Prediction: a risky business.

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Brian Hennessy. An Australian in China. June, 2009

Economics is often called the dismal science. Now I understand why. The proposition that economics is a science is on very shaky ground indeed. Those economists who analyse data and make predictions are too often wrong. Reason enough for this pejoritive moniker. So let me release a little bile on this topic:

 

Prediction: a risky business

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I am a psychologist: trained in the discipline of identifying and controlling independent variables which affect the behaviour of the dependent variable in question. This process is rigorous: we test our hypotheses, have levels of significance for results, and our conclusions are challenged by peer review.

Because independent variables in psychology are as diverse as humanity itself, one would assume that measuring, analysing, then predicting human behaviour would be a much more difficult task than measuring, analysing, and predicting economic behaviour. Why then, does the discipline of psychology get it right more often than the ‘discipline’ of the dismal science?

Answer: Psychology demands rigorous scientific analysis always. It does the research first, then offers opinion later. Economics comments on the data in front of it. There is no controlling for the independent variables which influence the numbers. Thus dodgy data leads to dodgy conclusions. And dodgy conclusions lead to dodgy predictions.

Western capitalism has an army of economists who make their money by predicting the future. Although these highly-paid ‘analysts’ have failed in this responsibility, they continue to ‘predict’ the future without any sense of embarrassment or shame for their collective failure last year. And no apology to the millions of ordinary investors who listened to them and lost. Big time.

Is their no peer review? No professional body which can hold individual members and their agencies accountable for their professional negligence or incompetence? If not, why not? Despite their dismal performance last year, these guys have dusted themselves off (the dust has settled now) and are demonstrating that they have learned absolutely nothing from last year’s debacle.

For example: Robert Zoellick and his World Bank have predicted that China’s growth would be limited to 6.5% this year. On the basis of this prediction (and the efforts of other ‘reputable’ agencies) the lesser lights further down the economist’s food-chain have been using this information as a fundamental assumption for their articles, journals, newsletters, TV shows, and so on (NB: since submission of this article for publication, the World bank has revised its forecast upwards to 7.2%. Later, the forecast has risen to 7.% {Chinese government stats.).

Too many of these luminaries have been alerting investors to the possibility of economic pain and social disorder within China over the coming year. They rarely refer to the economic pain and human suffering in their own backyard. A gullible media and public listen and factor these opinions on China into their investment strategies and their retirement plans.

Isn’t there one sharp lawyer out there in law-suit land (the USA) who can see an opportunity staring him in the face? Misrepresentation? False-advertising? Bullshit masquerading as analysis? C’mon folks, these guys have been treating us as idiots for years. And despite last year, they are doing it again. Shamelessly.

The Institute of International Finance (IIF), whose members include some 370 of the world’s largest commercial and investment banks reports that China’s growth for the last half-year period was 7.5%. Not 6.5%. This is not forecasting, this is retrospective scientific analysis of hard data. Thus, when the IIF estimates that for the next half-year, China’s growth should reach 8.5% (remember, 8% is the ‘break-even’ number for sustainable growth), I am more inclined to accept their prediction than that of the ‘China expert’ sitting in his office in offshore Hong Kong.

Meanwhile, the lesser lights have been churning out the usual rubbish. From Hong Kong to London. From Beijing to New York. These economic hangers-on continue to live off other people’s efforts. A less ‘couth person than me might call them economic parasites. Strong words eh? But isn’t it about time that someone called these people to account? They are an embarrassment to Western capitalism, and a threat to the savings of so many, many ordinary people who trust them.

These ordinary folks would do better to talk to expatriates who live their day-to-day lives in China, and who have eyes to see what is really going on in this rapidly developing nation. The other guys know only half the truth. Thus their data and their opinions are suspect. You need a ‘bottom-up’ as well as a ‘top-down’ assessment to find out what is really happening. Anything less than this is risky business.

 

–oo0oo–

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