Australian Economists Predictions No Better Than Flipping a Coin 290
First time accepted submitter ras writes "The Reserve Bank of Australia did some investigation into the accuracy of their economic predictions — the ones they use to run the country — with less than flattering results. '70 per cent of the RBA's forecasts for underlying inflation for the year ahead were close to the mark, but its predictions of economic growth were less accurate, and its unemployment rate estimates no better than [chance] ... The Reserve Bank employs numbers of people on very high pay and what they're admitting now is that their — all of this so-called science — has produced nothing more than what a roll of the dice could produce.'"
Re:No wonder ... (Score:2, Interesting)
No this is a common misconception. Investing in the stock market is much riskier that normal gambling because the probability distributions are not so well behaved. Generally risk is hidden in the stock market for a long time, and the odds of any event occuring are impossible to estimate without huge errors, whereas when you gamble generally the odds are quite well known and follow a normal distribution. You can work out exactly how much you will lose on average though normal gambling.
Random predictions are maybe even better (Score:5, Interesting)
A magazine here in Belgium (Humo) did a couple of years ago an experiment about the stock market to see what recommendations of experts were worth.
They had a team of chimpanzees and a team of experts. The results were that the chimpanzees did better than the experts.
Since the chimpanzees can probably be considered a very good random number generator, it seems that it would also probably be better to use random predictions.
Or, as Roger Von Oech would say, "Consult an Oracle".
Steeve Keen on the other hand... (Score:4, Interesting)
Economics - Simple Vs Complex system modelling (Score:4, Interesting)
Wonder if the RBA will now start listening more to one of Australia's most forward thinking economists, Dr Steve Keen [wikipedia.org]. Surprisingly, the vast majority of economist model "the economic system" based on simple linear assumptions. Steve Keen is trying to change all that by modelling the economy for what it is: a complex system. (See this short intro video) [youtube.com]. It is amazing the amount of flak he gets for applying complex system modelling techniques to the world of economics... (see some of his arguments with Krugman)
Here is a link to a presentation [debtdeflation.com] Dr Keen gave to google, interesting stuff.
Re:No wonder ... (Score:5, Interesting)
investing in the stock market has become more like high stakes gambling.
everything is high stakes gambling. I've been married 21 years, all because I kissed a girl in front of her house. I finished my university the year the Italian government liberalized, after fifteen years, investing abroad, and I knew English, So I was hired as a fund manager. Economy is no different, except the collective feels a need to substitute something for "insufficient data", a noble tradition that continues on olden day shamanism. The big difference is that economist do not pierce their noses with animal bones, no matter how we'd like to perform that operation for them.
That's not to say that all of the establishment is unaware of the pitfalls: many distingushed scholars, like Daniel Kahneman, Nassim Taleb and others, preach the right gospel about our inability to evaluate economic forecasts correctly. Karl Otto Pöhl, the ex president of the German Bundesbank, was once quoted as saying, in response on a question on the future movement of the Dollar-Dmark exchange rate: " the central bank does not make forecasts, and above all not on the future." This is obviously a witticism, but it betrays a keen awareness of the pitfalls of economics as a forecasting tool. The variables are too many, non linearity is the norm, and if you have to utter the phrase "all else being equal", you can throw all the other words to the dogs.
The push to try to forecast the economy, tough, does not come in reality from the instinctive need of humanity to dispel uncertainty: it comes from governments who have to justify dirigistic policies, Tax incentives etc. It's quite hard to impose for example a carbon tax, if the honest answer to the (legitimate) question if it will be a drag or a push on the economy is: "How in hell would I know?"
Fake economics (Score:-1, Interesting)
The entire mainstream industry of the so called "mainstream" economics is fake.
Realise that what economics really is, it's very simple. In reality there isn't actually a need for economists. In the beginning of the 20th century there were maybe 10 people who actually were known as economists, today there are tens of thousands. Why is that and what is it that they do? How is being an 'economist' more important or useful than being say an accountant?
An accountant can be very useful to a company, he really can find ways to make things more efficient, find ways to structure the business in a way that reduces costs. Unfortunately the government forces companies, people not only to pay income taxes (which is the most terrible tax, the most destructive tax you can think of for an economy, you get less of what you tax, you get more of what you subsidise, so if you tax people's work, you get less of it, if you subsidise people not working, you'll get more of that) to be unpaid IRS agents.
In 1942 the government forced employers to start withholding employee's income taxes, and that added more work for an employer, it costs money to do that kind of work. Of-course the government doesn't have a problem adding costs to activities that other people have to incur, but really, you have to be crazy to want to invest and employ people in most of the Western countries today. So accountants can help companies to reduce taxes for example.
What have economists done for the businesses and for people though? Have the economists helped people? As I said, in the beginning of the 20th century USA had maybe 10 economists. The economy of USA was growing, the 19th century was time of slight deflation (prices were slightly falling all the time, the dollar was strengthening, yet more and more productive capacity was added, people invested. USA became largest manufacturer, exporter and creditor nation). Of-course there are tens of thousands of 'economists' today and today USA is the largest in the world and in history of the world debtor nation, with 40-50 Billion USD / month trade deficits, with largest in the world and in history funded debt, unfunded debt, various contingency liabilities.
People like Krugman are suggesting dropping the pretence of solvency and just starting to print 1Trillion dollar coins, etc.
Greenspan was known for this 'Greenspan Put' over the nineties, when his policies of inflation fuelled the stock market bubble and started the housing and the bond bubble. Bernanke is known as the "Helicopter Ben".
None of these people saw the stock market and the housing market bubbles being inflated, none of them understand the biggest gov't credit bubble being inflated right now (bond and USD bubble, really it's the government bubble). Bernanke didn't know the US housing was in a bubble while the bubble was actually bursting already. These 'economists'.
In the meanwhile people who just follow the fundamental principles (normal economics, known as 'Austrian' school, but really it is just common sense economics), people like John Paulson, Peter Schiff, Jim Rogers, Marc Faber, they made millions and more because they just followed the fundamentals.
The fundamentals are: you can't spend more than you earn. Earning = working = selling things in the real market that people want to buy. Economy = production, it does not equal consumption. Consumption is just a trivial consequence of production, without production nothing can be consumed. Production comes first. Production comes out of investments. Investments come out of savings. Savings come out of the difference between some over-production and under-consumption.
Money cannot be printed, printing money is inflation. Printing money does not make more products. Real money IS products. Fiat currency is not real money if it's not backed by anything. Fiat = currency that is mandated by gov't to be accepted, currency by decree.
Real money imposes lending and spending discipline. Fake money (fiat that is printed by gov
Re:Economics... (Score:5, Interesting)
Ok, you already modded down to -1, but you know what, you did interesting claim I'm interested to answer to. Because it is example how lot of people have gotten their history fastfood in their veins - and ignorance and fear about subjects they don't really understand constructs their world view.
Marx was wierd, true. He was also harsh and cruel in his words (he was sort of armchair anti-nationalist and racist a little bit too), however time he lived in was also harsh and cruel (And Europe has lived trough series of series of devastating wars), so it must be taken into account. Dismissing his work on *trying* to understand human nature trough economics, and why capitalism rules the world as "communist/socialist propaganda" is very hollow. But taking in mind for how long Socialism was painted as big evil of "rightful Western", it's actually no surprise.
He got lot of things right, mostly describing why capitalism works they way it works. Also lot of people dismiss his future predictions as failure of Bolsheviks. There's one huge gap in their knowledge though - Marx predicted, that Socialism will become reality when industrialization and modernization driven by Capitalism greed will remove need for working. Sounds familiar, no? It's not precise prediction, it may even fail, but it gives you food for thought.
What usually people don't know that Socialists split at the beginning of last century - Bolsheviks (as from Russian "majority" or "more than others", t.i. referring to bigger supporter base) rejected reaching required modernization levels driven by greed as basis of Capitalism and stated that they will impose their dictatorship as they claimed that they know how to reach ideal Socialism, and then there was Social democrats, who wanted to work within democratic system (still in it's infancy at that time), as they followed more Marx vision and were against bloodshed - which followed October Revolution (although I would dispute Red Terror as something exceptional - Russia was land of cruel at that time, and Red Terror and White Terror fed each other quite nicely, driven by revenge and fear). Historically, Russia was full of people in despair and almost slave level industrialization made life very miserable, so while Bolsheviks used iron fist to crush dissidents, they had mass appeal, because they promised to solve problems right now.
So essentially Marx did understand economics and (a little bit of) human nature - well, at least for his century anyway. For me he's not a hero, nor villain. He is just a man, who really tried to think about problem we dismiss or even try to understand, because it's so uncomfortable to think or talk about.
"Economics" the pseudoscience (Score:4, Interesting)
Most economics isn't even astrology: it is a cargo cult (act as if something is true and this will somehow make it so).
*To be fair to Gorbachev, he did actually point out that Soviet economics didn't work before 1990, whereas governments are still able to be in denial about Capitalist economics - till the resources start to run out.
Re:Economy is not a science. (Score:5, Interesting)
No government has applied Keynesian policy.
Not quite true, actually: South Korea responded with massive employment programs and has fairly low unemployment right now. Iceland's response was also interesting, in that it basically said "screw the banks, take care of our citizens", and that has helped its economy pretty much recover from the worst of it.
Re:Economics... (Score:4, Interesting)
Karl Marx wasn't perfectly right, either: Specifically, he failed to account for (a) socialist societies becoming authoritarian societies, and (b) socialist ideas getting absorbed by capitalist societies. He failed to envision the USSR or the PRC turning out the way they did, and also failed to envision modern Finland, France, and Germany.
What Marx very accurately described, though, is what capitalism's tendencies are if left unchecked by government action, and what capitalism was doing in his day. A couple of his very accurate predictions:
1. Foreign trade creates a race to the lowest wages as countries try to out-do each other in oppressing workers to lower the cost of production.
2. Unregulated banks will eventually collapse and take a lot of other financial institutions and ordinary people with them.
Re:Economy is not a science. (Score:5, Interesting)
Umm, so what's the Keynesian excuse for Japan's "Lost Decade"
Mostly falling population. Seriously. Japan's GDP per working age person (GDP-WAP) has been growing for the last ten years.
When measured this way, GDP-WAP flattened at the beginning of the 90's and started growing normally in the late 90s exactly when the Keynesian stimulus went in full force.
I've been jumping up and down about this point for about seven years. Interestingly main stream Economists seem to have noticed only last year.