Economic Error
by Dr. Doug Cardell
I often am asked why economists disagree so much about the state of the economy and where it is heading. It's a question I enjoy answering since this topic has been a large part of my economic research. The direct answer is that the economy is a chaotic system interrupted by bubbles and black swans. But don't worry; I'll break it down. Let's take one part at a time; economics is a chaotic system. The easiest way to understand chaotic systems is to consider the weather. The weather was the first chaotic system analyzed to the degree necessary to achieve understanding. You've probably heard of the 'butterfly effect.' A weather researcher named Lorenz originally coined the phrase to describe an essential attribute of chaotic systems. A defining characteristic of chaotic systems is that tiny input changes can lead to colossal output changes. Lorenz entitled one of his research presentations, "Predictability: Does the Flap of a Butterfly's Wings in Brazil Set Off a Tornado in Texas?" Sounds crazy, right? However, imagine an extensive weather system beginning to form and needing only a tiny nudge to activate it fully. Enter the butterfly. It's like the straw that broke the camel's back. After a decade of study, researchers realized that the weather would never be predictable more than two weeks in advance. Suppose you have doubts—experiment. Every day for a week, look at the forecast in your favorite weather source and write down the basic facts for the weather a week ahead. Then, wait a week and compare the actual results with the predictions. Chaotic systems, like the weather, exist when millions of independent elements combine to create an effect. Weather is caused by moving air and water; every movement by people, animals, insects, and fish moves air or water. To accurately predict the weather, knowing how all these actors are and will be moving would be necessary—clearly, an impossible task. The economy is also a chaotic system. Today there are eight billion people on earth buying, selling, saving, and consuming. Therefore, making accurate economic predictions requires knowing what each person is doing economically and their economic plans. And like the butterfly effect in weather—a shopper buying a pair of shoes in Peru could be the tipping point that triggers a recession in Poland. Chaos is not the only problem making economic prediction unreliable. The second is 'bubbles' or boom and bust cycles. Speculation by large numbers of inexperienced investors causes markets to overheat beyond actual value resulting in a crash. This sort of bubbly behavior has happened dozens of times, for example, the Tulipmania bubble in the Netherlands in the 1630s, the Great Depression in the 1920s and 30s, and the Housing Bubble in 2007-9. The results can be economically devastating and impossible to forecast until too late. Finally, the third disruptor of economic predictions is the 'black swan.' Black swans are unpredictable events that have wide-reaching effects. The recent CoVid-19 pandemic and the resulting economic collapse is an example. But other examples include terrorist attacks, meteorite strikes, volcanic eruptions, and severe earthquakes. My published research indicates a 56% probability that at least one of the three factors will cause a consequential error in any economic prediction beyond the immediate future. You would literally do better flipping a coin. Forecasts that are correct forty-four percent of the time are not forecasts but guesses. Yet another problem with economic forecasts is the inherent biases of the forecasters. For example, many economists base their projections on how they wish the economy would function rather than how it has proven to work. For more details on bias error, please see my article on evidentiary economics. The preceding explanations also explain why centrally planned economies, like fascism, socialism, and communism, always fail. Primarily, central planning fails because planning requires the ability to forecast. For example, in mid-20th century Soviet Russia, the experts' 5-year plans never succeeded because the expert predictions they relied upon were not reliable. Millions of producers and consumers can independently order the economy without needing forecasts or direction. Just as a flock of thousands of starlings can navigate and execute rapid turns, climbs, and dives with no leader or central planner, free people in a free, uncorrupted market, move that market in the most beneficial direction for all. Free marketplaces have provided greater good to more people than any other economic system. For a complete explanation of how this can be true, see my article on spontaneous order.
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