The limits of supermodels

UK GDP another blow for economics' physics envy

UK fourth-quarter growth has come out and it's on the nail, as economists sometimes like to say, at 0.7 per cent. Their estimates of the recent past are right - but, regrettably, their past forecasts were hugely wrong. As recently as March the government itself and most economists were forecasting 0.6 per cent growth for the year. Instead the annual growth rate for 2013 is 1.9 per cent - more than three times faster. The UK's unexpected recovery is an all too typical big forecasting failure for a subject with an identity crisis, a social science suffering from physics envy.

That envy is understandable. Exact measurement and prediction helps. Economics is no doubt right to seek it and is doing so. The teaching of economics becomes ever more mathematical. And, the models become more and more sophisticated, so that mere economists struggle and physicists are better able to cope.

A big part of the new trend is technology. Computers get bigger, better and more able to compute and re-compute. More and more data can be assimilated. No doubt there are real advances but if forecasts for growth in a developed economy like the UK are out by a factor of three within months, it suggests turning points are still missed and that the complex interplay of macroeconomic forces is still far from being modelled successfully.

The problems emerge from too much faith in the new precise science. Mervyn King, the former governor of the Bank of England, was unfashionable in warning frequently that forecasts were extremely liable to be completely wrong. But the Bank of England's monetary policy has just become unhinged under King's successor Mark Carney because it was pinned to a three-year unemployment forecast that proved wrong within months.

Economies are driven by an astonishingly complex interaction of collective psychology and social, political, financial and even climatic forces. No doubt it all needs modelling. It's the excess faith in the models' figures that looks dangerous. Experience, judgment and caution remain vital elements of economics. The social needs to stay in the science. Risk and uncertainty still rein. Even supermodels can't figure out everything.