Home > Uncategorized > Yes — there is something really wrong with macroeconomics

Yes — there is something really wrong with macroeconomics

from Lars Syll

One way that macroeconomics stands out from other fields in economics is in how often it produces forecasts. The vast majority of empirical models in economics can be very successful at identifying causal relations or at fitting explaining behavior, but they are never used to provide unconditional forecasts, nor do people expect them to. Macroeconomists, instead, are asked to routinely produce forecasts to guide fiscal and monetary policy, and are perhaps too eager to comply …

sales-forecast-guessing-dart_0Forecasting is hard. Forecasting what people will do when their behavior is affected by many interrelated personal, local, and national variables is even harder. Forecasting when the forecasts cause changes in policy, which make people change their choices, which in turn make it required to revise the forecasts, is iteratively hard. Forecasting when economic agents themselves are forecasting your forecast to anticipate the policies that will be adopted involves strategic thinking and game theory that goes well beyond the standard statistical toolbox …  

To conclude with the most important message, yes, economics models do a poor job forecasting macroeconomic variables. This deserves to be exposed, discussed, and even sometimes ridiculed. Critics like Haldane (2016) are surely right, and the alternatives that they propose for improvement are definitely worth exploring. If nothing else, this may help the media and the public to start reporting and reading forecasts as probabilistic statements where the confidence bands or fan charts are as or more important than the point forecasts. But, before jumping to the conclusion that this is a damning critique of the state of macroeconomics, this section asked for an evaluation of forecasting performance in relative terms. Relative to other conditional predictions on the effectiveness of policies, relative to other forecasts for large diverse populations also made many years out, and relative to their accuracy per dollar of funding. From these perspectives, I am less convinced that economics forecasting is all that far behind other scientific fields.

Ricardo Reis

Yes, indeed, forecasting sure is difficult. On that we all agree. But having said that, it’s pretty perplexing that a mainstream macroeconomist who has spent a large part of his career developing macro models, with all of the more or less standard assumptions on rational representative agents making only stochastic mistakes confronting intermittent ‘shocks’ in DSGE models with risk reduced uncertainty, admits that the models perform poorly when it comes to forecasting. Isn’t that kind of admitting that there is a monumental gap between model and reality? And isn’t that what critics — who Reis spend a lot of the article criticising — have pointed at for decades now?

Reis is not the only one trying to defend this rather unproductive forecasting activity so many modern macroeconomists spend their working days with. Not that long ago, Reis’ colleague Simon Wren-Lewis had a post up on forecasting activities, also defending an activity that admittedly has little value and most often come up with results no better than “intelligent guessing.”

So why do companies, governments, academic researchers, and central banks, continue with this more or less expensive, but obviously worthless, activity?

A couple of years ago 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 — Kenneth Arrow came up with what is probably the most plausible reason:

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. cloudsAn 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.’

To this one might also add some concerns about ideology and apologetics. Although Reis is — as most other mainstream economists — only reluctantly prepared to discuss ideology, it’s undeniable that forecasting certainly is a non-negligible part of the labour market for (mainstream) economists, and so, of course, those in the business do not want to admit that they are occupied with worthless things (not to mention how hard it would be to sell the product with that kind of frank truthfulness …). Governments, the finance sector and (central) banks also want to give the impression to customers and voters that they, so to say, have the situation under control (telling people that next years X will be 3.048 % makes wonders in that respect). Why else would anyone want to pay them or vote for them? These are sure not glamorous aspects of economics as a science, but as a scientist it would be unforgivably dishonest to pretend that economics doesn’t also perform an ideological function in society.

And ultimately — who supplies these banks and companies with the basic models for the forecasting? People like Reis. I guess we have to allocate a part of the unforgivable dishonesty also to the academics that come up with blueprints for expensive and worthless activities.

  1. April 13, 2017 at 9:49 pm

    “Reis is — as most other mainstream economists — only reluctantly prepared to discuss ideology”
    A prominent economist at a nearby university claimed that noclassical economics is not an ideology. I suspect that many mainstream economists who are reluctant to discuss ideology believe this.

  2. Risk Analyst
    April 14, 2017 at 1:55 am

    Regardless of the poor quality, sometimes an economic forecast has be made. Case in point, once I was looking at a risk model at a financial institution with all sorts of computer code and work by PhD physicists with pretty algorithms about correlation between assets and pricing of derivatives. All those algorithms were nice, but the most important variable was the central tendency of where would interest rates be in one year. Around that they could create some probability distributions for their pricing models. But they had no clue what to put as the base case, so they just hand waved it and said because “they” don’t know, they will assume interest rates in a year will be what they are right now. I would hope that forecasts from most economists, even a Mr. Reis, would be an improvement or at least more theoretically sound than saying one year from now will most likely just look like today.

    • April 14, 2017 at 5:48 pm

      “I would hope that forecasts from most economists, even a Mr. Reis, would be an improvement or at least more theoretically sound than saying one year from now will most likely just look like today.”

      It’s not about mean – it’s about variance. When an economy is chugging along at 1%-3% growth per year, just about any model you choose regardless of whether it is connected to the underlying economy will get you into that 1%-3% range. But most of these models also predict that 2008 can’t happen.

  3. April 14, 2017 at 2:08 am

    Although I never believed it when I was young and held scholars in great respect, it does seem to be the case that ideology plays a large role in economics. How else to explain Chicago’s acceptance of not only general equilibrium but a particularly simplified version of it as ‘true’ or as a good enough approximation to the truth? Or how to explain the belief that the only correct models are linear and that the von Neuman prices are those to which actual prices converge pretty smartly? This belief unites Chicago and the Classicals; both think that the ‘long-run’ is the appropriate period in which to carry out analysis. There is no empirical or theoretical proof of the correctness of this. But both camps want to make an ideological point. To my mind that is a pity since clearly it reduces the credibility of the subject and its practitioners.

    Frank Hahn

    It takes some courage, maturity, and perception for the self-discovery that one is engaged in a fraudulent enterprise. Of relevance and importance in this connection is the debate between O’Boyle and McDonough versus Tony Lawson — the latter asserts that fundamental errors in economics arise due to technical mistakes, and not due to deliberate deceptions in order to support the ideology of capitalism. I think O’Boyle and McDonough provide a convincing refutation. At the same time, the reason for Tony Lawson’s mistake seems clear to me from my own experience as a student of economics. Our teachers never talked about ideologies or the larger issues, and seemed content with discussing arcane mathematics — DELIBERATE deception involves knowing the truth and then using lies to hide it. This does not seem to be the modus operandi. Rather, after the initial discomfort of swallowing certain absurd framing ideas wears off, one learns to believe these lies. Much like the experiments with reversing glasses, those who wear them are disoriented at first because the glasses turn the world upside down. However, after a little while the mind adjusts and re-interprets the world so that the upside down image becomes right side up. Then, if they take the glasses off, the world appears upside down. This is what is meant by “learning to think like an economist”

    • April 17, 2017 at 9:11 pm

      The fixation with the ‘long run’ is a fixation with with ‘end state equilibrium’. As a practical matter, neither short nor long term equilibria exist –nor can be proven even theoretically to exist without making very improbable assumptions.

      The short run is never in some supposed equilibrium nor approaching a longer one in time.

      My view about my teachers in mainstream economics conforms with yours. They ‘swallowed’ the theory without any serious examination of how it came to become established theory. They did not so much ‘lie’ as fail to understand how illusory/ill-defined many a vital concept in economics is; and, then they applied mathematics to what they did not understand were conceptual shortcomings.

  4. April 14, 2017 at 2:44 am

    In my book Crisis, Economics and the Emperor’s Clothes (a free download from new-economics.info) I cite Paul Ormerod, from his book “The Death of Economics” (1994). He mentions a 1993 study by the OECD in which the forecasting records of the OECD itself, the IMF and the world’s seven major economies are compared against a simple benchmark: the projection that next year’s growth would be equal to this year’s. Over the 1987-1992 period this simple rule performed at least as well as the professional forecasters in projecting next year’s growth rate. In other words, as Ormerod puts it, the combined might of the macro-economic models and the intellectual power of their operators could not perform any better than the simplest possible rule to make a forecast. Ormerod points out that all the problems of macroeconomic models – the contradictory answers different models give to the same question, the poor forecasting record, the inability to trust a model on its own – exist despite the effort devoted to their maintenance and construction, and despite the fact that model builders and operators pride themselves on incorporating the latest nuances of macro-economic theory.

  5. April 14, 2017 at 4:07 am

    The entire purpose of the ‘rationality’ assumptions in economics is to introduce certainty.

    Anyone who has actually practiced economics in the real world understands that decisions are fuzzy because real people do not behave like ‘rational’ consumers. If they did, they would be unable to provide for their needs in all of the dimensions of human needs.

  6. April 14, 2017 at 1:26 pm

    CBO (congressional budget office) makes forecasts about economic variables —i think GDP, inflation rates, tax revenue, interest rates (which is actually prediciting in part human behavuior since these are set by people, but even tax revenue is about human behavior–it assumes people pay taxes) and some others.

    i looked at 20 to 30 year forecasts (i dont remember exactly which set of years ) and they were (to me) remarkably accurate—with one outlier–the 2008 ‘crisis’. I assume they use some standard forecasting model (tho to me these are only weakly linked to a grand theory like general equilibrium theory—one can get similar forecasting models from different theories because they are approximations).

    Weather forecasts i also find to be pretty good—accurate. They do get some things wrong at times.

    Economic models for affects of NAFTA (trade deals) i think were much worse. Effects of trade deals are more complex and less well understood than the US economy partly because they involve people with different cultures, habits, and political issues.
    The trade models were used ideologically to support NAFTA—economists said ;’we can prove this is a good deal, increase social welfare etc. ).
    However, other (radical/progressive economists people have used the same DSGE models to argue the reverse. They made different assumptions on what numbers (data) to use in the equations. This is like guessing how well you will do on a test—-you may have one prediction based on knowledge of your skills, and your professor may have another based on what he knows of your skills).

    To me ideology to a large extent enters in your choice of problems to solve. Alot of people want to maximize growth as measured by GDP and try to predcict what it will be depending on policies. H Daly would prefer to maximize his alternative ‘green’ GDP—ISEW.
    One doesnt hear many economists talk about maximizing ISEW, nor do they in general try to predict ISEW.
    Its not their problem—to me that is ideology.

    Ideology does enter into choice of models—some of this is just based on tradition and laziness I think. Its like people who believe in god and go to church and tithe simply because its always been done, and they never gave a thought to doing anythig else.

    Alot of economists just use standard formalism or recipe they learned–once they’ve mastered the basics, they can just go on autopilot and churn out papers endlessly, get a big CV etc. The ideology comes in when they say thos is truly scientific–its only partly because they dont look at other theories.

    For 40 years or mre there have been numerous nonlinear models around but mostly published outside tjhe ‘big 3 ‘ journals read by most people (JPE, AER, …)
    Most economists i think have never heard of them and they dont read those journals. They say they are too busy.

    Heterodox types can be just as ideological. They choose what topics they find interesting and what to predict, diiscuss, and how—equations, words…
    (I wonder wwhat Tony Lawson discusses—does he discuss eecology and the environment, inequality and poverty, human motivation (or ‘utility’ or ‘/irrationality’) such as whether people are lazy or greedy, and what they want—leisure, money, consumer goods, art and science….

    The same situtation is in other sciences—psychiatry is split over whether nature rather than nurture should be studied, same in linguistics, biology is split between the cultural evolutionists and the Dawkin’s selfish genes people, physicists between LQG and strings (and many other theories). Neuroscinetsts have their own feuds.
    I’ve met some of the ideoklogical ones in biology and linguistics (and a few in econ). Alot of them spend more time writing polemics and getting in heated debates with their intellectual enemies than either studying what the other people are saying or developing their own alternative (ie repairing the model they are using since they know it is flawed.

    Often they get alot more attention than people writing complex nonlinear models in specialty journals. The extreme end is when some of these academics to really ‘polemic’ and become public features who get alot of attentionn and money by going around denying global warming, deny environmental problems exist, advocate for either unregulated capitalism or hard core socialism/communism, and such.

    Those are ideological and economic choices—people have ideas or beliefs and they go around promoting them and see the world in those terms. But that can be understood in economic terms—-they beieve what they think makes them feel good.
    A conservative economist has a very good theory of religion based on this—-you can predict to some extent what people believe and say, how many beleievers there are in a country (say france vs usa) doing a sort of cost benefit analyses and by using a utility function—one which is not the idealized ‘rational choice’ type. That utility fuinction is like assuming a Lucretian world—-the world is made of idnetical atoms which collide, etc. Physicists still study models like that for many cases, but they also study ones which are complex—many kinds of atoms, which interact in more ways than collisions.
    Utility functions describing religious behavior are interdependet, and also have all sorts of structure which describe the fact that ideas have structure—-they arent like ‘quanta’ of energy’ which are identical. They are ‘memes’ like different kinds of food or drugs which make people act in different ways.

    All ideologies are economic choices—eg how you spend your time.

    There is no universal set of values. Individual utilities vary with different choices.
    People choose what problems to solve. Jihadis choose to work for their caliphate (and they try to predict that as well) , atheists promote that and try to predict dynamics of religious belief, etc. Alot of economists predict whatever field they study will provide them a job, and may believe they are doing good, what ever model they do (capitalism, socialism, chaos theory…)

    I sort of dought readers of this blog have a common set ofg economic concerns and values, though it may be like most blogs and fields it is ‘self-organized’. This blog is for people who want to criticize some mainstream econ, and likely hold mostly liberal type politics (eg not rabid capitalists); other blogs will have their own loyal crew or echo chamber.

    Discussions like this may be suited for novices—both mainstream and heterodox economists know the models have problems. They may differr on what should be done.

    e.g. Krugman modifies them a bit, but keeps the terminology.

    The exact same thing done is done by Richard Dawkins type biolgists, and Chomsky linguists. They know their models are flawed, so they slightly modify them –actually they take all the theoretical machinery used by their opponents, and then say actually this their theory—they discovered it too. For example they include ‘culture’ as a variable in their modified equations, but keep the terminology—everything is innate, and genetically determined.
    Economists modify their ‘rational choice’ utility function by including other variables like beliefes and errors in choices, and then say they are still using a rational choice model—people use perfect rationality, which is defined by their modified utility function.

    Of course the other side says why bother using the terminology perfect information and competition, equilibrium and so on when the new system contains almost no similarity to ones described using that terminology. (one uses ‘dynamic equilibrium’, ‘bounded rationality’, and so on—in my area there are plenty of churches which profess belief in jesus and the bible, but in practice they are different from alot of atheists. They just call themselves christians (of course there is one difference in that they go to church, give money to it, and cite the saying of jesus rather than bertrand russel or einstein.). I’m sort of doing the same thing here i describe—rather than being ‘constructive’ by studying or writing my own models, i’m discussing what others do. They will probably keep doing it.
    These debates will go on (in biology and liguistics the debates have been the same for 40 years, but some of the sides are beginning to ‘win’ in the sense they get the jobs .

    ‘Scientific progress occurs one funeral at a time’–m Planck. People eventually get bored debating how many angels are on a pin, and learning the original latin so they can talk
    intelligently about that.

    • Risk Analyst
      April 14, 2017 at 7:17 pm

      Mart: a few observations:

      You have a different opinion of the CBO’s forecasting skills than others. For example, Stiglitz says the total cost of the Iraq War is in the 2 to 4 trillion dollar range, while the CBO originally forecasted the Iraq War would cost in the tens of billions of dollars.

      A critical issue and perhaps the only point of forecasting is risk management. The neoclassical economists were caught completely flat footed and clueless when presented with the biggest economic event of their lives. That is not an outlier to be dismissed. It is the most important data point. The story of the RMS Titanic does not dismiss the iceberg as an outlier.

      I enthusiastically agree with your GDP-ISEW point but that view has been, very frustratingly, completely marginalized.

      You mention economists being too busy to read the AER. In my view, one could memorize every article printed in the AER over the past 20 years and still have no idea as to how to understand the economy as it exists.

      • April 15, 2017 at 9:02 am

        i was referring to one set of CBO predictions–i remeember those iraq war cost predictions but didnt know cbo did them. That of course was a sort of political issue—some people thought the war would last like 1 year and the iraqui people would basically thank the usa for being liberated. (I’m not sure how that turned out—maybe iraq is now a free, democratic utopia in which previously marginalized groups like shi’ite muslims, al qaeda and isis now can be in the democratic process, and they have a different version of democracy than usa— ‘war is peace’, vote with bullets and bombs, etc.

        Some say CBO also made a bad prediction of costs/benefits of obamacare (they overestimated how many people would sign up, especially younger people). This shows economic variables easy to measure relatively (moeny) is bound up with human psychology which is harder to predict (ie who chooses to enroll in health care based on whether they think they’ll need it , because it is a cost even if small form some people–they ften dont want to pay—‘loss aversion’).

        i actually said something like most people do read AER or a bit of it (one issue might take a year tom read thoroghly–i used to mostly read abstracts partly because its filled with data for me—no way i can judge the data–eg if its made up).

        I said most people dont read the smaller specialty and theretical journas (eg J Ec Theory, J Econ Behavior and organization, and some others–review of mincome and wealth). Likely many people read a tiny bit of them. I would say to me it seems if you look at all the economics journals one gets a very different view of economists than the one on this blog which basically focuses on well known ones like krugmanm, general equilibrium theorists, mankiw, etc tough many more are mentioned here and there. I have maybe 100 or more academic econ papers around here and more on my computer and maybe only 5-10% mention or use DSGE models or use the word ‘neoclassical’ econ. If they are theoretical they basically are working wth variants of neo/classical. theory (I view Herbert Simon as one of the first attempts at this back in 50’s; there is a large (or huge) literature on things like ‘cultural norms’ in economics (even religion), alot of analyses of things like CEO and finance indusstry salaries (which commonly concludes it way too high and unjustifiable even in standard economic terms—eg marginal productivity–and its done by people at mit, harvard, nyu, etc. But for every paper like that, there will be another prof at harvard, nyu, mit, etc who writes a paper saying the opposite thing.

        But even some conservative/reactionary people are changing–Mankiw is in a group supports a carbon tax –something anathema to many ‘free market’ types who have their own economists and such (bjorn lomborg for example, though he’s not an economist–supposedly he was into nonlinear dynamics/ABM type modeling, and he m ay have been, or he may have one of these fake PhD degrees in science —basically someone just gave him the degree ( maybe even wrote his thesis) because he was politically useful or a family member).

        You read read every paper from last 100 years in Physical Review A, B, C, D, E ..on up to X (the new one that has eerything that doesnt fit into the original categories (quantum, classical, particle, cosmology, statistical…physics..) and still have no idea how to understand the physical world as it exists but you may some ideas about how to understand aspects of it.

        Same with AER (to me the best part is the short papers in the back–often thats where you get the ‘heterodox ‘ papers which use other concepts, eg ones from biology. ) My view is one has to read the big 3 like aer, but also the numerous less known speciality ones–at least the abstracts. .

        I you read those in my view even in the 80’s you would likely conclude that there will be a major economic crisis at some time—-all kinds of abstract models showed economic systems under any reasonable assumptions (ie not ones used to prove general equilbria) economies are inherintly unstable. But those therists didnt work with data or make any predutions about current economy.

        What they were doing was like some early climate modelers. They wrote equations for ann ideal earth and atmosphere and then looked to see what climate patterns were possible.; Ecologists did same –eg lotka volterra equations—an ideal ecosystem of rabbts and lynx. Usually much later someone takes those models and plugs in data aquired in the field or from weather records. So they could for example predict global warming in the 1950’s (and possibly one serbian guy in the 1920’s) though those were obscure papers.

        (some standard econ people like Kirman, Durlauf, and k arrow were very familiar with the abstract models.

        the ones who arent tend to be people like Jagdish Bhagawati, J Sachs, and so on. People who work at world bank, or CBO–they just do applications using a recipe. Sort of like the difference between a chef and a fast food cook.
        Saying no regular economist (people i’m talking about likely wwouldnt say neoclassical but rather they are working with a modified theory where there is no perfect information, rationality, competition, etc. ) predicted the crisis is to me like saying if you say people who make food and teeach in universities how to get a job doing that never heard of or could the predict the existance of a ‘salad’—all l they heard heard of was fries and burgers..
        Maybe most people didnt think a ‘crisis’ is possible but that is because they followed accepted wisdom and convention and adopted the normal fast or junk food diet and economics, and never bothered to see if anything else existed like salads.

        I wouldnt be surprised standard texts like Mankiw’s (free on line but i just glanced at it—it actually has a tiny bit more on imperfect markets than i remembered (the first time i looked through it i was appalled—it was like taking a modern physics classic using a physics book from 1850. ‘The real world is described using newton’s 3 laws, end of story’. I kinduh dought mankiw includes material i am talking about and which is what i think of when i think of economics.
        You probably dont hear about that except in grad school—and even then, not in most specializations. (You might isntead be doing like something like getting in a big debate about depreciation rates used to calculate the potential costs of a carbon tax with Nordhaus and others.

        Depending on your ideology, who’s paying you, or your scientific judgement ou may come up with very different numbers (eg global is good, bad, indifferent, as are taxes).

        Same is true in biology and chemistry–most of the standard texts i used had almost hasically absolutely nothing in theory from since say 1980—they might have new data ‘(we found this animal, or gene, or made this chemical) but not new models.
        One could actually find these in popular literature—eg James Gleick’s chaos, some by Ilya Prigogine, F Capra…

        But not in classes.

        (Oh yeah–i’ve come across economists and biologists who write textbooks—they hope to get a bestseller, replace samuelson or man kiw, etc and make alot of money. Their t terxts tend tom tbe basically the exact same as the ones already around, except with more recent computer graphics and such and maybe some on-line material. .

        They also dont have time to read econ journals since they have to cibntribute to society and be productive by writing a book. Thats how capitalism produces economic ideology, and why econom ic theory sort of predicts this—people respond to incen tives, and ‘maximize utility’ at least locally. Economists decide they want more money (they have tenured jobs but want a bestseller on the side) , perhaps they are hard wired to ursue slef-interest–naturally born greedy and averse to work like reading and writing math (unless its some standard recipe like arithmatic or linear optimization–after that they know its all irerelevant bs). These texts are then used to explain economics to the next generations.
        ‘the real economy is mcdonald’s, fired chicken, burger king.
        Now you are prepared to feed the world.’
        Not all academics / economists , book writers, etc are that bad but my impression is too many are pretty bad. Semi-ignorant but ‘satisificing’—they might love to learn more theory and try to understand and even change the world, but thats hard to do and they dont even know where to start—should instead i try a different restaurant than McDonald’s, or a different church? Usually its easier to stick with what you know–eg that you feel satisifed after eating some junk food or slving anohter consumer choice problem.. )

        Currently one part of the ‘financial crisis’ is ‘student debt’. I’m actually of mixed minds on this—as I am about another sort of hot issue—teacher’s unions versus charter schools. Theroetically i would be pro-union, pr education, etc but given what people are teaching a paying to learn its like supporting a drug dealer union selling poison to the world, and being in great sympathy for people going into debt to buy drugs. (I feel same abiout ‘housing crisis’—-beofre the ‘crash’ we called that ‘sub urban sprawl development’—everyone wants a big new hiouse on a quarter acre or more, new big car, and a new big highway to get there, and a shopping mall nearby so they pave over the wilderness, max out all of their credit cards, and cry for help when it turns out their job doesnt pay enough because Wharton business school trained their managment (as they did Trump ) on how to basically swindle or rip off or exploit basically ignorant workers —who on the other hand are very smart when it comes to what they can shop for and which new hollywood blockbusters to see.

        —————————–

        I have a feeling alot of people dont read AER much or anyhting else, so they don’t understand AER as it exists. This reminds me of some fundamentalist religious types who look at the bbiology section of the library, or the part o quantum theory, and say thats all bs. (Libertarians do this too—anything non-austrian and such is bs. ) They dont have to read it , since they already know what it is.

        I dont think anyone understands the economy as it is though tey often talk about ‘the real economy’ by which they mean the one they have in mind (but maybe can’t describe in words or equations because its difficult or they are lazy) and IS NOT the economy any one else uis talking about which is just bs.

        ‘the economy’ may not exist because there are as many economies as people. so its ‘these economies’.

        Half of my economy revolves around buying and consuming ccaffeine. Its sort of the (quantum) ‘state religion’ around here—one could identify the basic quantum of value which comproises the ‘gross ‘ part of GDP as C–caffeine. so we have CDP. money=happinness=C. more is better. This may be related to the CPT theorem (charge, parity, time symmetry or TCP) in physics (see E C G Sudarshan) if you replace D with T and rearrange by symmetry transforms CDP->CTP.

        This may show (as a few theorist types are actually trying to do this rigorously) that economies are the same as physical systems; you can turn one into the other. (this is like statistial thermodynamics , quantum theory and the arrow of time—-using the ‘wick transformation. you can turn thermodynamics into quantum mechanics simply by using the same equations but changing t (time ) into temperature, written it=1/T (where i is the square root of -1, so they call it ‘imaginary time’).

        in thermodynamics you have an ‘arrow of time’, while in quantum theory because of the ‘i’ you have at all times two arrows of time—one going forward and one backward forever in time. the present is what you get when you take a sample of these two time series (or continuous lines) and average them. ) One nice thing about this possible equivalence is it makes it sort of intuitive why money has its value—eg one day you are a millionaire and then then next one are broke because the government devalued the currency or basically abolished it (i think something like is happening in inida—all large bills now have zero value.)

        .

        .

  7. Hepion
    April 15, 2017 at 5:32 am

    Macroeconomic forecasts maybe useless in their stated aim of forecasting, but aren’t people fond of them because they are useful in other ways?

    Macroeconomic forecast may be a useful tool to give economic policy power to the forecaster. All you have to do is craft an forecast that casts effects of policy you want to happen in positive light and in negative light effects of a policy you don’t want to happen, and you can have sway over policy makers.

    • April 16, 2017 at 11:14 am

      I believe the situation re: forecasting is opposite from your position. I’ve worked on hundreds of forecasts (engineering, technological, economic, and cultural) and a few thousand long- and short-term plans. The attitude we found toward forecasting and forecasters was often summed up with the “expert” joke. You know “ex” and “spert;” drip that fails. Most people minimize their expectations of forecasts and forecasters. Planning comes out better, especially if it’s an open process where non-experts have an opportunity to make contributions in public hearings. In fact, planners were doing crowd sourcing long before it was the “in” thing to do.

      • Hepion
        April 19, 2017 at 6:13 pm

        Late, great economist John Kenneth Galbraith coined the term “innocent fraud” – frauds that are perpetuated by people who innocently believe them to be true.

        In my mind, core drivers of economic forecasting community are fraudsters – albeit they may be minority, in their activity they form economic forecasting theory almost exclusively, and drive the shape of key economic forecasts concerning, for example future deficits and debt forecasts.

        That the majority of the forecasting community may be innocently involved does not change core of the phenomenon.

    • April 20, 2017 at 6:28 am

      Galbraith is correct but not precisely as he thought. Most forecasters are aware the forecasts they create can and are use to drive the future in the directions suggested by the forecast. The forecasters who deal with this honestly do so by creating multiple forecasts dealing with many of the possible futures. These are used in the best of cases to foster discussion and force consideration of hard choices. Forecasters living out an ideology of some sort treat their forecasts as unassailable reference points for the future. And ask others to treat them likewise. This latter group should not have any substantial voice in creating public policy. It’s difficult to limit use of such forecasts in policy creation by private factions or political groups. But good forecasters will point out, repeatedly the many downsides of such forecasts used by factions or ideological movements.

  8. Hepion
    April 15, 2017 at 5:35 am

    Who is willing to say that economic forecasts are a form of lying?

    • April 16, 2017 at 11:16 am

      Lying requires intentionality. Sometimes forecasters lie. But often they are attempting to be truthful, as they understand truth.

      • April 16, 2017 at 1:21 pm

        i think that’s true. also people at times believe their theories in an honest way. (einstein in his later years , fred hoyle, etc were seen to have ‘bind spots’ as to reality and were telling the truth as they saw it.)

      • Risk Analyst
        April 16, 2017 at 10:43 pm

        Those who have professionally worked in forecasting also know there are many more layers or dimensions to that profession than being right. Forecasters may, for example, create a forecast, but then take the midpoint between their number and the average of the other forecasts as their number. The point being that they want to beat the other forecasts, but not be too terribly wrong if the number goes the other way. Is that lying to not give your real forecast? The forecaster could always fall back on saying it is not a lie, but they are just using a Stein estimation technique relying on the efficiency of averages as a better forecast. So, not a lie but just being efficient.

      • April 17, 2017 at 12:03 pm

        Mark, my point being “truth is always as it’s seen by a group or member of a group.” It’s never just the truth. Complexity shows this. Uncertainty is inherent in everything, so truth is not. This is the basis of modern science. And of history and its study.

      • April 17, 2017 at 12:09 pm

        Risk, as I said, since truth and certainty are illusions, forecasting is always a “best you can accomplish” effort. And planning is always more useful when many plans are check against and player off one another. The purpose of planning is to prepare, as best we can for whatever occurs. To have considered all the possibilities and possibilities of possibilities. Impossible task, of course, but one that constantly runs through every professional planner’s mind.

  9. April 15, 2017 at 10:13 am

    Yes, forecasting is hard. And generally pointless. The things that interest people (e.g., rain next week, a job next year, AI workable) cannot be forecasted. However, they can be imagined. Based on experience and some basic math it’s not that difficult to figure out rain patterns, employment patterns, and technology changing. Since these are imaginings they’re not fixed or certain. So, we move to planning rather than forecasting. Planning assumes that the future is transitory and uncertain; planning focuses on understanding these things and arranging actions that sometimes overcome them but more often seek to mitigate their impacts. Like forecasting, planning can take many forms. Some is mathematical (both statistical and non-statistical) while other planning is non-mathematical (e.g., expert opinion, scenarios, case study). I’ve worked on planning projects with many economists. Most were ideological to the extent they attempted to base the planning on basic economic assumptions described my many on this blog. Most of these were rejected by the other members of the planning committee. It’s interesting for me to note the assumptions that were not rejected. Maximizing shareholder value, rationalism, and competition were accepted but with many limitations. When I teach planning to corporations and governments I always omit all economics’ basic assumptions. Many in business and most in government are not comfortable with them. And they add nothing of value to the work of planning.

    • April 16, 2017 at 6:11 am

      my area has hourly, daily, 5 day, 10 day, and monthly weather forecasts. even longer periods. they are more accurate the shorter the period. but i usually trust the 10 days ones to a large extent–they tyipcally are at 70-80% true (especially they can tell you if some blizzard 1500 miles away will hit or miss this area, and other areas if a hurricane is likely to ‘landfall’ and when. ) one cannot predict these from basic experience and math —one can get closer if one eyeballs satellite produced weather maps but not to same accuracy. You can’t even predict with same accuracy local extreme weather even if you can see a storm coming. I may sayn 50% hit or miss; while weather will say 70-80% accurracy.
      long term forecasts like global warming and geographic differences in the effect of that also i dont think people can predict without equations of fluid dynamics. Calling these imaginations or plannings i don’t see as very very useful— just other words.
      modeling’s point may be just doing it (like art–another representation of reality). Given all the things people do, which seem pointless to me , its no worse. (And i’d say business and even governments may not like forecasting because some of these forecasts show their plans lead to mass destruction. I remember forecasts that when some big corporations like Walmart moved in certain areas there would be massive losses of small businesses; in many areas this proved true. (In a way one could intuit this but models added info.) Eco,ogists can often predict pretty well using models exactly how much development some rare species can withstand before it dissapear, and prove fairly accurate. ) .

      • April 16, 2017 at 9:44 am

        Often we don’t even need the basic math. The Lakota, Cheyenne, and and many other indigenous peoples have forecast weather quite accurately (much over 50/50) based on centuries of experience. Their methodology is directly pictorial. The early Europeans in North America would not have survived had the native peoples not shared this knowledge and other “planning” knowledge about finding food, healing wounds, treating sickness, building shelters, etc. This knowledge surpassed anything the Europeans brought with them. If one studies the pictorial records, as I have, it’s clear the natives understood fluid dynamics, physical chemistry, and biology/zoology/botany quite well, without any “equations.”

        As for imaginings, how do you think the world for humans was made? Humans have always organized their raw experiences through imagination into scripts, stories, social orders, and civilizations. Science was first imagined and then invented in this way. As was forecasting and planning, and the tools used for these. What we call “representations” of reality are reality. The only reality possible for humans. The observer problem prevents any other. That economists don’t get this is a problem. I guess the best way I can describe our situation is scientists study imaginings that form peoples’ lives (including science) by imagining them.

    • April 16, 2017 at 2:02 pm

      there is also the fairly recent case of an indigenous tribe who live on an island off of India—while others perished during a tsunami they survived because they had some sort of anceint indigenous knowledge which told them how to interpret weather/ocean patterns they saw even if it was the first time. they ran up in the mountains.

      in my area i sometimes can predict for short periods extreme summer weather events (high winds, torrential rains, flooding) even if i am far from any weather reports out in the woods ( i dont carry radio/phone usually except 1 for emergency calling) because the birds will suddenly get very quiet after being loud all the time. they may sense pressure changes or something.

      I think current various forecasting models really are just a modern form of ‘indigenous knowledge/science/folklore’. I think all of them have some use (and all are fallible, vague and sort of innacurate)—various indigenous mytholgies predict the end of the world, floods, catastrophes, alien being invasions, etc.
      Everyone and thing to some extent has an intuitive sense of fluid dynamics (wind, water current….) but there are different qualityative and quantative understandings of these.

      It might be interesting to have Lakota ‘experts’ (sman, chiefs, or whoever) make forecats and compare them with ones from say NOAA/weather bureau for next hour, wekk month, year decade, etc. there’s probably some overlap and some divergence.
      My sort of pet peeve has to do with terminology. eg people arguing over whether they are forecasting, imagining, or planning. One gets these in many fields—eg biology (selfish genes versus group selection—people point to the same data / observations and same equations and then say only one of these terms is correct. To me it siilar to rekligious debates —eg whether the correct word is god, allah, tao, universal field, spirit….

      “You can’t be a man if you don’t smoke the same ciagrette as me’ (rolling stones). ‘Real scientists imagine; fakes forecast. thats how you can tell’.

      i consider classic economic theorem imginations —in visible hands, perferct info, ecompetition, utility functions…Not really different from ‘waves, fields, particles, quanta, phases o states of matter’ in physics or ‘genes’ and ‘species’ in biology —thse are all just concepts. People try to formalize them and use them. Doctor’s and biologists had no clue what things germs, replicating molecules like DNA or genes were but mathematically modled them nonetheless long before they could find anything in nature that fit the description they had created from their imginations applied to what they knew at the time. (Delbruck and schrodinger called dna an aperiodic crystal or something; math people devloped math structures called tilings—by developing a geometric model of Godel’s theorems–just pictures but had same logical structure— which later were found in the form of quasicrystals in nature.)

      I think that saying economists ‘don’t get this’ is a blanket statement, stereotype, over generalization. I was just reading an obituary of Kenneth arrow by S Durlauf, summarizing his life’s work. (he was into everything, GET, uncertainty, risk, voting systems, complaexity theory. One thing i hadn’t thought of in a while but knew is ‘2nd fundamental theorem of GET’. GET cannot predict anything exactly any more than weather/climate people can (they can give probabilities that there will be say ’50 hurricanes this year’ and patterns of rainfall due to el nino’s etc. ) but not anything exact. You can’t predict apple computer from GET.
      But GET does not really provide any scientific justification of things like income /wealth inequality —any of that is ideology. It shows any result can follow from GET is possible
      fro huge inequality like now,, and monopoly, or else full equal income communism. What follows is pased on policy. This is no different than saying if one believes in biological evolution–‘neo darwinism ‘–that does not mean you are commited to eugenics, concepts of ethnic/racial supeiority etc. Also one can believe in quantum theory and be either a pacifist type (einstein) or a militarist (ed teller, wheeler).
      the Adam Smith of free market types is not same as smith of people who read the moral sentiment.

      • April 17, 2017 at 12:38 pm

        Mart, Anthropologists have examined the knowledge and life styles of indigenous peoples across the world. The findings are similar. Indigenous peoples develop knowledge and skills for practical and pragmatic purposes (in the broadest sense). But they also use that knowledge and understanding to compose poetry, paint, sculpt, and organize religious life. This knowledge and understanding is not different from that of modern peoples. Only more abstracted.

        We’ve been seduced into believing that mathematics has only one form, that of the west, and that mathematics is not socially constructed (that it reflects “reality”). Neither is correct. When I teach mathematics I always begin with bases. For example, I ask how many know we use a base-10 number system? Now translate the number 100 in that base into a based 4 system. I’m hoping to destroy the routineness of mathematics so we can talk about how it is constructed and how and why it is fallible. Once the students are aware of this, they have a reasonable chance of learning some useful mathematics.

        What is “scientific” justification. When a scientist, after years of research concludes that the emissions from coal-burning power plants in the Midwest leads to acid rain in New England, what is the scientists saying? Certainly, not that this conclusion is absolute and will never change. Without the statistics, the scientist is saying it is “likely” or “highly likely” that emissions create acid rain. This is not a flaw in either science or mathematics. It is rather, how both function. Those who attack science reject any sort of uncertainty. And those who support science sometimes respond by asserting the certainty of scientific conclusions. This is incorrect. The uncertainty must be accepted worked into all scientific conclusions. Science is the best source of knowledge available but it is not an unassailable source.

      • April 18, 2017 at 4:46 am

        Ken—i agree with that. I don’t like some of modern scientists who say because they have some very sophisticated theory it must be more correct than simpler ones or non-formalized ones.
        (There’s a movement called ‘qualitative math’ around that actually wants to bring back some of the older ways and get rid of all the heavy syntactic machinery/formalism. I havent really followed it.)

        (Feynman made some sort of famous discovery of why one of the NASA rockets crashed–it was because people confused metric system of UK with US inches/foot system.) There is a whole field of ‘ethnomathematics’ (and website devoted to mathematicians of the african diaspora which traces math back 1000’s of years –eg early number systems used there). Many of these are graphical, etc (but even newton used ‘fluxions’ which i dought most people would recognize today)

        (my view is we have base 10 because we have 10 fingers.computers use base 2 or many others. mathematically all bases are the same but 10 is conveniant for humans—also it obeys a sort of ‘minimax’ principle or one of ‘least action’–neither too simple nor too complex—sort of on the ‘edge of chaos and order’ lie humans—neither frozen in outer space nor burned up in the earth’s core. .

        its interesting to consider the possiblity that actually all basses are not the same in some ways–this is sort of like paraconsistant logics, where you have statements that are both true and false–curiosities for logicians and math people.)

        some indigenous tribes only use 1, 2, many. they dont really need any more. . . But there is alot of nonformal math as you mention–architectural patterns, clothing designs, occur everywhere. even animals have math (fibonnaci sequence is everywhere, crickets chirp and firefllies flash in patterns well described by stochastic resonance and chaos theory.

        indigenous people and different cultures have different values so they use math and language in different ways. of course some people might deny or recognize it as math.

        i dislike math and physics at first–because the example we were given were things like calculating the trajectory of a bullet or bomb, or using theory of compound interest to calculate bank account money, or gambling and game theory for money and war.

        it really was only interesting when i looked at Thom’s and Turing’s theory of morphogenesis in biology, and came across a discussion of visual hallucinations caused by drugs in scientific american which used a sort of quantum field theory model to explain the patterns–it also showed these were the same patterns one sees on the clothes and blankets used by Huichol indians of mexico who use the cactus/drug which is hallucinogenic.

        (i once took a fun course taught by a pretty hardcore
        re mathematical topologiist (who could also be pretty ruthless when criticizing the technical work of other topologists if tought they were in error). it was called ‘rhyme and reason—partial patterns in math and poetry’. (he’s also a poet and wion awards in that–sort of an eccentric person).

        . Also all the pictures of fractals which are like tree and river basin shapes. there are a ton of sculptors and artists who use math equations as basis of their creations, or art as the source for modleing. .

      • April 18, 2017 at 12:55 pm

        Mart, mathematics is inherently neither quantitative or qualitative. It is fitted into this dichotomy at different places at different times. And the dichotomy itself is created via historical processes beyond the control of humans. In simpler terms, tracing the complexity of mathematics and mathematical language over the course of history provides insights into the evolution of the hardening objectivity of mathematics and the objects of mathematics. This is mathematics. Embedded in culture and directly fallible.

    • robert locke
      April 16, 2017 at 9:43 pm

      We have known for a long time about the limitations of formal knowledge models as prescriptive science, and the limitations of planning as well. Perhaps it would be well to remember the distinction drawn by the ancient Greeks between knowledge and wisdom. According to Widepedia,
      “Wisdom or sapience is the ability to think and act using knowledge, experience, understanding, common sense, and insight.[1] Wisdom has been regarded as one of four due to Petross cardinal virtues; and as a virtue, it is a habit or disposition to perform the action with the highest degree of adequacy under any given circumstance with the limitation of error in any given action. This implies a possession of knowledge, or the seeking of knowledge to apply to the given circumstance. This involves an understanding of people, objects, events, situations, and the willingness as well as the ability to apply perception, judgement, and action in keeping with the understanding of what is the optimal course of action.”
      In the 19th century German engineers distinguished between Science (Wissen) and Skill (Koennen), the combination of both they called Technik. In German education they realized that the presence of both was essential to the running of technology and the economy. In the educational system Germans talked about Faehigkeit (capability) and Fertigkeit (ability to do a job), formal training could make a person capable and it could be acquired academically, but the ability to do a job could only be acquired sapientially on-the-job; Germany build a renowned system of apprenticeship training based on combining Faehigkeit with Fertigkeit. 60 per cent of German high school students undergo such education-training. Recently the need for experiential skills has been questioned through the use of algorithms that produce artefacts formally requiring the use of sapiential trained craft people. But until recently sapience was still regarded as essential to the preparation of people for the task of dealing with the management of human being.
      Somehow in economic studies, sapiential learning has been thrust aside. Tom Johnson pointed out that ‘At first the abstract information compiled and transmitted by these computer systems merely supplemented the perspectives of managers who were already familiar with concrete details of the operations they managed, no matter how complicated and confused those operations became. Such individuals, prevalent in top management ranks before 1970, had a clear sense of the difference between “the map” created by abstract computer calculations and “the territory” that people inhabited in the workplace. Increasingly after 1970, however, managers lacking in shop floor experience or in engineering training, often trained in graduate business schools, came to dominate American and European manufacturing establishments. In their hands the “map was the territory.” In other words, they considered reality to be the abstract quantitative models, the management accounting reports, and the computer scheduling algorithms. (Johnson and Bröms, Profits beyond Measure, p. 23)
      People have always consider sapiential forms of education essential to leadership preparation. They did this first of all because they felt character not knowledge to be most import in the education of leaders, which required for them to be deeply immersed in the study of the classics, and they thought that preparation of leaders best be achieved through experience (no person could be a prime minister unless they had years of experience serving in ministerial posts to learn how government functions; the best preparation for statemen is for them to study history of statecraft.

      • April 17, 2017 at 12:58 pm

        Looking at how people actually create and use knowledge and understanding frightens those who’ve learned that these things belong in the hands and minds of experts. Only the work of experts and their methodologies count as “real.” After all, they say the rest of us are just “lay persons.” This is why projects to make science and its methods fully public are so important. In this way there is a chance to “demystify” science and return all knowledge/understanding/experience to the same lifeworld. The lifeworld where all are created. Then we can begin the real discussion of the purposes for which these are created and used.

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