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.

[Ryanrule]

Oblig dilbert

http://www.youtube.com/watch?v=zJwwAVM1Auc

Re:Economy is not a science.

[lxs]

Don't forget: Astrology relies heavily on extremely accurate and proven celestial mechanics. It is still bunk.
Econometrics (bookkeeping with differential equations) is a real science. Economics is at best a pseudoscience that has built a cargo cult around the results of econometrics.

Re:Economy is not a science.

[Forty Two Tenfold]

Trend prediction is statistics, not economics. As for econometrics, this illustrates how it operates:

Three econometricians went out hunting, and came across a large deer. The first econometrician fired, but missed, by a meter to the left. The second econometrician fired, but also missed, by a meter to the right. The third econometrician didn't fire, but shouted in triumph, "We got it! We got it!"

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.

[mug funky]

this post needs all of the mods

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.

[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]

You are being extremely ignorant of the Australian situation and really are just parroting the government spin. The reason we didn't go into a recession had nothing to do with the government spend. Australia was one of the few countries with extremely strict banking regulations which meant banks could not leverage themselves in the fashion they did in Europe and the US and hence no initial funding crisis, secondly as much as our banks suck they don't use the ridiculous sub prime lending practises that the US practised and thirdly our economy was massively supported by the mining industry shipping ore at record prices to China. What the government did was purely a PR compaign.

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.

[Rockoon]

given how retarded politics is here, I can only conclude that we are, indeed, The Lucky Country.

Nah, this is simply the effect of mobilizing massive amounts of natural resources (the mining.) This is the same basic thing that kept the soviet union up for so long, of course in that case it was state sponsored but the how and why isnt really relevant to the effect.

The problem is that you are just exporting most of the resources. You are getting some instant cash now, but you arent creating any value at all. This is similar to a company that is in trouble selling all its inventory at cost in order to get some much needed operating capital.

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.

[Vaphell]

Austrians believe that the interest rate is pretty much the master knob and calling it the centrally planned economy is fully justified. Nothing else is anywhere near matching profound influence of the IR on economy as it coordinates activity across the whole economic time-space.
http://www.youtube.com/watch?v=czcUmnsprQI#t=29m25

Re:Economy is not a science.

[dkleinsc]

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:Economy is not a science.

[Alomex]

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.

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.

Karma Whoring actual RBA paper & stuff

[tqft]

The page with everything linked on it
http://www.rba.gov.au/publications/rdp/2012/2012-07.html
Estimates of Uncertainty around the RBA's Forecasts
Abstract:

We use past forecast errors to construct confidence intervals and other estimates of uncertainty around the Reserve Bank of Australia's forecasts of key macroeconomic variables. Our estimates suggest that uncertainty about forecasts is high. We find that the RBA's forecasts have substantial explanatory power for the inflation rate but not for GDP growth.

Download the Paper [PDF 713K] and the Data.
http://www.rba.gov.au/publications/rdp/2012/pdf/rdp2012-07.pdf
http://www.rba.gov.au/publications/rdp/2012/2012-07-data.html

Licence
http://www.rba.gov.au/copyright/index.html

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:Economics...

[Anonymous Coward]

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.

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.

Random predictions are maybe even better

[chthon]

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".

Re:Random predictions are maybe even better

[VortexCortex]

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

So, you're just too damn chauvanistic to see the obvous? What's with you humans? Hell, yet another Monkey just conned another nation (this time Iran) to give them a free ride in a space ship. First into Space, Better at Economics, actually able to live in an environment without destroying its ecosystem... And yet you just keep ignoring the evidence? Why? Because it's different than what you were taught growing up?

I, for one, welcome our Super-Intelligent Ape overloards.

Re:Steeve Keen on the other hand...

[Anonymous Coward]

Unfortunately, he predicted 20 out of the last 2 recessions.

Re:Economics - Simple Vs Complex system modelling

[FriendlyLurker]

Better link to the google talk by Steve Keen. and the short intro video "Minsky, turning economics into a science".

Re:No wonder ...

[gadget junkie]

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?"

Re:Eh mate?

[alexgieg]

When did we go from talking about Australian to Austrian?

Just wondering?

I think you're joking, but if not, "Austrian" is the name of a school of economic thinking. It's called that because, different from Marxism (from Marx's name), Keynesianism (from Keynes') etc., it had more than a single founding economist, and most of them where from Austria. I guess it could be named "Bawerkism" from its very first economist (Eugen von Bohm-Bawerk), but that's not how it went. Besides, although Bohm-Bawerk was the first, the most famous were Ludwig von Mises and Friefrich von Hayek, so that you do find people talking about "Misesian" and "Hayekian" when focusing on particular ideas from either. So, we're stuck with calling it "Austrian Economics". What, admittedly, is a source of confusion.

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:No wonder ...

[c]

If they actually did and understood the implications, people would be hanging from lamp posts.

... but not without the high-speed traders cleaning up on rope market futures.

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.

Re:Don't take this the wrong way

[Kupfernigk]

English is my native language and I have a humanities degree from Cambridge. That doesn't mean I know anything, it does mean my literary style has been criticised twice a week over nine academic terms. Although your English has a very slightly Teutonic ring to it, there is absolutely nothing wrong with it and, to my mind, the post from PPalmgren is completely out of order.

Comma use in English is greatly disputed; even in lists we have the Oxford comma (one, two, three, and four) versus the Cambridge comma (one, two, three and four). We have the adherents of comma minimalism and the adherents of strict comma use in any short pause, leading to the story of the writer who visited her editor to discover that all the commas had been marked for exclusion in her latest piece, and spent the next hour going through the document putting stet against every single one. She knew there were too many but it was now a matter of principle.

In English (i.e. England and Wales) legalese commas are avoided, because of the fear that a flaw in the paper or a fly mark will be read as a comma and affect the meaning of something. My father, a retired lawyer, often gets through an entire page of a letter without a single comma.