In late 2008, in wake of the financial meltdown, the worst sicen the Great Depression of the 1930’s, Her Majesty Queen Elizabeth, paid a visit to the London School of Economics and posed the incredibly embarrassing question to the assembled economists ‘how was it that none of you could see this coming?’She asked.
It was a question that could not easily be dismissed because, after all, this was the Queen and she was simply echoing the very question that was on everyone’s lips. How did the economists get the future so wrong? The number crunchers from the LSE, one of the UK homes of that type of economists who believe they can help mere mortals see the future through their highly sophisticated equations and models looked at their shoes and within a few weeks were spinning all sorts of answers. Had the Queen gone to Cambridge University she might have come across a few remaining economists who were still literate but not counted amongst the highly numerate charlatans that populate so many universities.
Those who were trained by Lord Keynes, the most famous economist of the 20th century, would certainly have answered what Keynes taught at Cambridge and what every businessman and woman know- ‘Mam’, they would almost certainly reply ‘the past is immutable and the future is unknowable’ This is almost trite but it encapsulates the difficulty that we all face both as people and as businessmen. We make an investment and one it is made that decision cannot be readily changed and we make that investment believing but never really knowing what the future holds cannot be known it offers opportunities. And where we are wrong in our investments and the dice of posterity do not fall in our favour…there is always the bankruptcy court which is market’s way of dealing with fools and uninformed optimists. In 2008 and 2009 the consensus amongst mainstream economists was that what was happening to the world was just a financial crisis stemming from US banks and global investors having mistakenly and with government incentives offered mortgages to people who did not have the income enough to pay. This is what was called the ‘sub-prime mortgage crisis’.
Banks all over the world bought bundles of these American mortgages, often not knowing the laws or even the nature of the asset they were buying, and hence an American financial disaster quickly morphed into a global one. It was only later, starting in 2010 that some economists began to ask if the 2008 crisis was simply just a banking crisis then why did it begin amongst the poor and lower income groups in America and why in 2008? It was then people started to put various bits of the crisis together. The process of analysing what happened in 2008 is by no means complete and hundred of doctoral these are yet to be written. What is known is that there has been a massive shift in the distribution of income in the USA over the last thirty years in favour of the rich and away from those low income workers, ie those who were supposed to pay these sub-prime mortgages.
Along with the massive rise in oil and food prices that occurred in 2006/7just before the 2008 financial meltdown provided the conditions for the economic crisis. No-one saw it coming because no-one was looking at what had happened to the structure of the America economy and those charlatans whose models did not predict what happened were largely looking forward based on one or other variant of what had happened in the past. Driving down the highway looking in the rear vision mirror is never very clever.
Economists Make Mistakes … sometimes big ones!
Late last year I was asked by the Ministry of Minerals to make a presentation on the future of base metal prices. I just giggled. For years I had seen absolutely wrong projections from the IMF, the World Bank and Economist Group on the future of commodity prices. If the economists in any of these agencies or firms could reasonably predict copper and nickel prices with any accuracy then they would be very, very rich people and would not be sitting at their work stations making predictions of the future for a few thousand dollars a month .
We have a similar case with oil prices which should be a lot easier to predict but oil prices have in the last few months slipped from over $110/barrel to under $50 in the last few days. Can anyone find an economist or so called ‘commodity specialist’ who was predicting that the price of oil would halve in 2014? To the best of my knowledge, not a one! But unlike the far more complex situation with money markets this decline should have been fairly predictable. Between the massive increase in the supply of gas and other hydrocarbons as a result of ‘fracking’ in the US , the collapse of substitute hydro-carbon and fossil fuels eg coal and the weakening global economy there should have been warning bells. But this did not occur.
Is Economics useless?
If your idea of economics is based on believing scurrilous number crunchers, ie those predicting the future then on the basis of past performance a saguma will give you results that are probably no worse than most economic forecaster. The famous economist John Kenneth Galbraith once quipped that the only function of ‘economic forecasting was to make astrology look respectable’. But if your vision of economics is a little humbler, that as a discipline it exists to help people to understand what forces shape the world we live in then it is far from useless.
But there are errors in economics that stem from really bad data and information. Last year I undertook a study for the government about the future of the Botswana economy after diamonds ran out. That of course was based on the assumption that the diamonds would soon run out. I did not try to predict the future but to analyse why the country had not diversified and what would happen when, based on the governments’ own estimates the diamonds would run out by 2027. But those predictions on future diamond production were wrong and superseded in August 2014. All the analysis the government had done which showed that diamond revenue would seriously decline after 2027 were completely wrong.
The new resource projections were made by the diamond industry and on this basis HE President Khama could safely say in the state of the nation address in 2014 that Botswana will remain a ‘significant diamond producer’ until the end of the 2050. But President Khama did not elaborate on what it meant in practice to be a ‘significant producer’- does that mean 5 Mcts o5 25 Mcts per annum as both numbers are significant. Clearly the earlier diamond projections upon which Botswana’s 10th National Development Plan were based were completely wrong and they were wrong not because De Beers suddenly discovered a massive new mine but because there is no financial interest in informing the diamond market that there are far more diamonds in Botswana as it will only serve to depress world prices. But there are bigger development issues for Botswana. The new resource assessment is almost certainly very good news for Botswana as it means there will be no imminent decline in diamond revenues after 2027. For the sake of Botswana I am happy to report that my earlier assessment was completely wrong.
But equally the new resource assessment mean for an entire generation the heat is now off the policy makers and as a result no-one will ever think seriously about undertaking the sort of economic reform measures that are needed to drive economic diversification.
But because the resource assessment is not public the good news about the future of the country is also not public and hence it is vital that the government release the future diamond production projections to 2050 because all private investment in Botswana ultimately rests on this number. De Beers and the Ministry of Minerals Energy and Water Resources should release, in approximate figures, this new diamond resource assessment because it will remove uncertainty about what President Khama actually meant about ‘significant diamond producer’ and will help private investors make better informed decisions about investment. The future, as Keynes said, is unknowable but there is no reason to make the job of business more difficult by not publicising this most important of Botswana’s statistics.
These are the views of the author and not necessarily those of any institution with which he may be affiliated.