While at university I swore that I would never be an economist because there were so many in the family. Instead, I decided to focus on history and become an archaeologist specialising in Australian prehistory, little recognising that history, archaeology and anthropology was another family path.
By accident, I ended up in the Commonwealth Treasury and spent the next twenty years working as a professional economist. You see how hard it is to escape our past!
Later I put economics aside, although I still used the techniques and analytical tools in my work. Then, with the onset of the Global Financial Crisis I picked up economics again. Now I once again sometimes claim to be an economist, although I am badly out of touch with elements of the academic discipline.
I mention this now because I have become quite fascinated with the behaviour of economists as economists.
When I first worked as an economist, there were very few private sector economists. Most worked in universities or in public sector institutions. Today, the majority of economists actually work in the private sector. Their primary task is to check the economic entrails and provide forecasts on economic activity.
The human desire to know something of the future, of the likely outcomes of our activities, is deeply held.
While in Greece last year, we visited the remains at Delphi, the site of the most famous oracle of the classical world. As we walked among the ruins, I thought of the tens of thousands who had visited the site seeking advice from the oracle.
Perhaps the most famous case was that of Croesus, King of Lydia.
Seeking advice from the oracle, he was told that if he attacked if he attacked the Persians, he would destroy a great empire. He did. His own!
Our modern economic oracles don’t have the luxury of ambiguity. We expect them to provide detailed numbers. The exchange rate will be this, GDP growth that, the CPI another number.
We puzzle over these numbers, comparing the different forecasts. Tables are prepared showing all the different forecasts. Because we know that results are uncertain, we do things like taking the median forecast and using that as a base.
Monday’s Financial Review provided an example of the process as work. There a table listed forecasts from no less than eighteen economists, along with the median forecast. The assumption is that that median forecast, the central view, is more likely to be accurate than any individual forecast.
It’s all very interesting. The problem is that it just doesn’t work!
By its very nature, economic forecasting relies on past data to try to determine the future. That data is partial, the relationships between variables uncertain. There can never be certainty, even with the most complex econometric models.
All economists use the same data, read the same things. Their views tend to converge. The use of comparative tables and of median forecasts just reinforces the process. The median forecast is no more accurate than the majority of individual forecasts simply because it reflects those forecasts.
To my mind, in focusing on what might happen at a point in time, we have lost sight of the role of economic forecasts. They are not oracular projections, just best guesses at to what might happen.
Economic forecasting is a process whose role, is or should be, different from the actual numbers at any point. What is relevant is not the numbers themselves, but the way in which results diverge from the projections as they must.
Government and business have to make judgments about the future, about the likely impact of economic changes on their activities. Their needs are very different from those of market players betting on what might happen in the short term. Yet economic forecasts that are actually linked to and driven by the needs of market players have come to dominate the forecasting process.
Most prominent business economists work for financial institutions. Their primary internal role is to provide advice on what might happen in financial markets. The economic reporting that follows from their public utterances is also markets focused.
Pity the poor businessman or even Government official trying to use all this to make sensible decisions. They end up like a wind vane constantly changing direction as the numbers change.
I have largely given up reading the short term projections beyond a very simple scan. It’s really the only way to retain a degree of sanity!