Friday, October 28, 2005

Pitfalls of Predictions

Tibor R. Machan

Many moons ago I listened to a lecture by an eminent economists who was predicting that with the unruly intrusiveness of the American federal and state governments, there would soon be a devastating economic downturn. The welfare state, he argued, can only last so long, after which there will definitely be a comeuppance.

That, actually, was also the teaching of one of the most famous free market economists of the 20th century, Ludwig von Mises, the leader of the Austrian School of economics. But he wasn’t alone—quite a lot of others in the discipline fancied themselves to be seers, forecasters short and long range. Be they of the Austrian, Marxist or neo-classical schools, they usually hold to a certain understanding of human nature, containing with various built in tendencies or inclinations, as well as to laws of history or the economic system, so they believe they can, with sufficient data on their hands, tells us what’s about to happen both in the overall economic system and in some cases also with individual human agents.

Of course, all social scientists who contend that such predictions can be made hedge their bets. They do so by way of the undeniable fact that none of us has command over all of the necessary information that would enable one to make a certain prediction—a bit like the weatherman. The most the bulk of them claim they can offer is pretty good estimates or probabilities. To be certain, they would need to know all the relevant facts and no one is so positioned; ergo, one can always provide an excuse for a bad prediction.

Problem is that the initial assumption of such forecasting and predicting is highly dubious. People aren’t robots hard wired to behave in predictable ways within any kind of environment. Their economic decisions often vary from person to person. Indeed, even a given individual can carry on differently in completely similar circumstances—how he or she will act is more often up to the individual than to any kind of fixed factors on which the people in the social sciences can base their clairvoyance.

One consequence of this is that while the social scientists build fixed models of the micro and macro world on which they base what they expect to happen—given even a reasonably clear anticipation of the circumstances people will face—actual human beings come up with surprising decisions in the face of these circumstances. That’s probably because they vary in the degree of attention they pay to them. Perhaps, also, when after a slew of bad policies have lead an economic system to the brink of disaster, many people will finally perk up and take notice of this and change their conduct and policies. So the dire predictions won’t come true because people will often change their old ways to new ones. Moreover, the dire predictions themselves can have the result that people will alter their conduct, having sometimes learned finally what is likely to happen if they carry on as before.

All this isn’t so only when it comes to how the economy works. Back in the early 70s, Paul Ehrlich, the famous Stanford University biologist, wrote the book The Population Bomb (1971), in which he made the prediction that in five years or so the vegetation of the globe will have shrunk to intolerable levels. But it didn’t happen. (Later Ehrlich made a bet with the late Julian Simon about whether certain vital resources would disappear, a bet Simon won because the resources didn’t disappear.)

I am not sure why exactly Ehrlich’s expectations turned out to be wrong but I would bet it had at least a little bit to do with how people began to change their thinking and acting upon learning of the dire warnings. Not perhaps everything—quite possibly Ehrlich made some very bad calculations.

The same with the eminent economists who kept saying that the welfare state cannot but degenerate into a dictatorship. People are likely to carry on negligently, recklessly for a long time but then pull back and take the needed measures to forestall the disastrous results that have been so confidently predicted. Or not—for sometimes the logic of what they did in the past will simply yield consequences that they try to avoid too late in the game.

Still, I think it makes sense not to be too trusting of the social scientists' way of thinking about people, as if we were simply more complicated versions of some classical physical system that can be predicted if known well enough. People will probably keep surprising us, for better and for worse—that, in fact, is one way they are different from the rest of the stuff in the world.

No comments: