An Oxymoron

5/5/09 – Cinco de Mayo

This point is probably beyond pondering. Nevertheless, I really do ponder if the “scientific method” could even remotely be applied to the making of policy. So you are totally forgiven if you just blow this point off as being completely a waste of time.

The scientific method requires experimentation seeking reproducible results. Why are we so good at technological stuff and do so bad a job at our economy? Is this why economics is the dismal science because economics is not compatible with such experimentation?

However, economics has copied space terminology such as “mid course corrections” and “soft landings” to add an aura of scientific credibility. Yet any experimentation is very costly in the time required to change policy if the current plan is not working.

Econometric modeling is a move toward science. As with technology a good respect for uncertainty is required. With modeling we can be assured that the computations are correct. However, there is a higher chance of misreading the conclusions because the models allow us to have so much more data from which to draw our conclusions and turn them into policy. This is seen in the failure to anticipate structural changes and macro social reaction/behavior, etc.

  • Is the quality of analysis improving?

Tools and analysis are better, but insight still is in question. For instance, did Goldman Sach’s forecast for $200 oil last year kill their credibility? After all, my probabilistic forecast has a finite yet remote chance of seeing $200. Of course it is a long-term forecast, reminding all forecasters to give a value or a time, but not both.

Regarding energy we are learning that corrections are a function of the magnitude of the swing. We saw real demand destruction at $150, and that the destruction is not linear. The energy industry still must deal with today’s missing barrels, but do they really matter?

While some concepts might appear to make no sense scientifically such as ignoring the law of thermodynamics cradle to grave in energy policy, economics still must be a part of the methodology.

Click here for more information about Confessions of an Energy Price Forecaster: A 12 Step Program to Enlightenment

Click here for John Tobin's full bio


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