Something must happen to people when they become billionaires. They lose all humility and claim authority on anything and everything. Recently Bill Gates, of Microsoft fame and fortune, opined on the inadequacy of economists. “Too bad,” he said in an interview, “economists don’t actually understand macroeconomics.” To be sure, what he said is more or less accurate. Economists and economic thought cannot grasp all the intricacies of the macro economy, much as historians cannot grasp all the intricacies and motivations involved in past events and medical doctors admit to mysteries about human health. Most economists know this fact and readily admit it. What is irritating about Gate’s glib remark is the implication that only he and perhaps a few other special people know. If he wanted to convey otherwise, he would have explained why the field cannot do what politicians and others sometimes expect of it.
Everyone knows – or should know – that unlike mechanical engineering, economics deals with people, their perceptions and their irrationalities. What seemed to work in one way yesterday can lurch in a different direction tomorrow because, for example, the public mood is different or because popular ideas have changed or because businesses have observed yesterday’s result and repositioned themselves. No one pretends, least of all economists, that the field can predict as physics can the speed a falling rubber ball will reach between the 102nd story of the Empire State Building and the 50th. Even physics cannot predict at the subatomic level.
Economists make the effort not because they are arrogant (though some are) or because they have deluded themselves (though some have) but rather because their subject matter is so immediately important to so many people. If economics were astronomy, for instance, this state of affairs would hardly merit comment or criticism. No one, for instance, faults astronomers because they cannot fully explain the existence of black holes or even characterize them adequately. People do not readily accept the limitations of economic thought because its subject matter is jobs and income, prosperity and wealth, things that matter deeply to individuals and businesses, as well as governments. When Washington and firms try to improve the situations of citizens or workers or shareholders, they want a roadmap that tells them where to turn and where the pitfalls lie. When told that economic thought and its practitioners cannot provide such guidance, these decision makers ask for a best guess, rough guidance on at least what is not likely to happen. And because a guess made within disciplined thought, no matter how inadequate to the task, is better than simply a guess, these decision makers accept what they can get from the economists.
In his interview, Mr. Gates called on the wisdom of another billionaire, Warren Buffett. Mr. Buffett, it seems, has pointed out the existence of negative interest rates and faulted the discipline of economics because no textbook mentions the phenomenon. Somehow this is supposed to explain how the field does not understand its own subject matter. It would be strange to fill text books with anomalies, but that aside, the negative rates are neither hard to understand nor are they a particularly economic development. They occur less because of economic forces, though those forces have some role, than because institutional arrangements in day-to-day financial business – the need for collateral, for instance — force people and institutions to buy and hold such negative rate bonds though they otherwise would avoid a financial instrument that loses them money. The reader will find a more thorough discussion of negative rates here. But such explanations matter little when billionaires opine smugly on the inadequacies of others.
No doubt Bill Gates means well. Even Warren Buffett might mean well. Neither has said anything that any responsible economist will not admit, and often. These two gentlemen and others like them might have been more evenhanded if they had admitted that they have said nothing new instead of implying, as Gates has, that he has had a remarkable insight.