It's been amusing over recent days to hear so many so-called economists predicting what just happened over three months ago, which is what happens every time "the latest" GDP figures are released.
Such is the dismal 'science' that is mainstream economics, they've only discovered this morning, at the end of June, what was happening to the economy from January to March. Turns out (according to Statistics NZ figures) the economy as measured by GDP shrank by 0.3% in what they call "the March quarter."
Bad news.
But as the latest newsletter from the Foundation for Economic Growth points out, weren't economists in 2007 predicting growth of 2% (plus or minus about 0.6%) for 2008? What happened to those predictions -- or indeed to any predictions made by mathematical economists? Turns out most of these predictions aren't worth the paper their invoices are printed on.
Frankly, they got their predictions completely wrong. As they usually do. Which means, just to summarise the position with respect to the profession on this particular news: they didn't know before the event what would happen, they didn't know at the time what was happening, and now it has happened they're not quite sure exactly why it did.
No wonder most economists are held in deservedly low favour. Give one a kick if you see one out loose in the wild.
26 comments:
Now I'm not much into this forecasting stuff, but you are using the wrong metric here. The real question isn't are the forecasts exactly right, the real question is, are the forecasts better than non-economists forecasts. Its comparative issue: are you better than anyone else, not are you perfect.
In response to Paul:
The primary goal of economics is to understand the economy. Peter's post has data relevant to how well economists can do that.
You are raising a secondary issue: How well or poorly economists do relative to each other and non-economists. That is an interesting issue, though not what Peter's post is about.
Anonymous: I would argue that forecasting and understanding may not go together. That is, you may be able to forecast well without much understanding of what's going on. For example if your data has a lot of serial correlation in it, you should be able to forecast without any understanding. So good forecasting does not require good understanding. Thus the real issue with forecasting is how good you are relative to other people, with or without understanding what is going on.
Now I have an(other) excuse to kick Paul! I suppose he gets to kick me back though. Damn.
Predictions are difficult, especially about the future. They might soon get a lot easier though...stay tuned...
Although economics does predict its own forecasting downfall in the efficient markets hypothesis. It is impossible to forecast a random walk.
There are also different kinds of economists. The economists that forecast exchange rates really do think about different things than do microeconomists, and most micro people I think view macro with the sort of contempt you do.
It actually surprises me how much bank chief economists are listened to and how infrequently anybody actually checks their performance. It wouldn't be all that hard to do. I wonder if it is because people are desperate to know about the future and macroeconomists are the best of a bad bunch.
Matt: I think you have a point. People are desperate to know about the future, for many reasons, and macroeconomists are the best of a bad bunch. But that's my point. The bunch is bad, but they are the best of them. And until someone comes up with a better way of doing things we are stuck with them.
Anon said...
That is an interesting issue, though not what Peter's post is about.
No, Peter's post was about insulting / rubbishing economists.
FF
Perhaps you might want to read what he wrote again because that's not what PC has done at all. By now you should know him beter than that.
Quick points to consider:
1/. As you well know PC holds certain economists, such as Prof G Reisman and L von Mises, in high regard. Going by what they are on the record as having said, lectured, taught and written, PC's comments would be acceptable to them. Likely they would not disagree or consider that he has insulted them. And they are economists...
2/. PC has targeted a specific group of fraudsters who identify themselves as "economists" but are in practice nothing of the sort. They do not understand human action. They have no idea what they are actually doing and their pronouncements are purile falshoods- easily exposed.
That's simple enough to follow, surely?
Now one last thing. On many occasions it has been suggested to you that a good thing for you to do would be to read the work of Prof Reisman and von Mises. You could even consider the work of Hazlitt as an easy start. If you are serious about UNDERSTANDING economics this is background reading you should undertake at the earliest opportunity. Without it you have little or no serious knowledge of the subject.
Now this is not to say you are incompetant when it comes to manipulation of computer algorithms or coding computers etc. But that is an entirely different subject from economics. If you are serious about learning and understanding economics then you must do the background readings as previously recommended. Time to make a start.
LGM
economists in 2007 predicting growth of 2% (plus or minus about 0.6%) for 2008?
Yep. but who knew before then how badly Labour's most recent inanities would effect the economy! You can't expect economists to take into account policy changes that haven't been announced yet!
What this shows is not that economists have got things wrong. What is shows is that Cullen hasn't smashed the ecnonomy by 2% --- but rather by 5%.
In just one year.
The only good news is that if Labour can take 5% out of the econonmy in a year, then ACT can put 5% back in a year.
Anon, What is ACT?
Julian
Hi Paul,
You said, "Now I'm not much into this forecasting stuff..."
And thank goodness for the future of Canterbury-trained economists. :-)
"The real question isn't are the forecasts exactly right, the real question is, are the forecasts better than non-economists forecasts."
Um, are they better than entrepreneurs?
As all good Austrians would know, the future is inherently unpredictable (whicxh makes me worried about Eric's "stay tuned"!)
As I'm sure you'll know, it is this 'uncertainty' that "calls forth the skill of entrepreneurship" -- not the lack of precision of poorly modelled mathematical functions that are inherently unable to predict anything, let alone to three decimal places.
Surely you'll agree it's entrepreneurs, not economists, who anticipate the future conditions of
markets and who work to meet them (or make them) by continually organising production to produce the highest-value goods at the least-cost; by directing labour and capital to those areas in which they anticipate greatest demand; by seeking new innovations and new technology to further enhance the productivity of capital and labour...
surely it's entrepreneurs who actually make decent 'forecasts' and who are judged (and rewarded) on the success or failure of their 'forecasts' -- and whose success or failure is central both to wealth creation and honest economics -- rather than the mathematical economists who, it seems, don't even seem able to predict their bar bill three drinks in advance.
Surely there's better things economists can be doing than something they do imperfectly anyway, and that entrepreneurs are already doing better? ;^)
... as I said here, by the way, quoting Mises and Arnold Kling post-Katrina.
Paul,
What you say doesn’t reflect the proper role of a professional economist in an economy. An economist’s job is very distinct from that of a businessman who is better placed to operate a business and make economic predictions. As Professor Reisman writes in his Magnum opis
“The value of economics to businessmen should be thought of not as teaching them how to make money (which is a talent that they possess to an incalculably greater degree than economists), but as explaining why it is to the self-interest of everyone that business-men should be free to make money. This is something which businessmen do not know, which is vital to them (and to everyone else), and which economics is uniquely qualified to explain.” (p.18)
You as a professional economist – as defined above – have much better things to do with your time than make economic predictions. And the data show that those who do try to make predictions do no better than what could be achieved by chance. This is the same with those who claim to be able to pick debt, currency, or equity markets.. There is little analytical evidence (if any) that this is possible.
As an aside, the term “professional economist” excludes those who promote ideas inconsistent with a pure division of labour economy (i.e. anti-capitalist ideas). This means that there are only a handful of real “economists” in NZ. Very sad.
Julian
Peter: I agree with you. Let me just make a couple of points.
" "The real question isn't are the forecasts exactly right, the real question is, are the forecasts better than non-economists forecasts."
Um, are they better than entrepreneurs?"
Yes and no. Entrepreneurs are making forecasts in just the same way as some economists. The question is whose forecasts are "better". This is not an easy question to answer, but I note that there is a market for forecasts and trade takes place at a positive price. That is, someone is willing to pay, serious money, to get these forecasts. These people must value said forecasts at least as much as the amount they pay for them. If not, trade would not take place. So some entrepreneurs are willing to pay to get forecasts. The market outcome tells us there is some value in what forecasters do.
"(whicxh makes me worried about Eric's "stay tuned"!)"
If Eric means what I think he means then do stay tuned! It will be fun.
"Surely you'll agree it's entrepreneurs, not economists, who anticipate the future conditions of
markets and who work to meet them (or make them) ..."
I agree 100%. The question is then what inputs do entrepreneurs use to "anticipate the future conditions of markets"? In some cases, but certainly not all, one such input are economic forecasts. As I noted above, trade takes place in a, by and large, unregulated market for forecasts at a positive price and thus I assume buyers value the forecasts they get.
Let me add a PS to what I just wrote. The point I wanted to make in my first message was just about what is the correct standard to judge forecasters by. I don't think it's whether or not they are perfect but whether someone else can do better.
This is the standard by which you can say how useful forecasters work is. Just showing them to be wrong isn't enough, you have to show that someone else can do better.
Paul Walker said...
Just showing them to be wrong isn't enough, you have to show that someone else can do better.
Amen to that.
Paul, you said, "Just showing them to be wrong isn't enough, you have to show that someone else can do better."
Not at all. If the science of meteorology didn't exist and all we had was Ken Ring, it would be sufficient to show that he was wrong -- ie., that the moon did not have the causal effect on weather he says it does. It would certainly be desirable that someone do it better, but to prove him wrong it would not not be necessary to point to someone who did. In other words, itt would not be a defence of Ken Ring to say "Well, no one's doing it better."
Wrong is wrong. Useless is useless.
Similarly, once the periodic table was understood, it would only have been necessary to point to the impossibility of transforming one element to another in substantial quantities (ie., by nuclear means) to show that alchemy was a waste of time better spent elsewhere. , It would not be a defence of alchemy to say "Well, no one's doing it better."
You also say, as another argument for taking economists' crystal ball gazing seriously, "I note that there is a market for forecasts and trade takes place at a positive price. That is, someone is willing to pay, serious money, to get these forecasts.... The market outcome tells us there is some value in what forecasters do..."
Not at all. The fact that people were willing to pay serious money for alchemists to dabble in bullshit -- or that people pay money for rabbits' feet, four-leaf clovers and 'systems' to win when betting on horses (and Ken Ring's almanac) -- does not mean there is any real objective value in these things.
It simply means they're being conned. As I'm sure you're aware, they all fall into the category of what Menger called 'imaginary goods' -- they're simply incapable of being placed in any causal connection with the satisfaction of any genuine human needs.
But it's even worse than that. These figures aren't produced for profit management in the free market -- the primary reason that predictions of aggregate figures are produced (and predicted) is because they're used by bureaucratic management to hamper free markets (ie., to give information that's six months lat to the likes of Alan Bollard so he can stuff up the money supply again). And to the extent they're given great publicity, they maintain the destructive fiction that such bureaucratic meddling is needed to maintain the markets.
Further, it's not even possible to say (as you contend) that economists' predictions are any better than those of non-economists (as I've mentioned above, entrepreneurs do it better, and to the extent to which they hold economists' predictions in contempt, I suspect they do it way better). Just look again, for example, at that graph showing economists' predictions for the TWI over recent years [from this post], which are frankly embarrassing. It's just not possible to be any less accurate than these high-profile wallies.
I think it's fair to say that throwing a dart at the wall would have produced predictions that were no worse, and probably little better.
Which means that, as Julian points out above, the time of rational economists is much better spent elsewhere -- ie, their time has a higher-value use in defending free markets than it does in predicting the outcomes of hampered markets to three decimal places.
By the way, I will stay tuned for Eric's "stay tuned," especially if it involves the money supply?
May one ask how long one's antenna needs to be up, and in which direction? ;^)
Next week or two, Peter (fingers crossed). Will make sure you're on the list the second things get going.
Of course, the future cannot be predicted with certainty. But entrepreneurs do make conjectures about the future when they engage in entrepreneurial activity; the successful ones find profit. The price system coordinates all of these individuals' forecasts about the future and encapsulates them into a single sufficient statistic: a price. Our best forecast of future oil scarcity? Look at the futures price of oil, cause that's where folks with real money on the line are. You just can't do better than the price as a forecast: any of the talking heads who think otherwise, unless they have real money on the positions consistent with the forecasts they're making, are engaging entirely in cheap talk. You just have to find the right market in which a position would correlate with the forecast. So, folks predicting big sea level increases as consequence of global warming really ought to have strong short positions in the Case-Shiller markets on housing aggregates for coastal property, and folks less worried ought be long the same indicators. Me? I own a house a block from the beach, so that suggests I'm not too worried given that I've not hedged by shorting in the relevant markets.
Following on from Paul, I would really like it if you'd not damn all economists for what macroeconomists get up to. Imagine if I damned all Objectivists because of the ramblings of one branch of the movement that you never much liked or agreed with in the first place. Damn "economic forecasters" or "macroeconomists" all you like, and it may well be the case that that lot helps give other economists a bad name, but they're certainly not a majority of economists. Check what Arnold Kling said here. I love that post. "Macroeconomics is something like the evil twin of classical economics."
Pete: "Not at all. If the science of meteorology didn't exist and all we had was Ken Ring, it would be sufficient to show that he was wrong -- ie., that the moon did not have the causal effect on weather he says it does. It would certainly be desirable that someone do it better, but to prove him wrong it would not not be necessary to point to someone who did. In other words, itt would not be a defence of Ken Ring to say "Well, no one's doing it better." "
This makes a point a noted earlier nicely. There is a difference between understanding and forecasting. You are right as far as understanding goes, showing Ken Ring to be wrong shows he doesn't understand what is happening. That doesn't mean he can't forecast what will happen. As I said before
"I would argue that forecasting and understanding may not go together. That is, you may be able to forecast well without much understanding of what's going on. For example if your data has a lot of serial correlation in it, you should be able to forecast without any understanding".
"Not at all. The fact that people were willing to pay serious money for alchemists to dabble in bullshit -- or that people pay money for rabbits' feet, four-leaf clovers and 'systems' to win when betting on horses (and Ken Ring's almanac) -- does not mean there is any real objective value in these things."
Value is subjective. If people are freely trading, I can only assume from their actions that they get (subjective) value from the trade. Otherwise why are they trading.
"But it's even worse than that. These figures aren't produced for profit management in the free market -- the primary reason that predictions of aggregate figures are produced (and predicted) is because they're used by bureaucratic management to hamper free markets (ie., to give information that's six months lat to the likes of Alan Bollard so he can stuff up the money supply again)."
Actually no. The market for most of these kinds of predictions is private companies. If fact many large companies have people doing this work in house. Again this tell us that the management of these firm think there is value in what comes out of this work. Otherwise some other firm should be able to make more profit by not doing or buying this type of input and thus force firms that use it out of business.
I agree that the use these predictions are put to by governments is by and large bad but that tells us more about the nature of government than anything else.
PC here is a very simple question that eludes you and if you can provide a simple answer then it would be interesting to see your logic.
What is the point of quantitatively analyzing economic activities of the past? If as you say that a rough guess ( estimate , projection , forecast ) of future economic activities is impossible or useless, then as a result of that proposition from you, the knowledge of the past must be useless information to know about as well, right?
I await your detail analysis on my question.
LGM said...
If you are serious about learning and understanding economics then you must do the background readings as previously recommended. Time to make a start.
LGM, thanks for the advise to read Reisman's/von Mise's books or their work, but they would be of no use to me apart if I want to be a politician , consulting economist, or a professional blogger. I am not aspired to pursue a career in those areas. A knowledge of Reisman's/von Mise's work is good for say, debating about economic policies if I am a politician which if I am on a Select committee , then I can argue based on Reisman's/von Mise's. I think reading PC's blog for some quotations from Reisman/von Mises is just enough knowledge for me. Apart that (being a politician) of course if I want to pick up chicks in a bar, then I perhaps I would start talking about the theory of Economics from Mise's & Reisman's perspectives, that would be impressive, but hardly chicks today are interested in intellectual chat about economics. So, if I know for sure that chicks would be interested intellectual conversation about economics in a bar, then sure, I would grab all of Mise's/Reisman's books and read them. I would also read all of Ayn Rand's books. But as far as experience has told me, a conversation about economic theory in a party or a bar will always drive chicks away from you.
BTW, I have other methods of conversation that really works.
Anyway, thanks for the advise, I'll pass, I'll just stick to reading PC's bits & pieces on Reisman & Mise's blog posts because I have too much to read at the moment. I read about 10 research papers at most everyday.
Now this is not to say you are incompetant
More irony, LGM?
A thought on the Ken Ring example: his performance can only be measured by comparing his outvcomes to those derived by other means.
Simply by luck, he will be right some of the time. How do we know being right 30% of the time, say, is "good".
Well you might compare it to how often a forecast of "always sunny" is true, or a series of forecasts that are randomly generated.
If Ken Ring beats those then he has something. Something.
Since all types of forecasts are inaccurate to some degree, absolute measures of wrong considered in isolation are incapable of telling you if the forecaster is adding anything beyond what he gets by chance. An "always sunny" forecast in the Sahara will be right something like 90% of the time - so Ken will presumably have a more difficult job there.
Matt said...
Since all types of forecasts are inaccurate to some degree, absolute measures of wrong considered in isolation are incapable of telling you if the forecaster is adding anything beyond what he gets by chance.
It is hard to argue with PC on this subject.
First, when PC argues in most of his posts here, he demands evidence from any one opposing his views.
When some opponents point out some evidence to PC, then he dismisses the evidence not based on counter-argument with his own evidence or pointing to studies that had validated his arguments, but dismiss it purely on the ground that it is impossible to predict the future. But we know that this is not the way to validate an argument.
I will give an example. As a skeptic in global warming, when the AGW proponents say that the debate is over and case closed. I don't waste my time in defending my position that the AGW is bullshit merely by asserting that the onus is on them (proponents) to prove. I defend my position by citing other studies that throws doubt on AGW. This is what you call balance arguments & counter-arguments. PC's dismissive of forecasting doesn't rely on showing what the other studies had found that is contradicting the current methods. PC offers none of those, instead he rubbishes it purely because 1 , 2 or a few errors made by economists, and then all forecasters are branded as bullshit. No evidence cited, from his own or from other studies.
Using Ken Ring as an example is irrelevant. WHY? Because it can be shown by repeated tests that his prediction is no better than guess work or chance, and I think that this has been done by some opponents of Ken , such as Hot Topic. On the other hand, a repeated tests of forecasting methods will show that it is better than guess work. Stating that it is better doesn't mean 100% correct all the time and only a sucker or a child who believes that forecast is 100%.
Matt
Well it wasn't meant to be irony at the time I wrote, but in light of the response...
LGM
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