Predicting the economic future
Thirty years ago, when the Independent Institute was founded, many of the economic institutions that have helped expand our choices in recent years — Amazon, eBay, Facebook, Google, Lyft, Uber, Airbnb — weren’t around.
So perhaps this is a good time to ask, “What’s the economy going to be like 30 years from now?”
At a micro level — for those of us in the age demographic that reads about economics for pleasure — the outlook is grim. We’ll be dead.
For the living, my prediction is that the economy will be what it’s predicted to be. Like most social sciences, economics tends to produce self-fulfilling prophecies.
The concept was first described by Columbia University Professor Robert K. Merton in his landmark 1949 book, “Social Theory and Social Structure”: “The self-fulfilling prophecy is, in the beginning, a false definition of a situation, evoking a new behavior which makes the original false conception come true. This specious validity of the self-fulfilling prophecy perpetuates a reign of error.”
“Reign of error” is as good a definition as any of economics.
Robert K. Merton was the father of modern sociology. He also was the father of Robert C. Merton, who won the Nobel Prize in economics in 1997 for his work on the Black-Scholes formula, a staple of prediction of futures-option pricing for hedge funds. The younger Merton also was a partner in Long-Term Capital Management, the hedge fund that lost $4.6 billion in 1998.
Not that Robert C. Merton’s predictions didn’t come just as true as his dad’s. Robert C. predicted that hedge funds could make a lot of money using sophisticated mathematical models. Then all the other hedge funds began using sophisticated mathematical models. Some made a lot of money. LTCM wasn’t one of them.
Two of the earliest — and most accurate — economic prognosticators were Adam Smith and Karl Marx. Their predictions came true. But perhaps their predictions came true because these two enormously influential thinkers made those predictions.
Adam Smith forecast the abandonment of precious metal coinage in favor of paper money to replace “a very expensive instrument of commerce with one much less costly.” He foretold quantitative easing: “The banks, they seem to have thought, were in honour bound to supply the deficiency, and to provide them with all the capital which they wanted to trade with.” And he predicted, too rightly, what would happen to “the Daedalian wings of paper money” if it became fiat currency untethered to any measure of value.
Smith is sometimes faulted for not foreseeing the Industrial Revolution. He didn’t foresee it because he knew it was already happening. “The productive powers of ... labourers cannot be increased, but in the consequence ... of some addition and improvement to those machines and instruments which facilitate and abridge labour.”
Karl Marx was wrong about communism. But that was just a harebrained idea he had. His predictions are another matter. In “The Communist Manifesto,” published in 1848, he showed great prescience: Disappearance of the middle class. Read all about it in every news outlet. Confiscation of bourgeois property. The EPA called. Heavy taxation. So did the IRS. Liberation of women. Done. Dissolution of the nuclear family. Check. Working without material incentive. “The sharing economy.” Free public education. And worth it. Centralization of banking and credit in the hands of the state. Were you invited to the last Fed meeting? Combination of agriculture with manufacturing. Chicken fingers. Proletariat becomes the ruling class. The lumpenproletariat in Donald Trump’s case, albeit a very rich one.
Our wishes will come true. I won’t bother to mention being careful about what we wish for.
Political satirist P.J. O’Rourke, a member of the board of advisers for the Independent Institute in Oakland, is the author, most recently, of “How the Hell Did This Happen? The Election of 2016.” He will be the master of ceremonies at the institute’s 30th anniversary dinner, focusing on “The Future of Liberty,” Sept. 22 at the Ritz-Carlton, San Francisco.