I've posted before on the failure of economic forecasters to do what they purport to do: forecasting the future (see here and here, for recent examples.) When it comes to most economic predictions about the future, the evidence shows that it's a matter of the blind leading the sightless.
Just look at the recent evidence gathered by Whangarei commentator Rodney Dickens [What are the economic forecasters up to now? - pdf], which compares predictions-against-performance for the top ten economists surveyed each quarter by the NZ Institute of Economic Research. The average predictions bythe economic forecasters are called the 'consensus forecasts.'
As Dickens says, "not much use to firms and individuals who make the mistake of trying to use the consensus forecasts for business or investment risk management purposes." Here's that same 'consensus' trying to predict consumer spending, measured against what actually happened:
Not a complete dead loss, perhaps, but if you were relying on the "top ten" to help you out in June '02 and June '03 you'd have been in trouble. Frankly, one can see why some contrarians make money by betting against the forecasters ... except that just occasionally the forecasters are right.
Despite their lack of forecasting success, economists nonetheless persist in making public predictions that are lapped up by media and business. And many people will have locked themselves into fixed-interest mortgages on the basis of predictions of how interest rates will move, which can be contrasted to what actually happened:
The phrase "friggin' hopeless" might occur to you about now. If it did, then think of something stronger because here's what that same "top ten consensus" made of exchange rates, as measured by the Trade Weighted Index (i.e. the weighted value of the NZD against the USD, AUD, Euro, Yen and GBP):
Not much success there either, huh?
Now, you might object about now that using the 'consensus' prediction here hides the few forecasters who've been successful. Just to test that particular hypothesis, the chart below shows the range of predictions made by those top ten...
Looks lik e that hypothesis can be abandoned too.
Now, these charts are hardly a compelling argument for the efficacy of economic forecasting. Of course, Rodney is himself a forecaster -- his newsletter 'What really drives the NZD/USD,' he boasts, "shows that we have a much better understanding of what drives the major cycles in the NZD/USD than all the economists combined" -- but he's at least aware that the public, that is, you, need to be aware not to take forecasters' predictions as gospel.
Unlike politicians and central planners, who do take these forecasts as gospel (and Alan Bollard, who thinks he writes the gospel) entrepreneurs themselves rely largely on their own independent judgement of what the future holds-- and it's them after all who actually move the economy and drive production. Entrepreneurs will certainly listen to forecasters, and they definitely don't mind forecasts being taken seriously by the easily led, since it sets up opportunities to take advantage of their poor estimates. ( What entrepreneurs are often looking for is, as Israel Kirzner explains, "unexploited opportunities for reallocating resources from [low-valued] use to another of higher value [which] offers the opportunity of pure entrepreneurial gain. A misallocation of resources occurs because, so far, market participants have not noticed the price discrepancy involved. This price discrepancy presents itself as an opportunity to be exploited by its discoverer. The most impressive aspect of the market system is the tendency for such opportunities to be discovered.")
Entrepreneurs generally recognise the truth stated by Ludwig von Mises, "that the main task of action is to provide for the events of an uncertain future." If, for example, the date of booms and busts and the like could be predicted "with apodictic certainty" according to some formula or other, then everyone would act at the same time to make it so.
In fact, reasonable businessmen are fully aware of the uncertainty of the future. They realize that the economists do not dispense any reliable information about things to come and that all they provide is interpretation of statistical data from the past...
If it were possible to calculate the future state of the market, the future would not be uncertain. There would be neither entrepreneurial loss nor profit. What people expect from the economists is beyond the power of any mortal man.
The greatest danger of 'the forecasting delusion' is the illusion that "the future is predictable, that some formula could be substituted for the specific understanding which is the essence of entrepreneurial activity, and that familiarity with these formulas could make it possible for [bureaucratic management] to take over the conduct of business."
The fact that the term 'speculator' is today used only with an opprobrious connotation clearly shows that our contemporaries do not even suspect in what the fundamental problem of action consists.
Entrepreneurial judgment cannot be bought on the market. The entrepreneurial idea that carries on and brings profit is precisely that idea which did not occur to the majority. It is not correct foresight as such that yields profits, but foresight better than that of the rest.
NB: I can recommend the regular ravings of Rodney Dickens to you, from whom most of the charts above are sourced. Click here to go straight to his latest Raving. Or click here to enter the 'Literacy Centre,' where you can access all Rodney's past Ravings.