Predicting the Future and Acting on Predictions: The Difference Between Individuals and Governments


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