Storm in Economic Forecasting

, London

Bank of England chief economist Andy Haldane spoke this week of a crisis in economic forecasting:

https://www.ft.com/content/e94c96a2-d3e3-11e6-b06b-680c49b4b4c0 [Subscription may be required]

http://www.bbc.co.uk/news/uk-politics-38525924

Haldane compared economists’ failure to predict the 2008-2009 crash with a 1987 mis-prediction in another discipline, when (locally famous!) UK weather-forecaster Michael Fish said that it might be ‘very windy in Spain’, ahead of a hurricane in the south of England!

https://www.youtube.com/watch?v=NnxjZ-aFkjs

(Incidentally, I was at the University of Cambridge at that time. I remember two things about October 1987. Having to climb over felled trees to get to lectures. And, an equally-unpredicted stockmarket crash, three days after the hurricane.)

Haldane also spoke about economists’ mistaken forecasts of the UK economy post-Brexit (although he said that missed forecasts were a matter of timing, reiterating the Bank’s view of longer-term adverse impacts). Before Haldane had spoken, the FT’s economics editor Chris Giles wrote this piece defending consensus analyses:

https://www.ft.com/content/15837254-d272-11e6-b06b-680c49b4b4c0?desktop=true&amp%3BsegmentId=d8d3e364-5197-20eb-17cf-2437841d178a

Many of Giles’ comments are entirely on point (and gel with some of Haldane’s ‘timing’ observations). Notably, there are a variety of interpretations of recent UK economic data, and it’s too early to tell what the fallout from Brexit will be. He also makes the case for admitting errors and learning from mistakes – a healthy call!

Nevertheless, Haldane’s broader call for economics to admit insights from other disciplines is surely equally valid. Unfortunately, there aren’t any other disciplines at present that offer a descriptively-accurate picture of emerging dynamics in human consciousness. (As I explain here

Consciousness, Economy and Earth (1)

orthodox science’s approach to this topic is currently completely unreliable.) But the decisions and behaviors that economics studies are a direct product of consciousness.

Until this theoretical gap is filled, mainstream economics will be limited to Haldane’s ‘narrow and fragile models’. In the meantime, forecasts and analyses at the Emerging Future Institute can be expected to continue to outperform orthodox methods, precisely because we do incorporate the deeper and broader factors that consensus approaches ignore or neglect!

[Note from Benjamin J Butler:  I have followed some of Mr Haldane’s work over the years. Perhaps economics and other fields are not really incorporating consciousness in to their work, but I would say that the influence of complexity theory and the inspiration of more ecological thinking is starting to happen. One can see this at places like the Santa Fe Institute and elsewhere.  Nonetheless, good investors with whom I have interacted over the years (who arguably have a greater incentive to be right than economists) have had insights about the deeper aspects of the human mind since antiquity. George Soros’ book ‘The Alchemy of Finance” famously touched on the ‘mind of the market’ but the reviewers were not interested in his ‘amateur philosophy’. In 2009 he articulated his views about the impact of the mind on reality:

“I can state the core idea in two relatively simple propositions. One is that in situations that have thinking participants, the participants’ view of the world is always partial and distorted. That is the principle of fallibility. The other is that these distorted views can influence the situation to which they relate because false views lead to inappropriate actions. That is the principle of reflexivity. For instance, treating drug addicts as criminals creates criminal behavior. It misconstrues the problem and interferes with the proper treatment of addicts. As another example, declaring that government is bad tends to make for bad government.”

In this sense – and simplistically speaking – if people think that a certain market is good it can actually attract capital and make a bad situation good as Adam Smith’s ‘animal spirits’ kick in.]

 

 

 

Nicholas Wright
Nicholas Wright
Economist

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