Written by Mike Newland
Mervyn King relates that when he appeared before Parliamentary committees looking into the economy, he’d sometimes reply to questions by saying that he did not have a crystal ball.
Parliamentarians seemed to think that it was the job of the then Governor of the Bank of England to carry an official crystal ball telling them what the future held, writes Lord King. He could not, and nor could anyone else. Perplexity and disbelief were the response.
We all have a past, present and future while we are here.
We can’t change the past, but at least we have a good deal of information about it. The present offers at least some possibility of our controlling our destiny while knowing broadly where we stand.
The future is quite different. We have no idea about what will actually happen or how long it will last except in extreme circumstances. This is difficult to accept, so there is a huge and historically unquenchable appetite for wanting to believe that there are ways of finding out. Humans seem to find it difficult to live with uncertainty. We seem to be driven by a programmed need for survival strategies ready for perceived contingencies.
Nicholas Taleb writes about the tendency people have to attribute good luck to their abilities when, in fact, they were beneficiaries of uncertainty. To accept the latter would be to accept the possibility of bad outcomes as well.
Dr Johnson’s biographer James Boswell went to see executions at Tyburn. He remarked that the condemned did not seem much concerned. Unusually, they were in the position of knowing the immediate future and its length, so were curiously relieved of one uncertainty if not about the nature of the ‘bourn from which no traveller returns‘. Perhaps this explains what Boswell observed. People say things like ‘I felt better once I knew the worst’.
If we knew what would happen to the economy, we could be rolling in money or at the least, avoid losing it. The fortune-telling industry is alive and well in generating apparent experts mostly validated by their past luck in getting it right on the basis of chance. Hedge funds are essentially fee-generating businesses with an investment service associated, as one of their number cynically observed.
Every politician and government needs to pretend that they can manage the future. Who wants to vote for those who fail to offer a plan and promise results from it? Hence the existence of ‘expert advisers’ who trail behind the politicians until they are dumped for the latest version. Their job is not even to attempt a genuine forecast. It’s to tell people what they want to hear dressed up as clairvoyance.
Ask a consultant to predict the future and they’ll reverse engineer it starting from the client brief about what the customer wants to tell people will happen. Headline – ‘Housebuilding Guild forecasts increased prices when reselling new property‘.
Since the entire industry of politics is largely based on fortune-telling as a marketing ploy, it does not matter how many times the forecasts are wrong. In fact, newspapers would be partly denuded of copy without the latest ‘new forecast’ stories. They are as vital to reader titillation as the latest horror weather story.
What happened to economic doom after voting Brexit? Hmm. Embarrassed forecasters admit defeat and promise no more forecasts? Not.
Economists have become the modern equivalent of priests examining the entrails of sacrificed animals for clues as to the future. That is where the big important jobs are, but nowadays the priests wield a mouse and it‘s less messy.
Until the second half of the 19th-century economics was called ‘political economy’ and was a narrative subject, then something important happened as science and engineering grew in power and understanding. Perhaps the economy could be framed and explained as though it were a machine like a piece of clockwork or a train engine and could be managed and regulated in the same way. Predictions become possible. Pull this lever a bit and that happens. Pull the other one and so on.
What is wrong is that the economy is not like a piece of clockwork. The parts of a clock do fixed jobs; they have no say in and cannot alter. The parts of the economy are people who interact and change their minds and behaviour all the time.
The economy is what is now called a ‘complex system’. That means that slight alterations to its functioning cause unpredictable and increasing change to what happens. The weather is the same, which is why weather forecasts are so unreliable and get worse the further ahead you look.
Some economic forecasts are more than farcical. There was one not long ago predicting the change to incomes over the next several decades as the result of something and quoting a very precise figure! Bogus accuracy gives any forecast extra cachet and helps with a headline.
What happens to the economy is not predecided. The economy is people who constantly alter their opinions about what to do and how much to spend. Worse, they do not have sufficient information to make rational decisions, so they tend to follow the crowd. As Keynes said, it’s like a beauty contest where you decide not who you think the most beautiful but who you think the crowd will view as the most beautiful. Thus, individual foibles in viewpoint will not average out.
Despite the army of ‘top experts’ almost entirely failing to predict the 2008 crash or indeed famously the 1929 collapse and many others. enthusiasm for fortune-tellers remains undiminished. Indeed, it’s almost as though 2008 never happened or is irrelevant in assessing our powers to predict the future. It’s as though it were a natural disaster of extraordinary rarity – say a volcano creating dust which shut out the sun and destroyed agriculture – which can be shuffled off as outside the scope of claimed practical forecasting.
There are two forecasts about the economy which can safely be made, but they are so general that they can’t be counted as forecasts at all.
The economy – barring nuclear war and so on – will go up and down, but when and by how much we don‘t know. The second forecast is that output will increase in the long run as what Joan Robinson called ‘God and the engineers’ bring their powers further to bear on production methods – or have done mostly and remarkably since the 18th century. One could make a better and far more precise forecast about when the sun will run out of energy and shine.
One general forecast can safely be made and offers guaranteed accuracy. There will be continued rubbish forecasts and lashings of them. Careers depend on it!