Australian Economists Predictions No Better Than Flipping a Coin

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.'"

Comments

Economy is not a science.

[Anonymous Coward]

Economy is not science and won't ever be.

Re:Economy is not a science.

[Forty Two Tenfold]

Yeah, the same way "Intelligent Design" is science.

Re:Economy is not a science.

[The Evil Atheist]

Uh, most governments of the world cut back expenditure during recession. That's not what Keynesian economics would suggest as a course of action.

If by "majority of the world" you actually mean the US, then it is more the Randians that are screwing up your country with their mad race to the extreme.

Re:Economy is not a science.

[dkf]

That's not what Keynesian economists tell us. Though this is what Austrian economists tell us. Funny that the majority of the world runs on Keynesian economics and is suffering badly for it.

A major part of the problem is that the thing that macro-economists study, the economy of the world, changes its behavior in response to the reported observations of the economists. Though the problem happens to some extent with other sciences (from physics to biology to sociology), it's at its most extreme in economics due to the massive incentives for behavioral screwing around. (Micro-economics has fewer problems because the incentives for gaming it are so much smaller.)

The other part of the problem (and your strawman) is that there are several major models for how macro-economics should work, notably the Keynesian models and the Friedmanite models. They give radically different predictions, but they're just models and that's a fact that people often lose sight of. Like all models, they have particular domains of applicability (and different models have different domains!) and are poor reflections of reality. Their weaknesses are also their strength, as they allow the model to be tractable enough to make predictions with them, but they are just models. People tend to lose sight of that basic fact.

So while the right thing to do is to use a model, you've got to keep in mind that the model might be totally wrong in the current situation: if the models predictions don't align with reality, you must change which model you use. That's the scientific approach. Pity the various zealots don't grasp that...

Re:Economy is not a science.

[Vaphell]

Austrian economics mostly says that people should stop playing with shit they don't understand in the first place (hayekian 'pretense of knowledge'), so they don't have to fix results of their own mistakes, potentially making even more mistakes in the process.
Interest rates are a price signal, you can't just lower them for political gains or whatever and not expect the economy to implode few years down the road when malinvestment levels are simply too high to contain. Is the structural defficiency of the global economy fixed? No, not in the slightest. All i see is balooning sovereign debts and balance sheets of central banks, a recovery concentrated in stock markets. In other words the can got kicked down the road once again.

Re:Economy is not a science.

[Mr0bvious]

I'm not sure we're doing so much better.

Our government has successfully kicked the can down the road with its intervention, but the underlying issues that have plagued the world's financial markets are still present in our financial markets.

Look at how lop sided our economy is. Money is only made in banking/finance and mining, it's not a healthy position...

We are in the middle/end of our biggest commodity boom - these are the super good times, yet we struggle to have a surplus. Our housing has become so expensive that many struggle just to pay their mortgage...

Not feeling too lucky to me.

I don't feel so lucky..

Re:Economy is not a science.

[alexgieg]

A major part of the problem is that the thing that macro-economists study, the economy of the world, changes its behavior in response to the reported observations of the economists.

It's worse than that, at least according to Austrian economics. For them, the theoretical basis of macro-economics, or at least of almost all of them, namely, the assumption what money (as a measurement unit) is what matters, is simply false. So, all the models starting from it will suffer no matter what.

The main criticism Austrian economists throw at macro-economics, econometrics etc. is that money isn't an objective unit, it's just a representation of subjective preferences that very from person to person, and within a single person from instant to instant, only resembling something minimally solid, and thus as a fake unit, as a kind of surface effect. Thus, the same way that a sociology divorced of any concept of human psychology is bogus, so is any macro-economics that doesn't base itself entirely on that small subset of human psychology that is micro-economics. True economics is at best a sub-field of psychology, and macro economics is at most a sub-field of sociology.

Austrian economists only do math after they manages to understood reasonably well the psychological mechanisms behind a set of atomic exchanges (not necessarily involving money), provided it shows itself as something that can have calculations done, which most often than not isn't the case.

Mainstream economics doesn't like this, at all. Keynesians, marxists, econometrists etc. all believe they have a unit of measurement, and that they can turn this unit and its measurement into a hard science. They cannot. It's wishful thinking, if not outright bullshit. But it's a bullshit so full of technobabble, so enchanting in its seeming seriousness, that the self-deception simply proceeds, unchecked.

Now, that doesn't means Austrian economics isn't full of bullshit too. It's own model of human psychology they call praxeology is extremely flawed, since it's based on philosophical assumptions more than on actual psychological research. Much of it is quite useful, or at least inspiring, but non-scientific anyway. But what they do very well, and the reason I keep reading them, is their debunking of mainstream economics pseudoscientific assumptions. They are at the top of their game when they take a macro-economics equation, break it down in its main components, and proceed to show analytically how what it describes is pure, glorified nonsense.

So, here's what must be done to really turn economics into the mostly scientific discipline it can ever be: take Austrian criticism of macro-economics, add the state of the art in cognitive sciences, develop an actually valid psychology-based micro-economics from both (it won't be Austrian's praxeology), and then, by way of reductionist thinking, build from then, step by step and floor-by-floor, a bottom-up macro-economics that's based on something actually relevant and universally valid (which "money" most definitely isn't).

Then, and only then, at least a semblance of actually working models.

Re:Economy is not a science.

[squiggleslash]

Keynesianism is barely being used anywhere at the moment. We're in the middle of a major recession and most countries are cutting back spending. Some are even deciding that now is the right time to pay back their debts.

In addition, Keynesianism is both a set of prescriptions and a general model for how the economy should behave. In the latter case, the model has, actually, done an astonishingly good job of predicting the behavior of the economy during this recession.

Re:Economy is not a science.

[overshoot]

Funny that the majority of the world runs on Keynesian economics and is suffering badly for it.

Say what? Whatever basis the world's large economies (Europe, the USA, Japan especially) are using, Keynes wouldn't recognize it. Please watch Krugman, deLong, and company rip their hair out over "austerity" before making comments like that.

Re:Economy is not a science.

[Anonymous Coward]

Uh, general relativity and anything else in physics is just a model, too.
The difference is that physicist have the brains to realize that when their "model" is more than marginally and very rarely wrong you don't have a model, you're just making shit up.
So no, the problem is not that they are "just models", but that what economists use just aren't models in any useful meaning of the word.
Unless you would consider "nothing ever moves" a physical "model" of our world.

Re:Economy is not a science.

[The Evil Atheist]

Nothing about the US bailouts was Keynesian. It may look Keynesian, but the underlying motive and effect is US Crazy Randian. What is Keynesian about tax cuts for the rich and attacking the middle class?

As for Japan, it actually isn't that bad. Unlike what economists would like us to believe, perpetual economic growth is stupid and dangerous. Japan kept it mostly level and it wouldn't have been so bad if economists weren't fear mongering about phantoms. Japan may have lost a decade, but it's not as if it plunged into the Dark Ages.

This is the stupid reality economists have people like you believing - that you can live in a city and not die from common diseases, not go hungry, not go homeless, but if you don't have your five wide screen TVs in your McMansion with economic growth every year, then it's the Worst Economy Ever.

Re:Economy is not a science.

[sFurbo]

Nothing about the US bailouts was Keynesian. It may look Keynesian, but the underlying motive and effect is US Crazy Randian. What is Keynesian about tax cuts for the rich and attacking the middle class?

Cutting overall taxes is Keynesian*. In general, the Keynesian recipe to getting out of a crisis is to do everything that makes the states deficit larger, from the theory that crises are an effect of too little money in circulation. This means increasing expenditure AND cutting taxes. Somehow, people who claim to be Keynesian today forget the last part, but then, everybody seems to forget that to decrease public expenditure when we are not having a crisis is also part of the Keynesian model.

*I don't know whether the overall taxes was cut in the US recently, though I doubt it, as getting fewer money to spend is not politicians favorite thing.

Re:Economy is not a science.

[The Evil Atheist]

I can't even parse anything you wrote. What are you even talking about? Do you know how to write proper sentences that mean something?

Re:Economy is not a science.

[The Evil Atheist]

That's what we're arguing. No government has applied Keynesian policy.

You can't argue against Keynesian theory by arguing that governments that implement it wrongly are screwing up. Governments today cut spending during recessions and increase spending during booms. The opposite of Keynesian.

Re:Economy is not a science.

[Rockoon]

Why are they picking on Australia, alone? The same can be said for Britain, the US, the EU - didn't we recently have a big banking collapse, with repercussions felt round the world?

But there were economists that publicly predicted the burst of the housing bubble and resulting banking collapse... these economists just didnt work for banks because, surprise, banks weren't interested in that sort of information being made public and certainly werent interested in acting in a responsible manner regarding it. The banks certainly werent the ones to get the short end of the stick in the end.

These predictions werent in a single camp either. Both major schools of thought, the Austrians and Keynesians, were predicting it. The thing to keep in mind is that while the Austrians and Keynesians disagree on quite a few abstract things, that there are still fundamental economic premises that they all agree on.

The correct observation is not that it wasn't predicted.. its that so few even in the private sector paid any attention to the predictions.

Its no surprise that the American government didnt pay any attention, even though some members of the government were trying for years to do something about it. Too many in the government are corruptively self-interested -- trading legislation for donations and support -- for there to have been something meaningful done about it. Members of government such as Barney Frank (among many many others in both Republican and Democrat parties) absolutely denied that a housing bubble existed when opposing legislation to do something about it.

One poster on slashdot suggested that those from the Austrian school stick their fingers in their ears and go "nah nah nah nah I can't hear you" but in actuality it was the government and banks that did that, not economists from any school.

Re:Economy is not a science.

[Charliemopps]

Of course it's science, but it's more about sociology than it is about math like a lot of people think. This was one of the first points Milton Friedman made back in the day when he wrote his book.

Economics, however, is not all that difficult of a thing to predict. Predicting an individuals behavior is hard, but predicting a large group of peoples collective behavior is fairly simply. The reason we have so much trouble is we have a lot of interfering factors. Mostly from governments. As grain supplies get scarce, producers raise the price. A predictable number of people switch to other commodities, but some continue to buy at the higher price. The system is very simple. But then you have government intervention. They buy up grain when there is too much, and then release it as "Aid" during shortages. So now there is a limited supply of free grain. Peoples behavior in these situations is unpredictable. The more interference, the more chaotic the system.

I really recommend reading up on the Dustbowl and Great Depression. Often we hear about the great government works that brought that period to an end, but rarely do we hear about how the whole thing started with the homestead act and other government programs designed to increase food production for WW1, that, after the war was over left millions of acres of farmland in production so the price of grains crashed after the war. Government manipulation of the market lead to the crash, but few recognized it at the time. Then, finally, an even bigger war came along to drive the prices up again. This time they had more foresight and were able to wind things down more slowly.

Re:Economy is not a science.

[locofungus]

I don't even think it's a corrupt government.

The fact is, in the UK (and I believe in the US too) the population would never have allowed a government that actually tried to put the brakes on the housing bubble to survive and would have elected the government that promised them eternally rising house prices and free money to spend, spend, spend.

There were, indeed, voices of reason inside government, but they only survived because their voice didn't carry.

The same is happening with oil and climate. We don't know when the crunch will come but we do know that there will be a crunch eventually. Pragmatism says that we should start preparing now and finesse the issue. But the people don't want to hear that and listen to, and elect, the people who promise them eternally flowing oil with no consequences to burning it.

Tim.

Well...

[smegfault]

If 'the market' makes decisions based on the predictions of the RBA, it's no wonder the predictions about 'the market' don't often hold up.

Economics...

[s.t.a.l.k.e.r._loner]

Economics is the only field where one can be considered an expert without ever having once been right.

Re:No wonder ...

[KiloByte]

Except that in this casino, friends of the owner are allowed access to cameras looking into your cards, to react a fraction of second before you do.

Re:No wonder ...

[Kupfernigk]

No, his analogy (high speed trading) is exactly correct. The stock market is not out of business because most people understand card sharping, but they do not understand how bank traders work. If they actually did and understood the implications, people would be hanging from lamp posts.

Re:Eh mate?

[alexgieg]

The roots of Austrian economics begin with Carl Menger, not Bohm-Bawerk.

You're right, thanks.

From your other note, if Austrian economics is non-scientific then mathematics is also non-scientific. IMO (as an economist and not a philosopher) Austrian econ can make an even stronger case than than math for being scientific because I'm satisfied that the action axiom is a priori true whereas the fundamental axioms of math are not. You can probably deduce that I don't believe 'science' is defined by induction :-)

The problem with this line of reasoning is that it confuses two meaning of "science". Since you mention math, let me use it as an example.

Nowadays it's an accepted matter that you can select basically any set of axioms you wish, and from those you'll be able to fully develop an entire math from them. So, if I want, I can, let's say, determine that the division by 0 has a finite result, and as long as I follow rigorous a logical reasoning, I'll get a consistent, with-division-by-0 math. Some other things will work differently from what we're used, but that's about it.

Now, for us to go from math as a whole, which includes the set of all possible combinations of all possible arbitrarily chosen non-contradictory axioms, to that specific subset that applies to the real world and in turn can be used to describe it, we need a non-a priori component, in that we must observe the actual world and find what of those axioms apply here.

Praxeology doesn't do that for its own axioms. It defines with extreme precision what it understands by "action", and derive lots of conclusions from it, which for the sake of argument we can assume are valid. But it doesn't come and actually prove empirically that what specific thing it calls "action" is the only one at play in economic relations. So, since we're assuming the conclusions from the axiom, if 100% of economics is built upon "action", then praxeology describes all of economics. But this hasn't been proven. It could be that the actual number is 99.999%, or 50%, or 0.001%, or even that the percentage varies given changing factors.

Thus, even with praxeology being valid from one extreme to the other, we still need to actually look into the world to find how much of it actually applies. There's no way around it.

Additionally, the logic upon which deductions from the action axiom are obtained can itself be challenged. It's for the most part classic logic with Kantian additions. What does happen if we were to start deducing with, let's say, para-consistent logic instead? Would it work better or worse in the real world? This, too, is a matter that can only be solved with experimentation.

And so on and so forth. Nothing in this is as straightforward as Austrian economists make it to be.