Crystal Balls and Econometrics

The growth of economic knowledge over the past 200 years compares quite favourably with the growth of physical science in any arbitrary 200 year stretch of the dark ages or medieval period. But one is reminded of Mark Twain: “it ain’t what people don’t know that’s the problem; it’s what they know that just ain’t so.” Along with the accumulation of knowledge there has been a proliferation of abstract theorizing that is only too easy to misapply or apply to situations where it is inappropriate. The low power of empirical tests and indifference of too many people to empirical testing has allowed useless models to persist too. Ideology also plays a bigger part than it does in most sciences, especially in macroeconomics. So it is easy to point to cases where economists offered terrible advice. No reason to despair. Smith, Marx, Keynes, Kalecki, Simon and Minsky all advanced understanding somewhat while Marshall, Hicks and others clarified and formalized concepts. Macroeconomics took a wrong path and a sharp turn for the worse in the1970s and we are barely emerging now. Still, what is 50 years in the eye of history?

— Gerald Holtham on RWER Blog

The modern forecasting field, which emerged in the early twentieth century, had many points of origin in the previous century: in the field credit rating agencies, in the financial press, and in the blossoming fields of science—including meteorology, thermodynamics, and physics. The possibilities of scientific discovery and invention generated unbounded optimism among Victorian-era Americans. Scientific discoveries of all sorts, from the invention of the internal combustion engine to the insights of Darwin and Freud, seemed to promise a new and illuminating age just out of reach. (Friedman 2014, ix)

But forecasting also had deeper roots in the inherent wish of human beings to find certainty in life by knowing the future: What will I be when I grow up? Where will I live? What kind of work will I do? Will it be fulfilling? Will I marry? What will happen to my parents and other family members? To my country, to my job? To the economy in which I live? Forecasting addresses not just business issues but the deep-seated human wish to divine the future. It is the story of the near universal compulsion to avoid ambiguity and doubt and the refusal of the realities of life to satisfy that impulse. (Friedman 2014, ix)

Economic forecasting arose when it did because while the effort to introduce rationality—in the form of the scientific method—was emerging, the insatiable human longing for predictability persisted in the industrializing economy. Indeed, the early twentieth century saw a curious enlistment of science in a range of efforts to temper the uncertainty of the future. Reform movements, including good, bad, and ugly ones (like labor laws, Prohibition, and eugenics), envisioned a future improved through the application of science. So, too, forecasting attracted a spectrum of visionaries. Here were “seers,” such as the popular prophet Roger Babson, Wall Street entrepreneurs, like John Moody, and genuine academic scientists, such as Irving Fisher of Yale and Charles Jesse Bullock and Warren Persons of Harvard. (Friedman 2014, ix)

Customers of the new forecasting services often took these statistics-based predictions on faith. They wanted forecasts, John Moody noted, not discourses on the methods that produced them. Readers did not seek out detailed information on the accuracy of economic predictions, as long as forecasters proved to be right at least a portion of the time. The desire for any information that would illuminate the future was overwhelming, and subscribers to forecasting newsletters were willing to suspend reasoned judgment to gain comfort. This blend of rationality and anxiety, measurement and intuition, optimism and fear is the broad frame of the story and, not incidentally, why forecasters who were repeatedly proved mistaken, as all ultimately must be given enough time, still commanded attention and fee-paying clients. (Friedman 2014, x)

(….) Forecaster’s reliance on science and statistics as methods for accessing the future aligns their story with conventional narratives of modernity. The German sociologist Max Weber, for instance, argued that a key component of the modern worldview was a marked “disenchantment of the world,” as scientific rationality displaced older, magical, and “irrational” ways of understanding. Indeed, the forecasters … certainly saw themselves as systematic empiricists and logicians who promised to rescue the science of prediction from quacks and psychics. They sought, in the words of historian Jackson Lears, to “stabilize the sorcery of the market.” (Friedman 2014, 5)

The relationship between the forecasting industry and modernity was an ambivalent one, though. On the one hand, the early forecasters helped build key institutions (including Moody’s Investors Service and the National Bureau of Economic Research) and popularize new statistical tools, like leading indicators and indexes of industrial production. On the other hand, though all forecasters dressed their predictions in the garb of rationality (with graphs, numbers, and equations), their predictive accuracy was no more certain than a crystal ball. Moreover, despite efforts of forecasters to distance themselves from astrologers and popular conjurers, the emergence of scientific forecasting went hand in hand with rising popular interest in all manner of prediction. The general public, anxious for insights into an uncertain future, consumed forecasts indiscriminately. (Friedman 2014, 5)

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