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Predicting the Future

Mises Daily: Saturday, August 07, 1999 by

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During the mid-1980s, one of the kookier things I as an economist and a sane person had to deal with was Dr. Ravi Batra’s monster best-seller The Great Depression of 1990, published by Simon and Shuster.

Dr. Batra prophesied--er, I mean forecasted--that the year 1990 would begin a cataclysmic, seven-year, world-wide depression. If there was anything good about this disaster, he said, it was that it would bring an end to the capitalistic system, and thus usher in a new Golden Age.

Upon the first sign of weakness in the stock market in late 1989 or early 1990, Dr. Batra warned us to sell all our stocks and bonds. He said we should empty our retirement accounts, even though there would be penalties for early withdrawal. And he rhetorically asked, "Can you trust banks at all?" He also warned business people to get out of long-term investments, and to get into the repair business.

The reason Dr. Batra was taken seriously was that he was lucky on a couple of wild predictions. I call this the first law of forecasting. When you’re a nobody out to make a name for yourself, what you do is this: Make a wild forecast. Predict something nobody else is forecasting. The odds are, it won’t happen. But, if it does, you’ll be the only one to have forecasted it.

This is what Henry Kaufman did. Back in the 1970s, and maybe even before then, Dr. Kaufman was forecasting 20 percent interest rates. Then, in 1980, when interest rates hit 20 percent, people were amazed by Kaufman’s forecasting ability. Then, interest rates started falling, but Dr. Kaufman was still predicting 20 percent rates. As far as I know, he’s still predicting 20 percent rates. But, after a while, people stopped caring.

Same thing was true with Dr. Batra. Back in 1978, with unrest brewing in Iran, he predicted that the Shah would be overthrown and replaced by Islamic fundamentalists, and that a war would break out between that country and Iraq. When these things happened, Dr. Batra was acclaimed a modern day Nostradamos, a person with amazing insight into the dynamics of the economy and of society-at-large. Everybody wanted to know what else he saw about to happen, and why.

In his next predictions, Dr. Batra followed what I call the second and third laws of forecasting. For the near term, his forecasts were murky. He said that in the next year, which was 1987, "the stock market will continue to rise, but its total percentage gain by the end if 1987 may not be as strong as its gain in 1986." This prediction could mean just about anything. The stock could rise, and by more than 1986, and this could have been said to have fulfilled the prediction. Or, the stock market could rise, but by less, and this could have been said to have fulfilled the prediction. Or, the stock could fall, and even this could have been said to have been intimated by the prediction.

I myself will make a similar prediction for the stock market for next year: It will rise, or else it will fall. I mean, it’s hard to see how the stock market can make a substantial gain from its already lofty level.

The second law of forecasting, is make your near-term forecasts murky, this way they can't be falsified.

The third law of forecasting is to have apocalyptic visions for the intermediate-term. Predicting the end-of the-world in the distant future won’t work, because if you say everything will fall apart in twenty or forty years or more, it’s the same thing as saying there’s nothing to worry about. In order to really excite people, the end-of-the-world has to come in something like five-or-ten years. That’s enough time to start worrying about it, and to try to do something about it, and to get your little mind working on the problem, but not so much time that you can postpone your concern over it.

This prescient end-of-the-world thing is a little tricky. If you have any control over yourself, you know that in just a few short years 1990 will actually occur. Then, the end-of-the-world won’t happen, and you’ll have to come up with some kind of an explanation.

For example, when the end-of-the-world didn’t happen in 1874 when the founder of the Jehovah Witnesses first said it was going to happen, he explained that it was a transcription error, and the end-of-the-world would actually happen in 1914.

Then, after the end-of-the-world didn’t happen in 1914, he explained that it actually did happen, spiritually, and that the physical end-of-the-world would be accomplished before the last person to have witnessed the events of 1914 had passed away. This prediction has befuddled his followers, who have ever since been debating when the physical end-of-the-world is supposed to happen.

It’s really good if you can work in pseudo-science, eastern mysticism, conspiracy theory, sex, envy of the rich, and other such stuff into your apocalyptic visions. Dr. Batra has some really funny examples in his. For starters, there are four different types of human personalities-- acquisitors, warriors, intellectuals and laborers, and each historical era has been characterized by the domination of one or the other of these personalities. During the stone age, it was the laborers. Then, in ancient Egypt, it was the intellectuals. In the Roman Empire, the warriors. Now, with capitalism, the acquisitors.

In pre-historic times, Neantherthal males abused their wives. During the age of intellectuals, women were temple-prostitutes. During the age of warriors, dominant males had polygamous marriages. And, during the age of acquisitiveness, women are reduced to money-prostitutes.

There’s more. During the height of the capitalist era, the economy was monopolized by robber barons, who impoverished workers and forced women and children to work in the factories and underground mines. Furthermore, out of greed (and stupidity), they cut taxes which caused depressions (and destroyed their fortunes). The stock market crash of 1929, and the Great Depression that followed were due to the tax cuts of early 1920s. And, the Great Depression of 1990 was going to result from the tax cuts of the early 1980s!

The business cycle has long attracted its share of nutty theorists, but the phrase itself is something of a misnomer. There is, in fact, no wholly predictable pattern to the "cycle" that can be identified statistically. There are booms and busts, and once booms and busts get underway, there are certain tendencies. But there is nothing "in the economy" generating these things; they're the results of external events, such as wars and mismanagement of the money supply. But, for many, the siren call of statistics proves irresistable.

The most famous attempt to explain the business cycle is that of William Stanley Jevons in the late 19th century. Jevons argued that there was a ten-to-eleven year pattern in economic time series. He attributed this pattern to fluctuations in crop yields, which he in turn attributed to a similar periodicity in sun spot activity.

The celestial approach to business cycles reached its apex in the writings of Ludwell Moore during the early 20th century. Moore claimed to identify two rainfall cycles: a major, thirty-three year cycle, and a minor, eight-year cycle. He related his eight-year cycle to the orbit of the planet Venus. Every eight years, Venus interposes itself between the Sun and Earth, disrupting the flow of energy to our planet.

Who knows the reason for Moore's thirty-three year cycle, which is eerily similar to Dr. Batra's thirty year cycle? Could it be meteors? El Niño? Hemlines?

Unfortunately for Dr. Batra, the world-wide, seven-year depression he predicted did not begin in 1990. Now the chances are low that he will join Karl Marx, John Maynard Keynes, and the other false prophets of economic history.

But, for a brief time, he did have his day in the sun. For those who merely bought his book, it wasn’t a total loss, because there's a lot of entertainment value there. And, for those who sold all their stocks in 1989, instead of seeing their money increase by 400 percent, their money shrank. If you were one of these people, well, at least you're not alone.

Ludwig von Mises was correct that this much can be said about the future: it cannot be known with any certainty. But with certainty, we can predict that people will continue to make money from pretending that they can.

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CLIFFORD F. THIES teaches economics at Shenandoah University.