The combined result of the unknown cannot be known.
— John Kenneth Galbraith
“And then?” she asked, sipping mint-flavoured green tea, something I too have taken a liking to.
“My caffeine days are over, thanks to you. Boy, aren’t we going green,” I said, taking a sip and savouring the rainy morning.
“Yeah, the world’s moving from the red zone to green. Take the US, for one. Its gross domestic product grew 3.5% in the July-September quarter. In fact, people had started talking about an economic recovery long before the data came in. In mid-September, Ben Bernanke, the governor of the US Federal Reserve, predicted the recession was over. “From a technical perspective, the recession is very likely over at this point,” he is supposed to have said. Some newspapers and magazines also went to town with similar views,” she said gleefully.
“You do take things at face value sometimes, don’t you?” I asked. “There were so many reasons behind the US GDP growth. The two major reasons were the car allowance rebate system (CARS) programme and the home buyer tax credit programme. The CARS programme, better known as “cash for clunkers,” essentially gave car buyers $3,500-4,500 in the form of vouchers to buy a car. This pushed up car sales, which reflected in the improved GDP growth. On the other hand, the Worker, Homeownership, and Business Assistance Act of 2009 gave first-time home buyers a tax credit of up to $8,000 and repeat home buyers a tax credit of $6,500, incentivising purchase of house property, which too perked up the GDP.”
“Just what are you driving at?” she interrupted.
“Two things —- first, we don’t learn from our mistakes. Excess consumption caused the financial crisis in the first place and the solutions being bandied around seem to be trying to encourage rampant consumption again. The solution being offered was originally the problem. Secondly, the incentives being given to people to go out and buy stuff are essentially preponing future consumption, which will have an impact on future consumption. To ensure that people keep consuming in the days to come, these incentives will have to either continue or other incentives will have to be offered, which is not a good sign. But my bigger worry is the spate of predictions in newspapers, magazines and television on the recession having ended.”
“You don’t think it has ended?”
“I don’t know. What I do know is that economic performance can rarely be predicted correctly. As John Kenneth Galbraith writes in The Economics of Innocent Fraud - Truth for our Time, “The future of economic performance of the economy, the passage from good times to recession or depression and back, cannot be foretold. There are more than ample predictions, but no firm knowledge. All contend with a diverse combination of uncertain government action, unknown corporate and individual behaviour… Also, unforeseeable technological and other innovation and consumer and investment response have a variable effect on exports, imports, capital movements and corporate, public and government reaction. The combined result of the unknown cannot be known,” I said.
“But some of the experts who have predicted a recovery sound quite sensible to me.”
“Call that self-delusion, something Galbraith explains beautifully in A History of Economics - The Past as the Present, “The most common qualification of the economic forecaster is not in knowing but in not knowing that he does not know.” Nassim Nicholas Taleb also says it brilliantly in The Black Swan - The Impact of the Highly Probable: “You cannot ignore self-delusion. The problem with experts is that they do not know what they do not know. Lack of knowledge and delusion about the quality of your knowledge comes together — the same process that makes you know less also makes you satisfied with your knowledge.” The other factor which works in favour of these experts is that so much information is available these days, so something which sounds sensible can always be said and people fall for such analysis. I also like what John Allen Paulos says in A Mathematician Plays The Stock Market: “Because so much information is available… something insightful can always be said.” The best part of making these predictions is nobody keeps track of whether these predictions turn out to be correct. As Galbraith writes, “His (the person making the prediction) greatest advantage is that all predictions, right or wrong, are soon forgotten. There are too many of them, and if the elapse of time is considerable, not only the memory of what was said will be gone, but so will an appreciable number of those making or hearing the predictions.””
“Are you saying the experts are merely putting on an act?”
“That’s right. In fact, Taleb gives a good example of this phenomenon in The Black Swan. “Many financial institutions produce booklets every year-end called “Outlook for 200X,” reading into the following year. Of course, they do not check how their previous forecasts fared after they were formulated.” Also most forecasters and experts tend to herd around one another. As Taleb writes, “Economic forecasters tend to fall closer to one another than to the resulting outcome. Nobody wants to be off the wall.”
“So there are no real experts?”
“That would be a huge statement to make. All I am saying is that if these experts had a good idea of what the future is like, why would they share it with you and me? Why not keep it to themselves and make money based on it? As Galbraith writes in A History of Economics, “Were it possible for anyone to know with precision and certainty what was going to happen to wages, interest rates, commodity prices, the performance of different firms, and industries and the prices of stocks and bonds, the one so blessed would not give or sell his information to others. Instead, he would use it himself, and in a world of uncertainty his monopoly of the certain would be supremely profitable.”
“That makes sense.”
“I’m glad it does. Now let’s have some more tea, er... green tea, if you please,” I said.
(The example is hypothetical)
(References: A Mathematician Plays the Stock Market, John Allen Paulos, Basic Books, 2003; A History of Economics - The Past as the Present, John Kenneth Galbraith, Penguin Books, 1987; The Black Swan - The Impact of the Highly Probable, Nassim Nicholas Taleb, Random House, 2007; The Economics of Innocent Fraud - Truth for our Time, John Kenneth Galbraith, Houghton Mifflin Company, 2004.)
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