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...profession which or she belongs.
To understand the nature of forecasting, and what can go right or wrong, examine forecasts in different times and places. This is not a complete survey; forecasts and forecasting have an exceptionally long history, so for the sake of brevity, I will focus on various forecasts relevant to the history of economics and economic history, to see what we can learn about this type of exercise.
Before giving examples I want to briefly describe several different characteristics of forecasts that can go wrong, since presumably, to paraphrase the famous first line of Anna Karenina, there are many different reasons forecasts go wrong, but accurate forecasts are presumably all based on one single feature.
First, would we expect long- or short-run forecasts to be more accurate? Shortrun forecasts require fewer projections and less information, but they may be subject to random, reversible events. Long-run forecasts can eliminate some sources of the difficulty found with short-run forecasts, but they do allow more time for shocks to occur, and, although this does not necessarily contribute to poor forecasting, more time is allowed for the undertaking of policies to offset trends and move things in a different direction.
Why are forecasts sometimes wrong? Are errors the result of endogenous or exogenous factors? (For a related discussion, see McCloskey, 1992.)
(1) We may use the wrong model or an incomplete model. This can be referred to as the law of unintended consequences, since even if the main prediction is accurate, there are often side effects that have been ignored or overlooked that can alter the evaluation of what has happened. To firm believers in chaos theory, however, no forecasting model is acceptable.
(2) We may fail to allow for shocks that will influence the system. This, of course, leads to two questions: (i) to what extent can shocks and their impact be forecast? and (ii) can we allow for expected adjustments to these unexpected changes?
(3) The basic observations used in the forecast may be incorrect (that is, the underlying data may be wrong or misinterpreted), so that the forecast, while consistent with the presumed data, is wrong.
(4) Forecasts made as part of a policy debate may be clouded or incorrect because of ideological beliefs. Problems arise because in some cases people actually believe the proposition; in other cases, these propositions reflect mainly the rhetoric of debate and are used to convince others. An example of this is the question of the relative productivity of slave versus free labor, a central issue in the eighteenth and nineteenth century antislavery debate. Adam Smith was the key figure, on the basis of his reputation, with his argument on different incentives for free and slave labor. His claims featured in later debates despite the fact that every slave owner knew about and tried to solve the incentive problem, and the ancient Greeks had worked out clever incentive schemes for differential rewards to encourage more output from slaves. When discussing slavery on British and French Caribbean islands, Smith did allow for the effects of owner behavior on a slave's performance (Smith, 1776, Vol. I, pp. 97-99 and 387-89; Vol. II, pp. 587-88; pages refer to 1976 edition). Moreover, in his antislavery argument, Smith did not note, as had others of the time, that hunger was a superb form of coercion, or as worded more subtly by his friend David Hume (1752, p. 267 in 1987 edition) that "necessity ... is the great spur to industry and invention." Claiming that ending slavery would raise output and lower goods prices was, of course, the better forecast with which to attract antislavery opinion. It must be noted that nearly every reform advocated is supported by both the belief that it is the right thing to do and the expectation that it will raise GNP. One of the few exceptions comes from the early-twentieth-century debates in Australia to end Pacific Islander indentured servitude used to produce sugar, replacing it with European workers--but with large subsidies and tariff protection. In Parliament it was noted that although the policy of keeping out the Pacific Islanders would raise the price of sugar (a cost estimated equal to about 1/2 of 1 percent of GNP), white Australians would consider this price hike worth it (Parliament of the Commonwealth of Australia, 1912, pp. xx-xxi, 553). For the most part, however, ideology and the economic forecast seem to go in the same direction.
(5) There is another problem with forecasts that merits more attention than it is usually given. Most forecasts take the characteristic of comparing equilibrium positions: the focus is on the present position and where the system will be in the future, in the absence of further shocks, with less attention given to how long it will take to arrive at the equilibrium. Considering the time it will take to reach equilibrium can be crucial for planning and policymaking. To demonstrate this point, I will now highlight a few cases; I will discuss others later.
Among the major opponents of southern slavery, and one of the more active politically, was the distinguished Irish economist John Elliot Cairnes. His 1862 book The Slave Power is still used in discussions among scholars. Cairnes (1862, pp. 274 and 350 in 1969 edition) believed that slavery was doomed and that northern free labor would prevail, but only "with the progress of time" and "by a gradual but sure progress." He quoted the North British Review (February 1862, p. 142), saying even when slavery's "doom is sealed ... the execution of the sentence may seem to be relegated to a very distant day." (1)
A more precise time frame was considered in the debates about abolishing the British transatlantic slave trade in the 1790s. It was proposed that ending slavery by parliamentary legislation would not be necessary, since once the transatlantic slave trade was abolished, on grounds of profitability, slavery would quickly end. Using land-labor ratios for Jamaica, the abolitionist William Wilberforce (1807, pp. 291-92) and Prime Minister William Pitt (see Coupland, 1923, pp. 270-74) estimated that if nothing were done by legislative or other means, it would take between 220 and 250 years for slavery to end once the transatlantic slave trade was abolished. This, clearly, was an unacceptable time frame.
Another interesting example of the importance of looking at the length of time before the equilibrium point of decline is reached comes from perhaps the most famous of the historical works on decline, The History of the Decline and Fall of the Roman Empire, by Edward Gibbon (Gibbon, 1776-1788, p. 177 in 1900 edition). He notes, in presenting his plan for his last two volumes, that, not as a historical explanation of an event that had occurred (not really a forecast) but as an explanation that does raise the relevant question, "five centuries of the decline and fall of the empire have already elapsed; but a period of more than eight hundred years still separates me from the term of my labors, the taking of Constantinople by the Turks." It took 1,300 years, but presumably, someone got it right at some time.
A more recent discussion of a contemporary policy issue also places in...
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Growth and volatility in an era of globalization., January 01, 2005
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