Charles University in Prague

JEM098: Philosophy and Economics

Bejan Natalia
May, 2011

THE MORALITY BEHIND FORECASTING

"My interest is in the future because I am going to spend
the rest of my life there."
(C.F. Kettering)

INTRODUCTION
One of the most naive sins of a child is to do a certain forbidden thing in order to see what will
happen. And the more it is forbidden, the more he wants it. That inspires him to break the law as soon
and as quick possible, trying to move the future of what if I do it? closer.
The desire to know the secrets of the future is, however, not only a naive game for little kids, but also
for mature and rational people, who put so much emphasis on the predictability that it seems at a
certain point that: discovering the magical formula of the future, would give you the key to govern
the whole world. The questions whether forecasting is possible or not and whether is it moral to make
knowledge claims about the future are going to be the central questions of this essay.

HISTORY OF ECONOMIC FORECASTING

From the very ancient times people tried to foresee what they should expect from their life. It wasnt
and it is not even now only a matter of curiosity, but also a try to look for an explanation of why all
of us are here? And how this story is going to end?
Anticipations were a survival need from the very beginnings of our history, such that anticipation of
risks (e.g. wild animals attack) was a natural state of surviving. But the more societies were
developing, the more the idea and purpose of forecasting was changing. The foreseeing became latter
a determinant feature of sacredness. The forecasting power was interpreted with a theological
rationale, forecasting declarations being seen as foreknowledge put at our disposal by the gods 1. In
the Ancient Greece this feature was represented by the Oracle of Delphi. Delphi was considered a
divine spot in Greece, dedicated to Earth Goddess2. For a very long time, the Oracle of Delphi was
consulted by kings, generals and philosophers who believed in the sacredness of its essence and

Rescher, Predicting the Future. An Introduction to the Theory of Forecasting, State University of New York Press,
Albany, 1988, page 20
2

Digest, Delphi, Volume 86, Number 2, 2008, page 30

The Morality behind Forecasting

truthfulness of its predictions. The motive of sacredness deducted from the ability of foreseeing the
future is present also in the Old Testament: Tell us what the future holds, so we may know that you
are gods (Isaiah 41:23). Probably, hearing no answer to this question, people latter converted the
original meaning of forecasting from interpreting it as being something super-natural to believing that
they are able to discover it on their own. This is when economic forecasting started to develop.
In the Ancient Egypt were done the very first documented economic forecasts of the harvests.
Experienced Egyptians were able to predict the volume of harvests by the level of the water in the
Nile River. Certain levels indicated very good expectations of harvest. If Nile flooded too little, it
implied that the country has to expect famine to come, but if the Nile River flooded too much, the
water would destroy their plantations. Thus, the level of the river was a good predictor of what
harvest to expect3. In nowadays economic terms, the harvest can be interpreted as a proxy of GDP,
taking into account that two millenniums ago the agriculture was the most important practicable
activity. The importance of the Nile River is revealed also in the Old Testament, in Isaiah 19. A
prophecy against Egypt was done and what was cursed is nothing else then Nile River from which
can be understood its national importance: The waters of the river will dry up, and the riverbed will
be parched and dry. The canals will stink; the streams of Egypt will dwindle and dry up. The reeds
and rushes will wither, also the plants along the Nile, at the mouth of the river.4 The impact of
drying Nile River is nothing else than a prediction of worsening economical situation in the country.
Another prediction from the Old Testament: the destruction of Babylon5 - a developed city which
became the center of sin. This example is actually the one which raises many debates among
theologians because nobody can prove: whether Babylon already was destroyed and this prediction
passed, or it is a prediction to be expected by all commercial, developed and sinful cities. In all cases,
predictions (named prophesies in the Bible) are made with God interference suggesting that there is
no way in which a simple human being can know how the future is going to be like.
Cannot be neglected the much more complicated economical forecast presented also in the Old
Testament, where Joseph had a dream on a future 7-year economic cycle6 and gave an interpretation
of it, as well as solution, known today as fiscal intervention. Few centuries later this cycle was
rediscovered by Sir William Petty who noticed the existence of a 7-year cycle in corn price
evolution. Fairly or not, Sir William Petty is now the one to be presented in many books as one of the
first who discovered business cycles by implying the change in corn prices.
The history of economic forecasting culminated and was reborn with Keynes, which besides being
considered as father of macroeconomics is also the father of macro forecasting. In his essay on
3

Hawkins, Economic Forecasting: History and Procedures, page 2

Bible, Isaiah 19:5-7

Bible, Isaiah 13:19-20: And Babylon, the glory of kingdoms, the beauty of the Chaldees' excellency, shall be as when
God overthrew Sodom and Gomorrah. It shall never be inhabited, neither shall it be dwelt in from generation to
generation: neither shall the Arabian pitch tent there; neither shall the shepherds make their fold there.
6

Bible, Genesis 41:25-28: And Joseph said unto Pharaoh: 'The dream of Pharaoh is one; what God is about to do He
hath declared unto Pharaoh. The seven good kine are seven years; and the seven good ears are seven years: the dream is
one. And the seven lean and ill-favoured kine that came up after them are seven years, and also the seven empty ears
blasted with the east wind; they shall be seven years of famine. That is the thing which I spoke unto Pharaoh: what God is
about to do He hath shown unto Pharaoh.
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The Morality behind Forecasting

Economic Possibilities of our Grandchildren, Keynes gives his optimistic view on how the
economies are going to develop in the following 100 years. This was to be named the very first
macroeconomic forecasting containing remarkably modern account of the determinants of economic
growth7. After the Great Depression (when Keynes published his predictions: year 1930), economists
started to put more and more emphasis on foreseeing economic events. And this still continues till
our days: neither with a successful method discovered, nor with economists to give up.

THE MORALITY OF ECONOMIC FORECASTING

The desire to forecast is, probably, just another sin of humanity. It is similar to wanting more
knowledge, especially a slice of that one to which the access is limited. It is similar to wanting to
consume more, especially if there is a forbidden fruit. The punishment which people can get from
trying to discover the future cannot be worse than unpredictable events to occur. Some say that the
problem is with our insufficient professionalism and bounded rationality, others blame imperfect
models. But maybe we are just not supposed to try entering this denied area?
Karl Popper gave his answer to this question. In his interpretation we should first distinct between
two different types of scientific predictions: conditional and unconditional one. The conditional
scientific prediction is a response to certain excitements, thus, it is foreseeable and to some extent
cannot be forbidden or immoral, because its future result is obvious (if X happens, Y will happen).
While the unconditional one is just an a priori post-factum (Y will happen). Why people actually try
forecasting both is because they dont make any distinctions between the two. But this is not the
whole explanation. Also, forecasting is the oldest dream of humanity, the dream to know what the
future has in store for us, and to profit from such knowledge8. If it is our oldest dream, we cannot
argue about its morality per se, it is just something in us, our defining treat.
But wanting to know more about the future in order to increase your potential profits and utility is
exactly what Kant calls: immorality9. However, some authors10 say that Kantian interpretation of the
present world has a pessimistic approach, because he believed that people live in a world of
appearances and only the future world (not the future of the world, but the future world) is the one of
morality and of more happiness. But this approach contradicts with the essence of nowadays
mainstream in economic growth and prosperity, because the present population finds itself actually
desiring future progress. Furthermore, desires and selfishness are positive assets which drive the
growth not to a certain finish point, but to a continuum movement and improvement:
Life is not fundamentally a striving for ends, for satisfactions, but rather for bases for
further striving; desire is more fundamental to conduct than is achievement, or perhaps
better, the true achievement is the refinement and elevation of the plane of desire, the

Pecchi, Piga, Revisiting Keynes Economic Possibilities for our Grandchildren, MIT, 2008

Popper, Prediction and Prophecy in the Social Sciences, Chapter 4

Kant, The Critique of Practical Reason, 1788: The direct opposite of the principle of morality is, when the principle of
private happiness is made the determining principle of the will.
10

Marshall, The Ambiguity of Kants Concept on Happiness, Newman College, Reason Papers, Vol.26
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cultivation of taste. And let us reiterate that all this is true to the person acting, not simply to
the outsider, philosophizing after the event.11
If you would ask any economist whether forecasting is moral or not, most probably he/she will say
that it is moral. And it would be irrational to believe that forecasting is not-moral while actually
performing it. Thus, the mainstream economics view the forecasting as a moral, normal activity. This
position is supported by Kenneth A. Posner. He, as a financial analyst, performing forecasts for many
Wall-Street companies, failed to foresee the financial crisis of 2007-2010. But in his perception
trying forecasting is the only way in which economists and investors can diminish the instability of
markets. What they actually do by forecasting is determining the potential riskiness of risks 12 ,
playing with probabilities. The reasonable solution is infinitely trying to find what models miss in
giving a successful forecast.

ECONOMIC FORECASTING: POSSIBLE OR IMPOSSIBLE?

"It is often said there are two types of forecasts ... lucky or wrong"
("Control" magazine, Institute of Operations Management)
Surely there is a future13 and there can be only two options for the state of this future: a free-will14 or
a predetermined story15, each of them excluding the second. If we believe in a free-will, than nobody
can predict our spontaneous reactions, decisions and actions, not even God can. But if we have a
predetermined future, then only God knows it and we cannot have access to this key just because our
role is making God prophesies becoming real, without any power to change its decisions or plans16.
If we believe in our free-will, we exclude the absolute power of the God on space and time. And if
we believe in the absolute power of God, we shouldnt pursue any essays of this kind.
However, the desire to discover the future resides in us. We are those who have the fear of instability
and emotional distress from unanticipations. But the complexity of predicting the future is being
much more complicated by the way we (people) are, and only less important are the systems which
we have created. Underestimation of certain future events, things, and overestimation of the others is

11

Knight, Ethics and The Economic Interpretation, Quarterly Journal of Economics 36 (May 1922): 454-81; reprinted
in The Ethics of Competition and Other Essays (New York: Harper & Brothers, 1935), page 19-40
12

Posner, Stalking the Black Swan, Columbia Business School, page 25

13

Bible, Proverbs 23:18: Surely there is a future, and your hope will not be cut off

14

Bible, 1 Corinthians, 3:21-22: So let no one boast in men. For all things are yours, whether Paul or Apollos, or
Cephas, or the world, or life, or death, or the present, or the futureall are yours
15

Bible, Jeremiah 29:11: For I know the plans I have for you, declares the LORD, plans for welfare and not for evil, to
give you a future and a hope which contradicts with its statement in Exodus 32:14 where uncertainty is somehow
evident: So the LORD changed His mind about the harm which He said He would do to His people
16

In case of a predetermined future, even if we think that to some extent we can predict the future, this is nothing else
than we accomplishing our role: we had to think that we foresee the future, and God knew that we will and this is what
we cannot foresee.
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a defining criterion which we cannot ignore. Our own instability complicates the future17 and is the
motive of affective forecasting18: because we are so complicated, it is not only incredibly hard to
predict the future, but it also becomes pointless predicting something which you dont know how
important will be at the time of happening. Our spontaneity is our animal spirit, and that is a rational
explanation why forecasting problems rely on expressions which target animals: black swan 19 ,
butterfly effect20, or the well-known trends on the financial markets: bear and bull.
This instability phenomenon is related to the confidence level on the market which is very sensible to
any minor decisions, and can cause the less probable consequences to occur for the further
development of economies. The problem with this unpredictability is the bounded rationality of
people which just do not learn from past mistakes and let the this-time-is-different syndrome to
aggravate, as Carmen M. Reinhart and Kenneth S. Rogoff argue:
The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held
belief that financial crises are things that happen to other people in other countries at other
times; crises do not happen to us, here and now. We are doing things better, we are smarter,
we have learnt from past mistakes. [However] the old rules of valuation no longer apply.21
In the economic world, systems are created by people, thus, a certain part of peoples affective
instability is transferred to those systems. But, unlike humankind, all economies have something in
common: the cyclicality, which even if have different amplitudes and frequencies from one country
to another are cyclical, thus, they repeat from time to time and simplify the economic forecasting.
Take, for example, crises. Their complexity, abnormality and anomaly, in one word: unpredictability
is not that unpredictable 22 . Recessions have to take place at least as frequent as expansions and
prosperity years do. The cycle of economies just cannot move always upward. It wouldnt be a cycle
in that case. Thus why, crisis is a natural economic phenomenon just like a positive boom is.
However, cyclicality is not a satisfactory answer when it comes to predict a future economic event. It
will not tell you exactly when and exactly how events will happen. The most interesting in this
respect is that the complexity of nowadays world doesnt allow us even to understand: whether the

17

If people would not have react so neurotically in the US to the crisis and would not have withdraw at the same time
their deposits from banks, probably, the consequences of the crisis wouldnt be so sorrowful, even if the main devil in the
whole story was the mismatches in the activity of financial institutions and their unfulfilled desire to play with the risk.
18

Wilson, Gilbert, Affective Forecasting. Knowing What to Want, Harvard University, 2005, Research on affective
forecasting has shown that people routinely mispredict how much pleasure or displeasure future events will bring. []
More common than underestimating future emotional reactions, [] people overestimate the intensity and duration of
their emotional reactions to future events
19

Posner, Stalking the Black Swan: Black Swan refers to a highly improbable event that seemingly could not have been
anticipated by extrapolating from past data
20

Expression used usually in weather forecasting meaning that weather is sensible to very minor impulses: even a
butterfly wings flip can cause a hurricane.
21

Reinhart, Rogoff, This Time is Different. Eight centuries of Financial Folly, Part I: Financial Crises: An Operational
Primer, Princeton University Press, 2009, page 15
22

Shiller, New York Times, Needed a Clearer Crystal Ball, April 30, 2011: In fact, some people view the recent crisis
as just another black swan event, one of those outliers [] that come out of the blue. [] But the theory of outlier
events doesnt actually say that they cannot eventually be predicted.
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The Morality behind Forecasting

past crisis finished and we can prepare for the next one, or the past crisis is still here and our problem
should be forecasting the future crisis, but dealing with the current one (!).
To some extent, it can be implied that, because the future is less explainable comparing with the past
(we dont have facts), we will be able to at least partially understand the future only when it will be
dead23 (when it will become past). This idea was pointed out also by Winston Churchill who said that
he "[] always avoid prophesying beforehand because it is much better to prophesy after the event
has already taken place." That would be reasonable because by relying on past experience it cannot
be possible to foresee events which you have never heard about. Future is not an extension of the past
or present24. Furthermore, the economic cycles are not settled to one measure by default (we say that
there is 7-year fiscal cycles, 20-year building cycles, 50-year long technological cycles etc.), but even
by splitting cycles by industry it doesnt give you a projection of the future: but of the past
experience. However, we have no methodologies to forecast the future which would not be based on
the historical experience. But, if the past experience would be a good predictor of the future, then,
first of all, we would not have any problems with predicting it, but we do have; and, secondly, we
would have nothing new to discover, because projecting the future based on the past experience
means that nothing brand new can be expected: there is nothing unpredictable25.
Following this logic, I tend to believe that it is impossible to predict the future. But the
imperativeness of infinitively trying to do it is unavoidable if we want our societies and economies to
grow and develop. Commercial banks, credit unions, pension funds, insurance companies, etc. the
activity of all of these institutions would just stop at one moment if their future would be absolutely
unknown. But what is for sure impossible to anticipate is the behavior of people who manage, work
or have certain relations with these institutions. Changing their desires and wants from one moment
to another is their natural state of existence. The joke on how often women change their mind is
actually a perfect proxy to underline how unstable all people are with respect to their future actions
and values: Women make all the rules. Rules are subject to change without prior notifications.

TO MAKE IT MORE COMPLICATED: DISCOUNTING THE FUTURE

If economists would give up in forecasting evolution of economies, we would get into troubles. An
explanation for that is: forecasts and potential performances of industries is the air investors breathe
with. But there is a price to be paid for playing with tomorrows numbers. The value of money today
is greater than its value tomorrow. And the more tomorrows come, the less you can buy with your
money, the less satisfied you are and less time which rests for your life.
23

Levitt, Dubner, SuperFreakonomics, : Economists have a hard enough time explaining the past, much less predicting
the future. (They are still arguing over whether Franklin Delano Roosevelts policy moves quelled the Great Depression
or exacerbated it!) They are not alone, of course. It seems to be part of the human condition to believe in our own
predictive abilitiesand, just as well, to quickly forget how bad our predictions turned out to be, page 14
24

Wittgenstein, Tractatus Logico-Philosophicus, Chapter 5, 1922: The events of the future cannot be inferred from those
of the present. Superstition is the belief in the causal nexus. The freedom of the will consists in the impossibility of
knowing actions that still lie in the future. We could know them only if causality were an inner necessity, like that of
logical inference. The connection between knowledge and what is known is that of logical necessity.
25

Sedlacek, Economics of Good and Evil, Chapter 14: Masters of Truth: The first major and completely obvious
difficulty lies in the fact that it is impossible to predict the unpredictable, its a direct contradiction. If it were possible to
predict the event, the event would not be unpredictable, page 303
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If its not logical to extent the past and present to the future26, and calculating it in this way, then
economists decide to take it other way around: from future getting back to the present. For
economics, but mainly for the financial sector, the future is so important that to some extent it is
transposed from tomorrow to today. Furthermore, we ignore everything which doesnt have a future
value, even if today it counts. The very actual example can be the Discounted Cash Flow, the most
commonly used company (investment, project or asset) valuation method. To put shortly how it
works: based on historical performances, we predict the future evolution of the free cash flow and
then apply a discount rate to obtain the present value of the company. The logic of calculations to be
performed tells you that the present value can be calculated only relying on the future value. So, you
cant know how valuable your company is today if you have no clue about its future. And other way
around, if you dont invest in your company today, it will not have a future. Thus, economists view
the balancing of present against future as similar to any other economic comparison 27 , and the
conversion between the two a game seeking increasing interests.
Another example of how crucial is the future in deciding current issues is provided by Herbert
Simon, a Nobel Laureate, who invented the term of feed forward meaning that all investors try to
foresee the potential actions and decisions of their competitors in order to make some decisions
today. If the decision is very important (e.g. decreasing substantially prices for one product), the feed
forward is unavoidable, otherwise exciting disturbances and conflicts on the market.
Regarding conflicts: wrong forecasts are considered one of the most shameful weaknesses of
economists. While, for example, weather forecast improved in the last decades significantly (from
1987 to 2004 the nominal lead time for tornado warnings increased from less than 5 minutes to 13
minutes; hurricane forecast improved from 24 hours in advance to 48-hour between 2006 and
1996)28, there has been no measurable improvement in the accuracy of economists forecasts over the
past 30 years. As an excuse, some (e.g. Karl Popper) imply that forecasting is not a statement of
facts, but just an opinion. It is up to each individual believing it or not.

TO CONCLUDE
What would happen if one day the economists will manage to discover the mysterious formula of
predicting the future? Keynes would, probably, say that it is unnatural to do it, because by solving the
dilemma of the future, we will also be able to solve the economic problem, but if the economic
problem is solved, mankind will be deprived of its traditional purpose. 29 What we have actually
achieved by trying to forecast is: being aware of a future potential risk. This keeps us wise and more
or less prepared to bear the consequences and minimizing the economic pain.
Hopefully I have managed to show in this essay that the current impossibility of accurate forecasting
is mainly caused by the unpredictability of human behavior. We mainly dont know what to expect
from ourselves and that is what accentuates the complexity of the systems we have created.
26

Because we neither know the mechanism, nor the exact point in time which we want to forecast.

27

Knight, Risk, Uncertainty and Profit, New York, 1964, page 19

28

Posner, Stalking the Black Swan, Columbia Business School, page 9

29

Keynes, Economic Possibilities for our Grandchildren, 1930

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Regarding the morality of this process, it is obvious that economists do see it as an ethical and
needed activity which fights with instability and helps catalyzing potential damages. Immorality of
forecasting is implied mostly by non-economists which believe that the only reason why people want
to know the future is benefiting of that information to gain additional utility or profits. In reply to that
can be said only that the homo economicus is in all of us and considering immoral our inside wants
means considering immoral the way we have been created.
Complicated or not, moral or not, forecasting remains an essential topic raised by the economic world.
Finding the answer to this topic is an issue of image for the whole economic science. But to this main
question of economic reputation neither beginner economists, nor the Nobel Prize winners in
economics could give yet a satisfactory answer.
I leave this subject open for my personal future research.

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LIST OF REFERENCES:

I.

Bible, Old Testament;

II.

Digest, Delphi, 2008;

III.

Hawkins, Economic Forecasting: History and Procedures, 2004;

IV.

Kant, The Critique of Practical Reason, 1788;

V.
VI.

Keynes, Economic Possibilities for our Grandchildren, 1930;

Knight, Ethics and The Economic Interpretation, Quarterly Journal of Economics 36, May
1922, page 454-81;

VII.
VIII.

Knight, Risk, Uncertainty and Profit, New York, 1964;

Levitt, Dubner, SuperFreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide
Bombers Should Buy Life Insurance, Harper Collins, 2009;

IX.

Marshall, The Ambiguity of Kants Concept on Happiness, Newman College, Reason Papers,
Vol.26, 2000;

X.
XI.
XII.
XIII.

Pecchi, Piga, Revisiting Keynes Economic Possibilities for our Grandchildren, MIT, 2008;
Posner, Stalking the Black Swan, Columbia Business School, 2010;
Popper, Prediction and Prophecy in the Social Sciences, 1948;
Reinhart, Rogoff, This Time is Different. Eight centuries of Financial Folly, Princeton
University Press, 2009;

XIV.

Rescher, Predicting the Future. An Introduction to the Theory of Forecasting, State

University of New York Press, Albany, 1988;

XV.

Sedlacek, Economics of Good and Evil. The Quest for Economic Meaning from Gilgamesh to
Wall Street, 2011;

XVI.
XVII.
XVIII.

Shiller, Needed a Clearer Crystal Ball, New York Times, April 30, 2011;
Wilson, Gilbert, Affective Forecasting. Knowing What to Want, Harvard University, 2005;
Wittgenstein, Tractatus Logico-Philosophicus, 1922.

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