock

That is the opinion of the former joint head of the UK’s Government Economic Service, Vicky Pryce, who told The Actuary that it is not always possible to forecast the behaviour of businesses after a financial shock.

Pryce refuted the claims of the Bank of England’s chief economist, who earlier this year had said that economists were in some degree of crisis for failure in big-event forecasts.

“I spend the entire day fighting the corner of economists after Andy Haldane’s comment about our ‘Michael Fish’ moment,” she said.

“I don’t think we are running in an existential crisis at all. What economists do is learn from history, experience and shocks.

“The truth is that there are external shocks that take place and you don’t know really how the consumer will behave, or how businesses will behave when you have these shocks.”

The last financial crisis is considered by many economists to have been the worst since the Great Depression of the 1930s, which ultimately saw the collapse of Lehman Brothers in 2008.

The US Senate's Levin–Coburn report concluded that the crash was due to a number of factors, one of which was the failure of regulators, which Pryce agrees, along with short-term political decisions, were much to blame.

“My belief has always been that economists believe in rational behaviour and then politicians come in and mess it all up by being irrational themselves,” she continued.

“But I think the real problem was the fault of the regulators. It wasn’t the fault of the economists which let this go to such an extent that policy makers let a big bank fail – which bought everything else down with it.”

“That is why people are still worried about the banking crisis in Europe because they do not want a domino effect like we have seen before.”

Global banks have been fined $321bn (£262bn) since the last financial crisis, while individual regulatory changes have more than tripled since 2011 to an average of 200 revisions per day, according to a report by The Boston Consulting Group.

However, Pryce added: “The truth is that everybody is still terribly worried, because the cycle is such that at some point there has to be a slow down, that has to come.”

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