The Fruits of Civilization – Economic Predictability

Economic Predictability

“One thing we are not going to have, now or ever, is a set of models that forecasts sudden falls in the value of financial assets.” ~ American economist Robert Lucas

Business leaders in a market economy try to minimize the risk of loss by foretelling the future. Investments which may produce future profits are made only if the prospect of economic growth is sanguine; hence economic cycles.

Peering into their models as if they were crystal balls, economists prognosticate to a receptive audience. Economic forecasts surreptitiously guide the economy through investment decisions.

Economists are like the man behind the curtain in The Wizard of Oz: capable of putting on a show that signifies nothing. Most economic forecasts are way off.

“In the 1920s, with no computers, forecasters relied on random statistics: freight car loadings; grain harvests and prices; bank deposits. Today, forecasters employ elaborate computer models that scan dozens of statistical series describing the economy. Yet the predictions seem no better.” ~ Robert Samuelson

The import of economic dynamics and government policies leading up to the 2008 crash, the crash itself, the prolonged recession that followed, and the skewed recovery, all went unforeseen by those whose profession is peering into the prospects of the economic gyre.

“If past performance is a reasonable guide to future accuracy, considerable uncertainty surrounds all macroeconomic projections.” ~ US Federal ReserveĀ in 2017