Why do people waste time on worthless economic forecasting?
from Lars Syll
The other day yours truly was interviewed by a public radio journalist working on a series on Great Economic Thinkers. We were discussing the monumental failures of the predictions-and-forecasts-business. But — the journalist asked — if these cocksure economists with their “rigorous” and “precise” mathematical-statistical-econometric models are so wrong again and again — why do they persist wasting time on it?
In a discussion on uncertainty and the hopelessness of accurately modeling what will happen in the real world – in M. Szenberg’s Eminent Economists: Their Life Philosophies – Nobel laureate Kenneth Arrow comes up with what is probably the right answer:
It is my view that most individuals underestimate the uncertainty of the world. This is almost as true of economists and other specialists as it is of the lay public. To me our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness … Experience during World War II as a weather forecaster added the news that the natural world as also unpredictable.
An incident illustrates both uncer-tainty and the unwilling-ness to entertain it. Some of my colleagues had the responsi-bility of preparing long-range weather forecasts, i.e., for the following month. The statisticians among us subjected these forecasts to verification and found they differed in no way from chance. The forecasters themselves were convinced and requested that the forecasts be discontinued. The reply read approximately like this: ‘The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.’
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Real-World Economics Review Blog 
I do not understand one thing – how can former physicists, mathematicians, statisticians, econometricians call themselves (macro)economists?
Back to reading the entrails of chickens!
I have been writing since 1983 that future economic measures can not be predicted because the system is a nonergodic one.
All studies of macroeconomic variables indicate that the statistics are not stationary over calendar time. and nonstationarity is a sufficient statistical condition for a nonergodic stochastic process.
I even got an article in the Journal of Economic Perspectives in the 1990s about this — but few if any paid any attention to my warning. Only three Nobel Prize winners have endorsed my argument. They are John Hicks, Doug North and Robert Solow. Hicks has written that my nonergodic argument has convinced him that his ISLM model is not applicable to our world. Doug North has written that his explanation of economic growth and change requires my nonergodic argument. And Robert Solow has indicated he believes my argument is correct– but he has not attempted to in anyway indicate this means there is a problem with his growth models.
Isn’t it strange that the MIT people (and those at University of Chicago) who make so much of economics being a science refuse to change their models to accommodate this nonergodic assumption?
They refuse to do it because they know that science is discovery. They already made their “discovery” long time ago – free market and perfect competition are good and in equilibrium, government is bad. They do not want to discover that this is wrong. That is why they discovered nothing.
I predicted the 2008 Debt Crisis in 2006 in my animated movie Money as Debt and also presented what I consider to be an irrefutable explanation in Money as Debt II:
As a result, I was invited to write a paper for the WEA:
http://peemconference2013.worldeconomicsassociation.org/?paper=proposed-new-metric-the-perpetual-debt-level
The empirical evidence in graphical form:
http://www.moneyasdebt.net/M2-M1.htm
And the full analysis: http://paulgrignon.netfirms.com/MoneyasDebt/twicelentanimated.html
Anyone is invited to refute my arguments.
No evidence that your purple line is actually savings…that is lent. Steve Keen has shown that the neo-classical loanable funds theory is false, and besides that the garden variety monetary reformer’s obsessions with FRL and/or interest is also mistaken as a basic cause of our problems. Ironically however, your graph exactly mirrors a graphing of what the actual most basic problem of the monetary and economic systems is….which is that, systemically, the rate of flow of prices will PERPETUALLY and by cost accounting convention exceed the rate of flow of individual incomes. This correct analysis then exposes the fact that the economy REQUIRES continual lending (which is the Keynesian “solution”) in order to keep itself “in the air”, but of course the continual build up of debt eventually becomes onerous and “un-repayable”. The actual solution to the problem is equating individual incomes and prices via a universal dividend to individuals enabling BOTH that most basic equilibrium AND less CONSUMER borrowing. Voila! Equilibrium IN FACT, all the way around, instead of only in theory. And just to be adult, responsible and empirical about controlling our systems, as opposed to being orthodox and religious about them via “free” market theory, if you equated the nominal costs of consumption and the prices of production in a prescribed period of time via the mathematical mechanism of a fraction……virtual equilibrium in perpetuity….instead of perpetual monetary and economic dis-equilibrium parading itself as equilibrium.
I’m on board with economic weather forecasting….if the individual AND the system are BOTH set free by a sufficient universal dividend and compensated retail discount. There is only freedom amongst barriers in the temporal universe and uncertainty is only a burden for the neurotic….or the powerful who are currently in “control”. But I repeat myself.
The reason why “economists” are highly valued by the establishment is because they are part of the priesthood that controls the public mind. They are the “experts” that pontificate over matters economic.
The extent to which their pontifications coincide with observational outcomes are almost irrelevant because the media priesthood makes sure that impact of blunders of prediction are minimized.
George Orwell (Eric Blair) had it pretty well figured out.
If forecasts are impossible, how could governments forecast the consequences of their actions? For example their attempts to increase employment might end up preventing any increase or worse, lead to reduced employment.
Why would economists prefer to leave control, especially if it is actually “control”of the economy and money systems in the hands of a self interested elite, instead of placing that ultimate control into the many hands of individuals collectively, not with government, but with their sufficient purchasing power money-votes? It can only be because of misunderstanding, habit or, for those economists also employed by the above self interested elites, perhaps all three. Man must live free. That is an historically observable fact. Yes, he sometimes can be cajoled into believing enslavement is freedom, or even irresponsibly prefer/allow others to dominate him for a season, but domination is problematic itself because it always corrupts and then maintaining that covert or even self deludedly justified domination requires overt domination. And so “the center will not hold.”
Freedom is essential. The individual is MORE important than the system by itself. Individual freedom must always be our first and last consideration, in economics, money systems and in every endeavor.
Why do they waste their time? Because somebody pays them money to do it.
Easy profession, some paperwork, big salary. What else you need?
Lets hope that Dark Ages of false paradigms will end soon.
In 1977 Friedrichs and Kuebler in a paper read before the German OR society noted from their investigations that “neither the econometric, the naïve prognosis, nor the judgmental forecasts could satisfactorily predict future economic development.” So what to do? Prepare your population to deal with the unexpected successfully. Get it?