Here’s a question, what’s the difference between the three of them? Here’s a hint: not much. Here’s an excerpt from an interview with Alan Greenspan, former chairman of the Federal Reserve:
“I’ve been in the forecasting business for more than half a century. If I get it right 70 percent of the time, I consider that very successful. People don’t realize that we cannot forecast the future. What we can do is have probabilities of what causes what, but that’s as far as we go. And I’ve had a very successful career as a forecaster, starting in 1948 forward. The number of mistakes I have made are just awesome. There is no number large enough to account for that.
Forecasting our futures is built into our psyches because we will soon have to manage that future. We have no choice. No matter how often we fail, we can never stop trying. The ancient Greeks had the Oracle of Delphi … And then there’s Nostradamus, two millennia later… Fortunetellers and stockpickers today make a reasonably good living. Physical scientists can forecast with some precession. But in economics, we are extraordinarily fortunate that we succeed a majority of the time.”
Alan Greenspan Interview, Business Week dated Aug 13-26, 2012.
Although many blame Alan Greenspan for the financial crisis, there is no doubt that he is a highly intelligent fellow and an excellent economist. During his 18 1/2 year tenure at the Fed, he undoubtedly had access to the best information regarding the entire economy. Even with this massive advantage, he still couldn’t get it right more than about 70% of the time. Just the fact that he celebrates this number should give you an idea of the predictive power of the “science” of economics (and stockpicking and fortunetelling). Next time you see an economist on TV, ask yourself, is this guy smarter than Alan Greenspan or does he have access to more information than the Federal Reserve? If not, better not bet on what’s he’s saying to come to pass.
Despite this massive deficiency in the predictive power of economics, it’s the best we got. Better to have 70/30 odds rather than 50/50. The main problem really is the people who try to convince you that it is a hard “science” — it is decidedly not. Just like the fortuneteller or the stockpicker who tells a convincing story about how you’re going to win the lottery, or about the next big things, so do economists spout their fancy tale that the economy will go up, or down, or sideways, or maybe not even be here tomorrow. Just as Warren Buffett famously said:
“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
Looks like it’s going to be sunny this weekend, better bring my umbrella…