Friday 20 May 2022

Economics - a really 'soft' science

Economists like to think of economics as a 'science' but although it uses a lot of graphs, numbers and statistics it is firmly rooted in psychology and crowd behavior which means any one event often has several competing theories trying to explain what has happened, and none of them may be very 'correct' (think of it like curve fitting a fourier transform to past data points - you can get many equations that will fit the past data points very precisely, but none of those equations will make a good prediction of future data points).

For an example of how woeful economic predictions can be in practice, have a look at Statistica's predictions out to 2026 for Turkey that were published at the end of Nov 2021:

Turkey GDP projection:

Turkey Inflation projection:

One gets a sense of just how insanely optimistic the Author Aaron O'Neill was in the commentary about Turkey's economy "By 2030, Turkey is estimated to be one of the countries with the highest gross domestic product worldwide."

Of course, reality has already diverged widely from the four year forward projections made less than six months ago:

Turkey actual GDP data isn't available as promptly, but it looks likely to turn out more like this: 

considering how inflation has been taking off in 2022:

Turkey actual inflation:

Now, inflation may suddenly drop and GDP pick up in Turkey so that the '2026' predictions turn out to be accurate, but I doubt it.

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