Economists in Denial
The Bank of England’s chief economist has blamed the failure of its forecasting models, which had predicted a major economic slowdown after last June's Brexit vote, on “irrational behavior.” But what seems irrational to a central bank, not to mention the City of London, may be perfectly rational for a "Leave" supporter.
LONDON – Early last month, Andy Haldane, Chief Economist at the Bank of England, blamed “irrational behavior” for the failure of the BoE’s recent forecasting models. The failure to spot this irrationality had led policymakers to forecast that the British economy would slow in the wake of last June’s Brexit referendum. Instead, British consumers have been on a heedless spending spree since the vote to leave the European Union; and, no less illogically, construction, manufacturing, and services have recovered.
Haldane offers no explanation for this burst of irrational behavior. Nor can he: to him, irrationality simply means behavior that is inconsistent with the forecasts derived from the BoE’s model.
It’s not just Haldane or the BoE. What mainstream economists mean by rational behavior is not what you or I mean. In ordinary language, rational behavior is that which is reasonable under the circumstances. But in the rarefied world of neoclassical forecasting models, it means that people, equipped with detailed knowledge of themselves, their surroundings, and the future they face, act optimally to achieve their goals. That is, to act rationally is to act in a manner consistent with economists’ models of rational behavior. Faced with contrary behavior, the economist reacts like the tailor who blames the customer for not fitting their newly tailored suit.