[FOUNTAIN]Forecasts err, but popularIn the Science Museum of London, there is a box that is 2.1 meters (7 feet) tall. The box has water containers and pipes connected in a very complicated way. It is not a device for an experiment in natural science. It is a model for economics that William Phillips invented in 1949 when he was a student at the London School of Economics and Political Science. Inside the device, colored water, symbolizing currency, runs through tanks and pipes that represent economic variables, showing how different factors are related and how an economy works. It can be said to be a prototype of economic forecasting models.
In 1941, Wassily Leontief, an American economist born in Russia, published a book titled “The Structure of the American Economy,” which had a large and complicated diagram attached to the back. The diagram was to show how industries were related, using complicated equations of each industry’s input and output. The model explained how the market economy in capitalism operates.
Since those days, as computers have developed rapidly, the number of variables for economic forecasting models has also increased and equations have become even more complicated. Central banks and economic research institutes in all countries, and international organizations such as the International Monetary Fund and the World Bank, work hard to develop new economic forecasting models. However, the evolution of economic forecasting models does not necessarily mean that economic forecasts are precise. Economic forecasts vary greatly from institute to institute and the forecasts are often very different from the real figures.
Economists have an answer for why economic forecasts are always wrong. The say it is difficult for an economic model to reflect complicated economic phenomena. Because humans move the economy, it is impossible to control all economic variables, which can sometimes be done in science experiments. Among variables that affect the economy, many are impossible to represent with numbers, the only thing computers understand. As the year nears its end, many economic institutes inside the country are presenting gloomy forecasts for next year. But many say they are not trustworthy because the institute forecasts often turn out to be wrong. Some may think that economic institutes might as well give up making economic forecasts. Nonetheless, many forecasts are pouring out at this time of the year. Economic experts explain the reason for this in accordance with economics: Although many do not trust forecasts, the demand for such forecasts is still very high.
*The writer is an editorial writer of the JoongAng Ilbo.
by Kim Jong-soo