Let go of anecdotal economics

Teaching of economics needs to include a more pragmatic approach, says Joseph H. Ellis in ‘Ahead of the Curve: A commonsense guide to forecasting business and market cycles' (www.landmarkonthenet.com). He argues that both the beginning and advanced students need to know more about the relationships between key macroeconomic data series, especially how these series have played out against each other over time.

“Every former economics student will remember the exhaustive study of theories such as the price elasticity of demand or the marginal productivity of labour, accompanied by theoretical graphs illustrating the result of ‘a' on ‘b' when ‘x' is converging with ‘y'. However, most of these textbook graphs lack numerical scales and are only used to demonstrate theory.”

Fretting that few of the textbooks express actual relationships between macroeconomic data series or go on to document how well these theories have manifested themselves in the real world of historical economic data, the author rues that introductory economics courses seldom teach macroeconomic forecasting based on a down-to-earth understanding of economic cause-and-effect relationship.

While a thorough education in the rich history of economic theory is imperative for all those who wish seriously to study economics, he urges that at all levels students should learn to gather and manipulate current data with a level of simplicity and commitment to comprehension that facilitates its use in the real world of policy, business, and investments. For, “To teach even beginning economics without instructing the student in the pragmatic use of the economy's rich historical database is tantamount to teaching physics or chemistry without a lab.”

Context missing

The book opens by cautioning against the use of ‘anecdotal economics' – that is, ad hoc response to the deluge of data released by the government and trade groups, news headlines, and personal experiences.

Each piece of the picture may be an individual stimulus, but in the absence of a disciplined context relating it to other inputs, the result is confusion on the part of the entire economic audience, cautions Ellis. “Month after month, business people absorb these reports with varying levels of credulity. Although we usually receive the disclosed economic data at face value, we lack a framework or context provided by the government bureaus that release the data and the journalists who report it.” This lack of context, he points out, usually results in a profound latent sense of unease and frustration, or at the very least, a deep-seated lack of confidence in the data's forecasting value.

Taking on the question, ‘Why aren't companies themselves forecasting more?' the author reasons that the historic paucity of credible macroeconomic forecasts and forecasting disciplines has generated an atmosphere of forecasting apathy among companies and investors. He observes that the lack of reliable and comprehensible forecasting at the macro level has sapped the analytical will of those with the most to gain at the micro level. The book, therefore, beckons companies to return to the drawing board and establish reasonably simple forecasting disciplines, to re-educate themselves regarding the forecasting possibilities.

Makes a case for establishing accountable economics departments within enterprises, even if that were a far cry at the national and global level.