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!
Great article, Mike, thank you. I would add another to your list of general forecasts; the fact that economic growth is partially a function of population growth, meaning that any demographic crunch of the kind that the developed world is now facing is likely to make growth nearly impossible, and monetary contraction a near certainty. This is because younger people do most of the borrowing and spending, whilst people tend to naturally decrease discretionary spending as they age and repay debts rather than take out new ones. I’ve never heard a mainstream economist so much as allude to this, however, although I’m willing to bet it was a factor in Merkel’s fateful decision to allow large numbers of migrants into Germany. We are used to hearing about the pension problem that emerges when populations age, but that is the tip of the iceberg.
The big point you raise is in the literature but not made much of. A slowly ageing population does not create poverty if productivity increases. Mass migration lowers productivity. The capital stock has to be spread over more people and cheap labour deters productivity enhancing investment. Why the Romans did not invent a vacuum cleaner! Get another slave. Merkel’s Migrants won’t spend enough. Politicians’ Number One Economic Misleader Scam is that growth through population increases is a benefit. More people to consume more output. Not better off! They deliberately confuse it with growth through improved productivity which is a benefit. How about encouraging the native population to have more children if the population is ageing? Capitalism wants women doing rubbish jobs not looking after kids and sells it as liberation with the assistance of the left. One reason the left will lose is that they have less children. Small changes over a period are like compound interest. Devastating over a time. As Rod Liddle said London is not a beacon of liberation. It’s a slave camp of foreign cheap service labour to serve the bien pensant smug lefty middle-class. The pesky servants just don’t live in any more darling. Too much to answer fully.
I would have thought some of what Keynes said is still good advice. If business borrows in order to upgrade outmoded equipment the new equipment will, other things being equal, increase productivity. More goods will be available at lower prices because the cost of production is less. If the buying public have more money in their pocket they will buy more of those goods, etc. etc.. Basic laws of supply and demand have not altered, though now we are not just talking about machinery making pots and pans.
As for the balance of trade. I thought the ideal was for a country to export more in value than it imported. In Macro terms surely that means more money to invest in improved equipment/innovation.
But our economy is Free isn’t it. Not Planned. Business and People do what they want. So in a way Mike is right. Economic forecasts are rubbish. However, that is not the whole story. We know there have been vested interests dictating doom into the forecasts.
If more attention was paid to basic economic theory and less to what financiers say and want, maybe forecasts would be of some use. Also, maybe we would have seen the 2008 crash coming. Maybe.
Anyway, lets invest in our fishing industry. Lets invest in the old Red Wall areas. Re build infrastructure where it is needed. Subsidise food production. We can’t eat grass, so raise sheep and cattle on it. (Sod the CO2 warriors.) The more we produce for ourselves the less we need to import. And decide what is our best long term strategy to meet our energy needs ourselves.
That’s my economic plan and I forecast we will do it better without EU interference.
Of course productive investment is good as are many things. That is not what I discussed. My point is predicting how much will actually be undertaken – in fact how much will be spent generally overall. You can’t tell.
Remember Neil Woodford? Investment advice genius touted for years. His fund has gone under he’s been sacked and some investors are getting 50p on the pound. So much for his crystal ball!
I’m probably being naive Mike. The way I saw it – an entrepreneur looks around and sees if he could only make more of his product without increasing the unit cost – he could sell more, making more money. So he gets a loan, buys more or better premises/machinery/even labour and increases production. Where does investment advice come into this? That advisor is probably part of the ‘financiers’ that I disparage.
Of course the loan my entrepreneur got from his bank was funded by money invested by someone, somewhere. Yes I am being naive. The whole circulation of money – ‘finance’ is beyond me. But my clear impression was that the 2008 crash was basically caused by too many loans being made on too little – cash reserves – I think it is called. Didn’t we bail out one or more of our banks? (Too little too late, I’ve heard it said.) And didn’t Eurozone countries suffer more because EU had no Central Bank to bail anyone out?
I also naively believed that the job of the Governor of the Bank of England was to understand, advise, and even influence the amount of credit being allowed via the other banks. This involves him in understanding ‘the economy’ so in that sense I can understand why ‘Government’ expected Mervyn King to have a crystal ball.
We are not really disagreeing about economic forecasts being rubbish. They are. There are all the Treasury civil servants in the mix as well and maybe similar in the Bank of England.
Somewhere along the line, someone surely has the power to direct a suitable amount of ‘finance’ into productive investment. Which we agree is good, what is needed.
Surely if I asked for a loan I would be asked what it was FOR, wouldn’t I? As well as how I will repay it.
I suppose what I am wanting is our democratically elected government to have more control over the system. To be able to direct investment into good productive investment without raising taxes to fund it. I admit it frightens me as well as possibly not being realistic.
So many points there it would take a week to answer. I’ll go for two. The Bank of England is supposed to try avoid disaster but that’s not the same thing as fine tuning the economy with forecasts to match. If a business builds up stocks thinking to sell more that’s investment. Woodford was an adviser on where to put your savings which involves predicting the economy. If crash go to cash.
I remember many years ago, my Solicitor’s advice. – ”Take all the time necessary to consider. – Then decide quickly.” ….. Also the SAS moto of – ”He who dares, wins.” ….. This advice and moto are of course just that, but consider what the alternative would be. – Dither without decision, and never ever taking any chance due to fear ! ….. A man or a Nation faced with a possibility of benefit, can either be timorous and do nothing, unable to make a firm conclusion, or upon due consideration, dare to win !
Leaving the shackles of the EU comes to mind ! – Due consideration being given, the British decided to break free ! – It would be advantageous to all for a mutual deal, but not at any price ! – The British must dare to evaluate our Nation correctly, and then to act, – by leadership if necessary !
Yes Mike Maunder, I think you are right. We have dared and if we don’t win there is no one else to blame now. Boris seems to be confident we can revitalise the failing areas of the country and also boost the whole economy by trading world wide. He now has to withstand all the EU’s bullying tactics. We are better without them.
‘Well balanced’ is exactly what they said before the 2008 crash from which we have not recovered. Output is around 20% down from the trend line before the crash. They called it ‘The Great Moderation’ they did then woops. I remember the 1973 property crash. In three weeks the market went from everything selling to nobody buying. That’s because people have a choice whether to spend their money. The danger is thinking ‘This Time It’s Different’ and that the authorities can control everything now.
It should be noted , that theideal system is that the bal. of trade is Zero plus any innovation.Vatia ions like immigration etc are destabilising. The ideal situation would be internal innovation, and change in other beneficial moves. to compensate as immigration is not often beneficial
Whenever I am asked I always answer Prepare for the worst Buy Gold sovs, Classicly beautiful/desirable artifacts,Land and buildings,, A copy of “How it Works “, more gold (.plus small change = Silver ) etc.
So about the economy, There must be a Select Committee somewhere. I believe they would have said that the UK economy is pretty well balanced to respond to most threats and that many sectors can be quickly mobilised if needed very effectively. [ I also believe that the bal of payments has been managed to give the desired and apparently random result ][ the moronic way is cars ]
I believe that the main threats are not economic but cultural. Like Education, propoganda, information, Political, Dispersal, ,reaction times, intelligence, religious, local environment, , etc,
Some of these threats are dire and imminent. and seem unnoticed Select committees contain some very clever people ( MPs) and can call on serious experts. But maybe too easily misled. or or diverted being of a certain type before being chosen ( eg the pond is too small )
You may of course envisage a different scenario and want to know how to make more money( As someone recently pointed out, I’m a doom-monger) I have no idea.,,,, Buy Weapon makers..?
Measures to take; that’ll cost you.