The physics of economics
Physicists’ predictions outperform Goldman Sachs.
Physicists may be able to predict the behaviour of quarks with ever-increasing precision, but what about the messy behaviour of economies? A team of Italian physicists have put their mathematical minds to the question of economic forecasting, with surprisingly simple (and surprisingly accurate) results.
In a paper published in Nature Physics in July, Andrea Tacchella, Dario Mazilli and Luciano Pietronero describe a method of GDP forecasting that relies on publicly available export data and spits out predictions that are an average of 25% more accurate than those of the International Monetary Fund.
Traditional forecasting techniques might take hundreds of variables into account, but the new technique uses only two: the first is the country’s current GDP and the second is what the researchers call “economic fitness”.
The researchers assign a fitness rating based on the diversity and complexity of a country’s export products. So a country that exports plums rates lower than one that exports jam. And the more types of jam, the better.
The results are promising. In 2015, the method correctly suggested the Chinese economy would keep growing strongly, when many other forecasts said it was headed for a slump.
And retrospective use of the method revealed the trouble brewing for Brazil and Russia as early as 2005, when the likes of Goldman Sachs were predicting they would be economic powerhouses of the 21st century.
For the last two years Pietronero’s team has been working with the World Bank in Washington DC, and its sister organisation, the International Finance Corporation, is already using economic fitness to guide its decisions.
The Chinese and Italian governments are also interested, according to Pietronero, as is the EU Commission.
Next on the agenda? Predicting innovation itself, says Tacchella.
Economic modelling of countries can come down to just two factors.