Anthony Hilton: We’re too harsh on Dr Carney’s diagnoses

Some were based on the level of activity and employment in the economy — the Phillips curve — some on levels of interest rates — the Fisher effect.

Some said it is entirely dependent on the amount of money circulating in the economy as espoused by Milton Friedman; some believe it is largely down to the ability of central bankers to influence what the public expects inflation to be.

As a result, those setting monetary policy face three challenges. First, none of the theories really explains the way inflation has behaved in the 10 years since the beginning of the great financial crisis.

There are many reasons for thinking it should have gone sharply higher and been much more volatile — not least the quantitative easing and liquidity pumped into the system by the major central banks — but it did not happen in any major economy. Quite the opposite, in fact.

But all this time the central bankers were pursuing all manner of different policies to influence inflation, and the results by and large seemed to turn out all right — not perfect, but all right. The trouble is no one knows whether this was skill or luck, and the worry is that if it was simply luck, what will happen next time round if it deserts them?

Second, even when they work, none of these theories works all the time but the policy measures that central bankers put in place to curb inflation depend to a considerable extent on what they think is causing it.

Different theories imply different, and often conflicting, remedies but central bankers have to plump for one, even if they do not really believe it. They have to do this in the uncomfortable knowledge they might be making things worse.

Third, central banking has got increasingly politicised. The ironic side-effect of the independence most of them now have is that they dare not alienate the public too much lest politicians use this as an excuse to take the powers back.

As a consequence, although central bankers are in theory told to worry only about inflation, they instead worry about the state of the whole economy and separately about financial stability. Although they find it hard to admit to doing so, they for very good reason sometimes push inflation to the back of their minds in order to focus on these other issues.

The International Centre for Monetary and Banking Studies has just published one of its “Geneva Reports” on this issue of skill or luck among policymakers, and decided the relative success of the past decade came from a bit of both — good and bad policies and good and bad luck.

Given that some of the best economics brains in Europe fed into this analysis, it seems a bit unfair to turn on Carney for appearing occasionally to back the wrong horse.

This is true also of economic forecasts in general. Back in April, monetary policy committee member Gertjan Vlieghe gave a speech called Good Policy and Accurate Forecasts, in which he explained that economic forecasts were not about predicting that something would happen on a given date but rather were about highlighting the direction of travel and suggesting the likely outcomes.

His analogy was with a doctor who told a patient to stop smoking, to pay more attention to his diet and to take more exercise because if he did not, he was likely to get a heart attack.

The doctor does not say the heart attack will arrive next Easter or even in 10 years, but instead that it is likely to happen, and the policy actions will make it less likely. The doctor is not ridiculed if the patient survives and never has a heart attack.

People —including, often, the patient — assume instead the advice was broadly right but the patient was one of the lucky ones. No patient accuses the doctor of inaccurate scaremongering or says the absence of a heart attack means the patient need not have stopped smoking in the first place.

Nor is the doctor roundly criticised if the patient has a heart attack anyway — it is assumed the policy change came too late. But when that does happen, people turn to the doctor to intervene and put in place more policies to aid the recovery.

There are so many moving parts in a modern economy — as in the human body — that you can never be certain how things will turn out. But you can have a broad idea about what is likely to happen, with varying degrees of certainty.

And it is quite possible to put in place policies that are beneficial to the patient even if the forecasts on which those policies were based turn out not to be strictly true.

So the message is clear: if we thought of Carney as a doctor, we would be disappointed a lot less often. It is not the forecasts that are at fault, but the way we interpret them.