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 at my, ahem, other blog.)
Frankly, when it comes to most economic predictions about
the future, the evidence shows that it's a matter of the blind leading
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
NZ economists surveyed each quarter by the NZ Institute of Economic
Research. The average predictions by their economic forecasters are called
the 'consensus forecasts.'
Here's what that 'consensus' predicted would happen with NZ's unemployment rate:
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
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
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:
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?
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 like that hypothesis can be abandoned too.
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 and Ben Bernanke, who think they write
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.")
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...
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.