an image of various concepts in physics
the phrase “Economics is not physics” is somewhat common and very true. Not just in the obvious sence wherein physics is the study of motion and economics is the study of resource distribution and scarcity but in the fact that physics often deals with very few varriables (although shooting rockets to mars, landing rovers, recovering samples and returning them safely to earth does involve millions of variables, its tiny when compared to the variables involved in economics.)
With the moon shot we had a whole bunch of constant things, like earth’s gravitational pull, the moon’s pull and the sun’s pull. we knew the relative velocities and orbital paths of everything involved. we knew the mass of the Saturn V rocket and the Apollo craft and all three astronauts. We knew what they would be on Tuesday, or Friday since they weren’t going to change enough to matter.
Let’s compare this to economics. Today I wanted a quesadilla so I bought the cheese at the store and i happened to have the rest of the stuff at home (a tortilla, oil, a pan and some fire). Because I wanted something, i used my resources to trade with the grocery store for their resources and we both walked away happy. I bought cheese, they got two bucks. But who at the store knew i wanted to eat a quesadilla today? no one could know that because I didn’t know that until a few hours ago. They knew i would want some kind of food, but they couldn’t be sure what. They couldn’t even be sure I would buy from them, there are a dozen other options for me to buy the same cheese brand in the area where I live.
My point is that with economics the economists who try to gauge what will happen based on what has happened are at a disadvantage because there is no way known for them to collect the data necessary to turn human behavior into an equation. There are patterns in larger groups of people and this is all they have. Out of a million people X% will want cheese and of that X% another y% will come to their store to buy cheese. So they do some math and guess that about Z people will want cheese, so they buy Z bricks of cheese and put them on the shelves. Then they sit and watch to see how close they were. If they had too many, they buy less cheese next time. If they sold out, they buy more cheese. Smart store managers track this over several years and find annual trend. Amazingly in America turkey sales peak around November and plummet as the spring comes. By summer hambur and hotdog sales are peaking but eggnog is nearly non existent. There is alot of wiggle room in these results leaving room for intuition and experience over hard mathematical number-crunching. If you did that with the moon shot, the first words on the moon wouldn’t have been “One small step for man…” they would have been “Hey Buzz, aren’t we going a bit too fast?”
This fuzziness in large systems where there is a great deal of missing information is covered in chaos theory. Read Jurassic Park by Michael Crichton. It’s an older book, dating to the 1970s and the movie doesn’t really cover the chaos theory part enough, Jeff Goldblume wasn’t given the screen time to do it right, (the movie has much more basic description) . The idea is that without the required information you can only get percentages of probability. 80% chance, 70% chance. We know this in our modern life with the weather report where they don’t come out and say “there will be rain” much of the time, they say “a high probability of rain” because frankly shit happens. The weather is a great example of a chaotic system. It is, perhaps, the most complex system operating on the planet right now. Every molecule of gas in the atmosphere is part of the system, every therm of solar heat that comes to the earth is part of the system, mountains, lakes, streams, towers, blimps, fat guys, butterflies, and kittens are part of the system. If you have heard of the “Butterfly effect” (again the movie of the same name kinda gives you an idea of what happens) the idea that a small change over there can lead to a dramatic change over here. It’s a factor in any well thought out time travel story. Even the Simpsons embraced it when homer went back in time and stepped on a big. Then sneezed on a T-rex, then got angry and killed a bunch of stuff. The simple fact is we do not have the ability, at this time, to track nearly enough pieces of the climate to measure predict anything beyond a few days.
If you would like some evidence you can play scientist at home (see my previous entry). 1) google up a tv station’s weather reports for the last few months. Then assume that what they have for “Today” (what ever day you are recording from) is about as accurate as they can get. Realize that they are talking about a very tiny location when they give the temperature because temperatures can vary wildly even in your own home. Then compare the date of “Today” to what they thought it would be 5 days before, 4 days, 3 days. Many times it shouldn’t change too much, some times it will change radically. What causes the massive miscalculations? well time for an example.
A*B-C(D/E)^f+g*2=z this is a mock formula that I hope will get the idea of how complex the climate is. (real climactic prediction formula are much much more complex and require a lot of grad students with excellent math and computer skills to set up.) But I will tell you that A=4, and D= 3/5s and G= -4… the other stuff you have no idea what it is because you can not measure it accurately. So in order to give me Z you will have to give me likely numbers, but you will have no idea What it could be. Over time you can figure out likely ranges for the rest of the numbers but you can not nail it down with our current technology.
Why am I talking about all this complexity? Well being a student of history and from my youngest days reading old books on the future, I always found it hilarious how people thought “This is how it WILL be” got it way wrong. The more complex the calculations the less likely of any accuracy with time. A weatherman can likely tell you the weather for 4 days, but after that they are just guessing. fronts can move, winds can shift. Economists are even worse off. Unlike the weather, the economy is based largely on human feelings. A great historical example of that is FDR. His programs, by the numbers, make problems worse. a pure mathematical evaluation of the depression shows how it was prolonged by FDRs actions, BUT, he got on the radio and made people feel good. So they spent a little bit more because of “Consumer confidence”.
No weatherman can sweet talk a cold front into moving into a place where there is a heat wave, But a smooth political leader can sweet talk a million consumers into buying something they wouldn’t have bought before, its called Advertising. It’s a skill as old as trade. Nikes and New balance shoes are nearly identical in material design and construction. but they sell themselves radically differently and people feel different about them. Nike is trendy, cool, basket ball players can slam dunk with them. New balance is all American, made by American hands, so people are patriotic when they buy them.
The other side to this confidence is when an executive puts out a stupid memo on how to live on minimum wage for the employees of his franchisees. This makes people think “that man is a bad bad man, I’m not going to buy at his store for a while.” The quality of the product and service, the only really quantifiable measures, remain unchanged, but human opinion shifts. And that is the tricky part, human opinion.
How do you measure opinions? how do you quantify thoughts. When You ask a human what they think, they might sugarcoat it to please the ears that want to hear it. Or they might say something to insult those ears, or nothing at all. when you radiocarbon data a rock, you get a solid number, the rock wont lie, you might make a mistake in testing it, but you can test again, or some one else and correct it. How do you confirm what some one says is true? Many people aren’t even honest with themselves let alone other people. You ask a person about Wal*mart “Oh, i hate those bastards” they say, next night they are down at the store buying toilet paper because its closer, or cheaper, or more convenient. When pressed they might say “the girl asking me about it was against wal*mart, i thought i might have a chance with her…”
Trying to figure out how people will react in an economic situation is more complex than trying to figure out the climate because the climate does what it does with no cares about anything, its purely Newtonian physics with trillions of variables we can not yet measure. Economics might only be billions of variables but the problem that makes it harder to gauge is the inability to trust gathered data. If a cold air mass is moving south west over Los Angeles at fifteen mph, that’s what its doing. Its observable. We may not be able to track all the air at the same time, but we can measure the bulk of it and its general direction. If a mass of people are waiting to buy an Xbox One at Target at midnight, we can ask them “why are you here?” they could say “To get me an xbox!” but what if they are there because they just want to be on tv, or they are bored, or they really want a Wii? Maybe they cant afford the Xbox right now and will put it on layway, or try…
my area of history at this time seems to be economic history. I read a lot of economic articles from a lot of people and some of them are more honest than others. They make predictions saying “This is what we have seen before, we can assume something close to this will happen because the situation is similar.” Thankfully those are more of the mainstream guys (gender neutral “guys”) in the field. Some people, however, make wild claims that go contrary to the past data and make very specific predictions about what will happen. Strangely these guys (gender neutral) seem to work for the Congressional Budget Office and make stunningly precise predictions about how the economy will pan out, how much tax money the government will receive, and nearly every time they have more egg on their face then the guy who landed in the chicken coop.
in 2001 the CBO predicted the deficit and debt would both be going down by 2009.
http://www.zerohedge.com/news/speaking-credibility-here-cbos-2001-forecast-which-predicted-negative-25-trillion-net-debt-2011 (Source with some commentary, i don’t often read zero hedge, i make no claims about its accuracy, nor do i agree with or oppose what is said there, they just posted the numbers, and I’m citing the numbers they posted)
I remember this happening every year, always ten years down the road things would be great, Ive been watching for 20 years now, it never seems to get here. The problem is who in 2001 would have predicted the 2008 housing bubble collapse? People got worried about it seriously in 2005 and 2006, in 2001 it was under the radar. This is part of that complex system. With a space mission you could look out into space and see anything that was likely to be in your path for your mission (at least to the moon or maybe mars). the CBO in 2009 issued a report http://www.cbo.gov/publication/20445 (haven’t read it all, just skimmed it for some predictions) and on page 18 predicted the deficit would be triple digits in 2010, 11, and 12, and by 2013 would be 400 billion (shaping up to be more than 900 billion this year,) How can they be off by more than half a trillion dollars? Because they are just really out of touch. They looked at the world in 2009 and said “if everything stays the same, this is what will happen.” But economics isn’t physics. Gravity doesn’t change (we think (we have never observed it changing yet) ) but human behavior changes radically with stimuli. Some economists know this and try to account for it, they make shorter range predictions and say its a probability, not a certainty.
When I make my predictions about the future, I try to take into account how people will react. If you have been reading this, you know Ive predicted that unions will try to oppose automatic trucks. But I haven’t talked about random wars that no one can predict which will change the outcomes of this. What about a possible Luddite movement that banns technology? It might happen, but not likely to get too widespread. My big thing is when people try to tell you how the economy, and the buying public, will react to programs, taxes, news, new products, disasters, ect, try to remember that whether they know it or not, they are making a guess because they can’t possibly have all the data, know all the players, and see all the angles.