Recently the Wall Street Journal published an op-ed by theoretical physicist, Steven Koonin wherein Dr. Koonin discussed the difficulty in modeling the climate and climate change. As a consequence, climate science is hardly settled. The op-ed, as well as subsequent Letters to the Editor, brought to mind what I believe to be a similar difficulty in modeling the economy. In fact, I would go so far as to say that modeling the economy is even more problematic. To make these points, I sought to join the discussion by submitting a Letter to the Editor. I reproduce the letter below for anyone interested in my argument.

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Dr. Steven Koonin’s Review article (Sept. 20, print edition) and the subsequent Letters (Climate Science and Interpreting Very Complex Systems, Sept. 27) describing the problems with modeling climate change bring to mind the like problem of modeling the American economy.  A key difference, however, is that climate science models rely on unmotivated data and relationships among variables that are fixed in nature.  At least in principle, as data quality improves over time, the accuracy of climate change models should likewise improve.  By contrast, the computer models on which our monetary masters at the Federal Reserve rely to manipulate interest rates, contrary to what the free market would generate, depend on data grounded in motivated human action and relationships among variables that are anything but fixed.  Unlike carbon dioxide, human beings have preferences, consumption patterns, and levels of risk acceptance that regularly change, making mathematical relationships derived from historical data prone to being grossly inaccurate representations of the future.  Moreover, there is little hope for improved accuracy over time.  It is no wonder that macroeconomic forecasting is largely an exercise in futility.  Yet, it is the driver that makes us all slaves of the boom/bust cycles brought to us courtesy of the central planners on Constitution Avenue.

Theodore A. Gebhard