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Predicting
the future is extremely difficult. Even the most famous and intelligent
people often make notoriously
bad predictions. In 1932, Einstein did not believe that nuclear
power was obtainable. H. M. Warner of Warner Brothers famously asked
in 1927 “Who
the hell wants to hear actors talk?” Irving Fisher, professor
of economics at Yale, said in 1929 that “…stocks
have reached what looks like a permanently high plateau.” Darwin
wrote in The Origin of Species
"…I see no good reasons why the views given in this volume
should shock the religious sensibilities of anyone." Famous
generals dismissed airplanes as toys. This list could go on an on
for hundreds of pages.

Yet, people
continue making predictions and listening to experts, pundits, futurists,
fortune tellers, and weathermen. Why? Partly out of curiosity, but
mostly because we perceive that correct predictions will allow us
to take action and increase satisfaction with our circumstances.
Without prediction, human action would be pretty much impossible.
When thirsty, we drink water because we predict that drinking it
will diminish our thirst. When we need groceries, we head to a supermarket
because we predict that it will have what we need in stock. When
weather forecasters predict rain, we take an umbrella. When, stock
market analysts predict a bull market, we may act on their predictions
and buy growth stocks. We believe/predict that higher education
will help our children so we steer them to colleges rather than
vocational schools.

Companies are
no less dependent on predictions than individuals. They predict
demand and plan production accordingly. Designers predict future
fashion trends. Farmers need long range rain forecasts; casket makers
need expected mortality…

It is self-evident
that some predictions are relatively easy and risk-free and will
come true most of the time. Water usually quenches thirst. When
we go to a supermarket, we usually find it well stocked with food
and beverages (unless we are in North Korea). A bank will usually
work during business hours (unless there is a holdup). Sometimes,
otherwise easy predictions fail. In 2005, three days before Rita
was scheduled to strike Houston, I went to a Walmart Supercenter
only to find its shelves bare.

Other types
of predictions are more difficult. As a rule, far future is more
difficult to predict than near future. It is usually easier to predict
behavior of simple systems than complex systems. In other words,
more variables make for tougher predictions. Finally, it is easier
to predict natural events rather than socially constructed ones.
After all, social systems are comprised of human beings capable
of independent human action (check out Human Action and The
Ultimate Foundation of Economic Science by Mises).

There is a
difference between predicting and acting. When I watched the 2006
World Cup, I made many predictions, some of them successful. However,
I did not act on them i.e. didn't place any bets. Many fans around
the world did, with varying results…

After this
somewhat lengthy preamble, let's consider the difference between
individuals and private companies on the one hand and governments
on the other. Both private entities and governments make predictions;
both win some and loose some. So what is the difference? Let's consider
three examples: an individual investor, a large company, and a government.

An individual
investor has a choice of advisors and analysts to listen to, both
bearish and bullish. Upon deciding who is correct (i.e. making a
prediction of her own), our investor may decide to buy stocks, invest
in real estate in California and/or Florida, buy gold, etc. While
she may prove right or wrong, her success or failure can only directly
affect relatively few people. Since it's her money, if her investment
choice proves incorrect, at some point she is likely to pull her
money out and do something else. Finally, there is no coercion involved
since all investments are voluntary.

Let's now look
at corporations. Before the gas price hikes, the Big Three American
automakers bet heavily on popularity of trucks. The
Big Three sold more trucks than cars. This strategy worked just
fine in the 1990s. Nowadays, with consumers spooked by high gas
prices and staying away from large trucks and SUVs, the Big Three
are embracing change (albeit reluctantly). They are making plans
to slash truck production and build more cars. As in the above example,
the damage is limited. People who are hurting, i.e. investors and
autoworkers, are directly and voluntarily associated with
the Big Three. Rather than persisting in their folly, upon realizing
that the situation changed and they had made mistakes, the
Big Three are trying hard to readjust. Finally, other automakers,
such as Toyota, chose strategy emphasizing fuel-efficient cars over
gas-guzzlers. Hence, consumers have a choice of what to buy.

Now, let's
look at a government example. The
British government has embraced a new report with stark warnings
on global warming. Now, I am not a climate scientist and have
no idea whether global warming is a man-made phenomenon and what
effects it's likely to entail. Climatologists do not seem to agree
on these issues either, so it seems that the jury is still out.
However, based on our preceding discussion of predictions, we can
safely make these observations:

1. Global climate
   system is very complex. Behavior of complex systems is
   difficult to predict.
2. Global warming
   effects will/will not be realized over a long period of time.
   Far future is notoriously difficult to predict.
3. Global ecosystem
   is comprised of both natural and social components. Social
   components' behavior are extremely difficult to predict since
   humans are capable of independent action (possess free will if
   you will). E.g. humans can and do change their energy habits.
4. New technologies,
   perhaps unthinkable today, could be developed. These technologies
   could dramatically change the energy game.

By their very
nature, climate predictions are extremely shaky. Yet, the British
government wants to act upon them. There are several differences
which distinguish government acting on predictions from individuals
and private companies:

1. It is not
   voluntary. There is no opting out, selling out, or resigning.
   On the other hand, an investor can freely sell off stocks. An
   autoworker at Ford can take a retirement or retraining package.
   A company director questioning corporate strategy may resign in
   protest.
2. It is not
   limited. In fact, it is monopolistic. Every resident of the U.K.
   will be directly affected.
3. It is not
   easily correctable. A private company or an individual can pursue
   a wrong course of action only for so long before going bankrupt
   or readjusting. A government can tax or use the printing press
   to pursue its policies in perpetuity.

So, what is
the solution? Upon reading this article, a friend of Lew Rockwell
noted that it was simple: "…if government allows the free market
to work unimpeded, the problem of government action based on controversial
predictions is avoided."

We have friends
who are seriously concerned about the environment. Some take direct
action by driving hybrids and bio diesel cars. Maybe they are right
or maybe not. In any case, I say more power to them since they do
it voluntarily and exercise their freedom of choice. When individuals
act on shaky predictions, it's their own business. When governments
do it, it affects us all.

November
6, 2006

Sergei
Boukhonine [send him mail]
writes out of Austin TX.