Tuesday, 20 March 2007

The Economist's Curse - Part 2

If it is the case that economic forecasting suffers from an inherent flaw (that of ceteris paribus - the future will be the same as the past), the question arises over why it is that this work continues to be produced? Even to the point of it flourishing.

We can start to understand this as part of a model of consumption - the consumption of information about the future. If there were to be no demand for information about the future, then there would be no production of information about the future. In this respect, it is the demand that creates the supply. Information about the future is demanded because we all have to make decisions in the present that have consequences in the future.

A good illustration of this point was provided this week by the decision whether or not the UK ought to act now to secure the option to renew Trident (the UK independent nuclear deterrent) in about 2020. (See article for story). The decision was whether or not to sanction the concept and design work for the Trident replacement, at a very significant cost to the UK Exchequer. Not to go ahead would mean saving the cost, but eliminating the possibility of renewal in 2020. To go ahead does not commit the UK to replacement in 2020, but does enable the possibility of its renewal.

In looking for an answer to this dilemma, an element of foresight was needed by the government. The key areas of foresight were whether or not a deterrent would be needed in the 2020s and under what circumstances a deterrent would be needed. To answer these questions, point forecasts of future deployment options were taken, and the advice was given to government that it could be envisaged that a deterrent could be needed in the 2020s and 2030s.

To deter which threat is something of a moot point, but we are living in an era of great change where we cannot presume that old relationships will last indefinitely, and Trident can target Washington just as easily as it can target Moscow. In undertaking this exercise, the probable futures have been determined. This is good government, but poor futures, as we have not considered a whole range of possible futures that could happen, but now won't because they have been excluded from consideration.

Of course, by excluding a whole range of posibilities, the act of decision making has been made that much easier. Perhaps this is why we live with the Economist's Curse? The Economist's Curse cuts the cost of making decisions about the future.

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