When economists make predictions, just walk away ...
'Mathematical economists' predict all sorts of things, and all sorts of people believe them -- but there's a reason contrarians still make money even if Bear Sterns can't: the 'mathematical economists' with their crystal balls really don't have the first clue what they're talking about.
These are the people, it should be remembered, who told the government they'd be in deficit when they're not (oops); who said for years that government surpluses would be small (when they turned out to be huge); that Kyoto would be a net benefit to New Zealand taxpayers (it's going to cost us billions) ... we're heading for recession, says Cullen, we're not, says Clark; we are says the BNZ, we're not says BERL ... let's face it, none of them really has the first clue what's going on.
And that's just the gee-whiz crystal-ball gazers who do the sums for government! Then there's the ones who pull down the really big salaries, the chaps who are all over the TV and radio making predictions -- which mostly consist in agreeing with what every other pundit is saying -- but it turns out with these types that they've got no more idea about what's going on than your taxi driver does, as a new study fresh from the printer makes clear. What you see in the graph below is a chart of NZ's Trade Weighted Index for the last fourteen years -- a crucial figure on which billions of dollars are spent -- measured against the predictions of all those big-name chaps with a calculator, a big salary, and not a clue what's going on. Take a look:
You'll be wondering what those little fan-shaped things are that seem to bear no relation to the actual TWI? Those suckers are the range of predictions made by most of the big names you hear cluttering up your airwaves with their soothsaying (the red line is the median forecast, the grey line is the range of their predictions, the solid black line baring little to no relation to either of these is what actually happened). Just to stress this point again: none of these turkeys is able to predict the future any more than you could by throwing a dart at the wall. Or to put it another way, when you hear these mathematical economists making predictions about the future, don't believe a word of it. You might just as well read your tea leaves.
Here's the real lesson: Economics doesn't give you a crystal ball allowing you to make quantitative predictions about the future. It doesn't give anyone that kind of crystal ball -- and anyone who says it does is either lying to you, or to themselves. As Ludwig von Mises pointed out fifty years ago, economics is not a science capable of quantitative predictions:
People by and large know today that a boom brought forth by a policy of credit expansion and "easy money" cannot last forever and must sooner or later lead to a slump. They do not want to be taken by surprise and ruined... As they believe that economics is the art of predicting tomorrow's business conditions, they consult the economists.
"How will business be in the coming months?" asks the newspaperman when interviewing the economist. No convention of businessmen is held without the solicited presence of a professor of economics, or the head of a bank's research department, who in guarded language produces a cautiously qualified prediction about the nation's, or the world's business. Whenever and wherever a businessman catches sight of an economist, he tries to sound him out about the future state of the market.
But we've already seen that the country's highest-earning economists have no idea, do they.
Economics can only tell us that a boom engendered by credit expansion will not last. It cannot tell us after what amount of credit expansion the slump will start or when this event will occur. All that economists and other people say about these quantitative and calendar problems partakes of neither economics nor any other science.
Economics predicts the outcome of definite modes of conduct, in our case, of a policy of credit expansion. But this prediction is qualitative only. Economic prediction can never disclose anything about the quantitative relations concerned. There is not, and there cannot be such a thing as quantitative economics ... [and any] forecasts about the course of economic affairs cannot be considered scientific.
Despite popular beliefs, economics is not a science of quantitative predictions. It does not provide reliable information on such matters as what the price of a common stock or commodity will be in the future, or what the 'gross national product' will be in the next year or quarter ...
...or what the Trade Weighted Index will ever be, except in the past. The future is unknown. There's no way to put a number on it. Real economists know that, and don't pretend otherwise.
Proper economics -- not the mathematical junk that squeezes real market processes into a Procrustean Bed of mumbo jumbo -- that is, real descriptive economics of the kind practiced by Austrian economists will, as Reisman goes on to say, "provide an important intellectual framework for making personal and business economic decisions." A proper knowledge of economics will help defend business and economic activity against regulators and politicians who continually seek to destroy both. It will not teach businessmen how to make money, he says -- a skill "they possess to an incalculably greater degree than economists" -- but it will explain why it is to the self-interest of everyone that businessmen should be free to make money.
That should surely be enough for anyone, you would think, without witchdoctoring up the world with lots of overpaid and under-successful clairvoyants.