Thoughts on economics and liberty

The pitfalls of forecasting

Unless one takes a truly long-term view, and thoroughly understands the entire range of impacts, including  stabilisers, adjustments, substitutions, interactions, and the lot, it is best to avoid forecasts on complex matters. We can talk about trends, and tendencies, but not precise estimates of what is going to happen.

The number of constantly changing forecasts by the IMF during the past three years should have led it to shut down its delusional macro-economic forecasting branch, but forecasters always manage to  avoid taking responsibility (much like climate change "scientists" who manage to receive public funding even after making the most absurd forecasts!). 

Here's Julian Simon on the pitfalls of forecasting

This is what Julian Simon had to say about forecasting (source).

Despite those reservations about technical forecasting, I shall briefly survey the results of some of the forecasters, mostly in their own words. My aim is to show that even with relatively “conservative” guesses about future extraction developments, many of the best-qualified forecasters report enormous resource availabilities – in contrast to the scare stories that dominate the daily newspapers. The central difficulty again is: Which expert will you choose to believe? If you wish, you can certainly find someone with all the proper academic qualifications who will give you as good a scare for your money as a horror movie. For example, geologist Preston Cloud has written that “food and raw materials place ultimate limits on the size of populations … such limits will be reached within the next thirty to one hundred years”, and, of course, not too many years ago the best-selling book by Paul and William Paddock, Famine–1975!, told it all in the title.

We begin with the assessment of the raw-materials situation by Herman Kahn and associates. Examining the evidence on the twelve principal metals that account for 99.9 percent of world and U.S. metal consumption, they classify them into only two categories, “clearly inexhaustible” and “probably inexhaustible,” finding none that are likely to be exhausted in any foreseeable future that is relevant to contemporary decisions. They conclude that “95 percent of the world demand is for five metals which are not considered exhaustible.”
Many decades ago, the great geologist Kirtley Mather made a similar prescient forecast:
Summing it all up, for nearly all of the important nonrenewable resources, the known or confidently expected world stores are thousands of times as great as the annual world consumption. For the few which like petroleum are available in relatively small quantities, substitutes are known or potential sources of alternative supply are at hand in quantities adequate to meet our current needs for many thousands of years. There is no prospect of the imminent exhaustion of any of the truly essential raw materials, as far as the world as a whole is concerned. Mother Earth’s storehouse is far more richly stocked with goods than is ordinarily inferred.
In a comprehensive 1963 survey of natural and technological resources for the next 100 years, Harrison Brown – a well-known geochemist who would not be described as a congenital optimist by anyone who knows Brown’s work – nevertheless looked forward to a time when natural resources will become so plentiful that “mineral resources will cease to play a main role in world economy and politics.” (I think that that time has already arrived.) In an article sufficiently well-regarded that it was the first article from the physical sciences ever republished in the American Economic Review, H. E. Goeller and A. M. Weinberg explored the implications of possible substitution in the use of raw materials that are essential to our civilization, with this result:
We now state the principle of ‘infinite’ substitutability: With three notable exceptions – phosphorus, a few trace elements for agriculture, and energy-producing fossil fuels (CH2) – society can subsist on inexhaustible or near-inexhaustible minerals with relatively little loss of living standard. Society would then be based largely on glass, plastic, wood, cement, iron, aluminum, and magnesium.
As a result of that analysis of “infinite” substitutability, they arrive at an optimistic conclusion.
Our technical message is clear: dwindling mineral resources in the aggregate, with the exception of reduced carbon and hydrogen, are per se unlikely to cause Malthusian catastrophe….In the Age of Substitutability energy is the ultimate raw material. The living standard will almost surely depend primarily on the cost of prime energy.
Are those quotations from far-out voices? Hardly. Vincent McKelvey, then-director of the U.S. Geological Survey, said in an official Summary of United States Mineral Resources: “Personally, I am confident that for millennia to come we can continue to develop the mineral supplies needed to maintain a high level of living for those who now enjoy it and raise it for the impoverished people of our own country and the world.”
You may be startled by the discrepancies between these assessments and those that you read in the daily newspapers. The best-known doomsday forecast in the last few decades was The Limits to Growth. It sold an astounding 9 million copies in 29 languages. But that book has been so thoroughly and universally criticized as neither valid nor scientific that it is not worthwhile to devote time or space to refuting its every detail. Even more damning, just four years after publication it was disavowed by its sponsors, the Club of Rome.The Club said that the conclusions of that first report are not correct and that they pu rposely misled the public in order to “awaken” public concern.

With respect to minerals, Dennis Meadows (of Limits to Growth) predictably went wrong by using the known-reserves concept. For example, he estimated the world supply of aluminum to be exhausted in a maximum of 49 years. But aluminum is the most abundant metal in the earth’s crust, and the chance of its supply becoming an economic problem is nil. (Meadows also made the error of counting only high-grade bauxite, while lower grades are found in much greater abundance). The price history of aluminum in Figure 2-2 shows how aluminum has become vastly more available rather than more scarce since its early development in the 19th century. And in the two decades since Meadows wrote, the price has continued to fall, a sure sign that the trend is toward lesser rather than greater scarcity. Figure 2-3 [Prices of aluminum, and early ones from Madigan booklet]
The complete failure of the prophecies of Limits to Growth, and even the repudiation by its sponsor, have had little visible effect on the thinking of those who made the false prophecies. In 1990 Meadows was still saying, “We showed that physical growth will stop within the lifetime of those being born today…The underlying problem has not changed one iota: It is the impossibility of sustaining physical growth in a finite world.” (The next chapter discusses why finiteness is a destructive bogeyman, without scientific foundation.) And in 1992 they published Beyond the Limits which says the same old things while attempting to wiggle out of the failures of past predictions by saying that they just had the dates of the forecasts wrong.
Forecasts made by government agencies attract much attention, and many naive persons put special credence in them. But the inability of government agencies to predict resource trends, and the ill effects of such “official” but badly made forecasts, would be amusing if not so sad. Consider this episode:
After a sharp price rise in the late 1970s, timber prices in 1983 fell about three- quarters, causing agony for lumber companies that had contracted to cut government timber at the high prices. Industry trade groups then argued that the government owed the industry help because its forecasts had led to the bidding disaster. In the late 1970s [an industry spokesman] says, government economists predicted timber shortages and helped to fan the bidding.
Even economists can be influenced by physical considerations into focusing on too-short-run price series, and making wrong forecasts thereby. For example, in 1982 Margaret Slade published an influential analysis of trends in commodity prices based on a theoretical model including grades of ores. Her series ran from 1870 or later through 1978. She fitted quadratic concave-upwards curves to the data and concluded that “if scarcity is measured by relative prices, the evidence indicates that nonrenewable natural-resource commodities are becoming scarce.” If she were to conduct the same analysis with data running to 1993, and using data before 1870 where available, she would arrive at quite the opposite conclusion. 
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