Wednesday, May 11, 2016

Can Economists Make Forecasts?

At the post, Why Carl Icahn Needs to Read the EPJ Daily Alert, the following comment was left:
Apollo SlaterMay 11, 2016 at 12:32 PMHarrison, the Austrians I've heard, including Robert Wenzel, say ABCT is not a predictive science. So, it can't be used to critique or support Icahn's investment strategy. ABCT is really just an after-the-fact view of history.
With that said, Wenzel's critique of Icahn isn't based on anything substantive, except his opinion that maybe the current bubble has a ways to go before it pops. Not very solid!

It is really incorrect to think of economics as just holding an " after-the-fact view of history." While we can not make exact predictions about the future economy, it does not mean we are totally blind about the future.

Different sciences have different predictive capabilities. The science of physics is very predictive. If we put x amount of fuel into a rocket a scientist will be able to, with a high degree of accuracy, forecast exactly how far the rocket will travel.

In meteorology, it is impossible to predict today what the weather will be like in New York City on February 19, 2017.

However, this does not mean we can't now say anything about the weather on February 19, 2017. We know for example that the date falls in the season of winter so that the possibility exists that it could snow on that day. We also know that it is extremely unlikely that it will snow in New York City in August 2017, the middle of the summer season.

Economics is similar in ways to weather forecasting, We are not entirely blind but extremely limited in what we can say. If the Fed is pumping money aggressively, we can say it is a "season" when price inflation can occur, as opposed to a period when the Fed would be shrinking the money supply that would be a "season" when deflation could occur.

Again, the economic world is very complex and exact forecasts are impossible but we can have rough ideas of what might be developing.

The same goes with the business cycle. When the Fed is aggressively pumping money and we see capital markets climbing, such as the stock markets and real estate, and improving unemployment after a recession, we can hold a very strong view that we are in the boom phase of the business cycle.

It can get  tricky to know exactly what will cause the bust phase of the business cycle, unless there are dramatic changes such as existed in the summer of 2008 which is why at that time I pounded the table warning about the developing crisis that did develop.

My current view is not merely that "the current bubble has a ways to go before it pops." It is that there are no.indciations that money supply growth has slowed to the degree that a major bust is likely in the very near future.

I watch money supply very closely and have done so for more than 30 years, I will have a very good chance of recognizing when the money supply growth has slowed (or not accelerated) enough to cause the next bust and I will report any warnings I have in the EPJ Dail Alert in real-time.

So no, I can't name the exact date of every stock market crash that will develop over the next 10,000 years, anymore so than a meteorologist can forecast today the exact weather on February 19, 2017. But as the next economic crisis gets close, I will have a very good chance of spotting it early on.

Again, it is a very complex world so there is no absolute certainty, but we are not in a world of complete blindness either. In other words, don't plan a cookout and beach day on Cape Cod right now for February  19, 2017 and don't book a ski trip to Killington, Vermont for August 19, this year or next, I predict that if you do so you will very likley be very dissappointed



  1. The issue isn't precision: it's whether we can make any testable predictions, of any sort. In weather forecasting, we make statistical predictions about the chance of rain, which can be tested against the actual rainfall over a period of time. In other sciences, you can make a prediction that is not exact, but falls within a certain range.

    Can we make similar predictions in economics? Not exact, but within a certain range, or a statistical probability that can be tested against a larger dataset? If it's possible, let's have such predictions and test them. If it's not possible, then economics, including ABCT, is not predictive, so can hardly be considered a "science". It's more of a worldview, which is reinforced by the fact that economists have such basic disagreements about the nature of reality!

    1. Not predictive yet Wenzel, Schiff, Grant, and half the staff at predicted the great recession, as well as Hayek and mises predicted the Great Depression.

      Lol sit down dude, you've lost.

    2. @Adam Marx, Wenzel hardly predicted anything. (At most he may be able to predict that the sun sets in the east) Most Austrians think the crash or bust has already started and unwinding, that includes Schiff, Grant and others. It is only RW, who is oddly clutching to the HIS theory that the M2 will tell him that the economy is going will be in the toilet. He is combining his theory and muddling it up with the ABCT.

      No Austrian worth his salt has EVER claimed that one should pour over the data from the FED and stare at the M2 to find-out when the bust has arrived. Only Wenzel does that.

    3. Obviously you havent read his book. He predicted it. But youre probably too afraid to actually do the research. lol

  2. "My current view is not merely that "the current bubble has a ways to go before it pops." It is that there are no.indciations that money supply growth has slowed to the degree that a major bust is likely in the very near future".

    Thanks for making your thoughts known with certainty. I appreciate that and although I believe quite the opposite that it's very plain that the real economy is deteriorating and the Fed is boxed in, it will be enlightening to see your posts in the coming months.