Futile forecasts?
On New Year’s Day 1962, Brian Epstein brought a largely unknown four-man guitar band from Liverpool for an audition at the Decca Record Studios in London. Weeks later, Decca told Epstein: “We don’t like your boys’ sound. Groups are out. Four-piece groups with guitars, particularly, are finished.” Their conclusion: “The Beatles have no future in show business.” In what is considered one of the biggest mistakes in music history, Decca rejected the Beatles and missed cashing in on the best-selling band of all time, with over 600 million records estimated sold worldwide, and still growing. Incidentally, one of John Lennon’s early teachers wrote this about him: “Hopeless… Certainly on the road to failure.”
Software genius Bill Gates, cofounder and chair of Microsoft Corporation, is widely quoted as having said in 1981: “640K (of memory) ought to be enough for anybody.” He later denied ever making such a statement. He did admit, in a 1989 speech, that “a move from 64K to 640K felt like something that would last a great deal of time… (but) it took only about six years before people started to see that as a real problem.” Then, in 1993, he reportedly said: “The Internet is not important to Microsoft.” This was followed in 1994 by remarks he made at the Las Vegas Comdex expo, one of the largest computer trade shows in the world: “I see little commercial potential for the Internet for the next 10 years.” He obviously had to swallow those words later.
In a 1974 speech, Margaret Thatcher said: “It will be years—and not in my time—before a woman will lead the (Conservative) party or become prime minister.” Five years later, she was the first woman leader of the Conservative Party and prime minister of the United Kingdom, serving in both capacities from 1979 to 1990, the longest-serving British prime minister of the 20th century.
In 1895, Albert Einstein’s father received this report from his son’s schoolmaster in Munich: “It doesn’t matter what he does, he will never amount to anything.” Einstein himself declared in 1932, when he was already a widely known genius: “There is not the slightest indication that nuclear energy will ever be obtainable. It would mean that the atom would have to be shattered at will.”
So much for predicting the future. Even experts in their own field are often way off the mark in the predictions and forecasts they make. (I will not even discuss weather forecasters—among the more notorious of the lot.) With a new year just starting, I’ve already been asked the question economists like me seemingly must face inevitably at this time: “How will the economy fare this year?” or more specifically, “By how much will the economy grow?” It’s as if we economists possessed a crystal ball that churns out future GDP growth numbers with any level of accuracy. And yet, let’s face it, we economists are wrong a lot of the time, especially on economic forecasts, even for a period as short as one quarter ahead. Note how established public institutions like the Asian Development Bank, World Bank and the International Monetary Fund, along with private economic and financial institutions, consistently issue forecasts on economic growth, specified precisely to one decimal point, at the start of each year. But notice how they later change these projections either upward or downward, often two or three times, as the year progresses—and then still miss out in the end. Yet they keep doing it, year in and year out, as everyone seems to expect them to.
The “crystal balls” that economists use are often mathematical models of the economy, ranging from a few equations to hundreds of them. Powerful computers have made it possible to build much bigger and more elaborate mathematical macroeconomic models. The more elaborate they are, the more data they require to construct and run. But no matter how complex they can get, models can only help so much in predicting economic outcomes, even measurable ones like GDP growth, price increases, and employment levels. Availability and quality of data feeding into such models constrain their reliability (as they say, “garbage in, garbage out”). More tellingly, many of the factors and events that ultimately determine economic performance cannot be adequately captured, if at all, in a mathematical equation. Besides, many such events are not even predictable. Supertyphoon “Yolanda” was a case in point.
England’s Queen Elizabeth reportedly asked economists at the London School of Economics, in a visit in 2013, why they failed to foresee the financial crisis in 2008. And it’s much more than financial crises and recessions that economists consistently fail to foresee. Economics has never been an exact science, after all. Often, the more important part of the economist’s “crystal ball” is intuition and judgment, gained from years of experience and observations. Indeed, no sensible economic forecast has been based entirely on what a mathematical model directly churns out. There is always a subjective adjustment applied to model-generated forecasts, which are premised on assumptions regarding nonquantifiable factors like political or natural events. I lost a bet on the 2014 GDP growth rate because the assumptions I premised my optimistic forecast on (having to do with government responsiveness and effectiveness) didn’t quite hold out.
You can ask me how much the economy will grow in 2015, and I can always give you a plausible number, with a host of assumptions behind it. I won’t, for now. Even if I do, in the end I’ll have to be honest and say I really don’t know. No one does.
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