The economy changes due to numerous variables, and sometimes forecasts themselves influence the economy. We examine the difficulty of forecasting and methods to reduce uncertainty.
Economics emphasizes human rationality. Generally, economic laws are principles that apply well in societies with many rational individuals and a high level of public awareness. This is because the rational choices of individual members collectively enhance the overall economic efficiency of society. Therefore, no matter how sound an economic policy may be, good results cannot be expected if the quality of its members is lacking. Furthermore, it is crucial to enhance the understanding and willingness to participate among society’s members before implementing economic policies. This is because for economic policies to be successfully implemented, the fundamental purpose and intent of the policy must be sufficiently communicated, and the ability and willingness to execute it must be demanded of the members.
Furthermore, even when scientific analysis and prescriptions for economic problems emerge, they should not be mechanically applied to the real world without meticulous examination of public sentiment trends affecting economic direction or the prevailing economic and social atmosphere. Since the economy’s trajectory is heavily influenced by the direction of public sentiment, implementing policies while overlooking shifts in public opinion can actually produce counterproductive effects. This is one reason why political stability and social trust form the foundation of economic growth. For economic policies to function effectively, it is necessary to read public sentiment and adjust policies accordingly.
Economics assumes human rationality, but it must also take into account animal spirits. Humans easily become emotional, and the more unstable the economic and social environment, the more animal spirits tend to take hold. In this sense too, economic stability becomes a fundamental issue. Without social stability, economic instability intensifies, potentially creating a vicious cycle that further fuels social disorder. Particularly during recessions, amplified individual selfishness and anxiety significantly increase the likelihood of speculative or irrational consumption behaviors. Such phenomena can further heighten economic uncertainty.
And because the economy is based on these human economic behaviors, predicting it becomes difficult. For instance, weather forecasts do not influence the actual weather, even when predicting tomorrow’s conditions today. Economic forecasting, however, is different. If the government announces an impending recession, many people adjust their behavior in anticipation. Conversely, if an economic recovery is forecasted, people act accordingly. Thus, the forecast itself impacts economic fluctuations. Consequently, some degree of inaccuracy in predictions is common. Predictions like “it will happen” or “it won’t happen” have a high potential to become self-fulfilling prophecies. The problem with such self-fulfilling prophecies is that they can exacerbate economic instability, necessitating a cautious approach by economic policymakers.
Economic issues are also closely tied to human value judgments. For example, Person A is young, capable, and has no dependents, yet receives a high salary. In contrast, Person B is old, less capable, yet has many dependents to support and receives a low salary. How should the income gap between these two be addressed? Such income disparities cannot be viewed solely as an economic issue; they necessitate discussion regarding social fairness and moral values. Moreover, housing prices rise faster than the salaries of those without homes. Or, construction of luxury housing increases. How should housing policy be formulated in such situations? This is an issue requiring social consensus and policy intervention rather than being left solely to market logic. Such issues are highly susceptible to being swayed by emotions or value judgments. Economic inequality can be a source of social conflict, making policy considerations to mitigate it essential.
Human behavior is complex and multifaceted, vacillating between reason and emotion, yet people are highly sensitive to their own economic gains and losses. Those who regret and dwell on a missed opportunity vow to succeed next time if the situation arises again. However, they often fail to consider that even if a similar situation does reappear, the surrounding environment has likely changed significantly from the past.
Humans tend to become overly fixated on their own actions, overlooking those of others. This is precisely why economic forecasting is difficult. The economy is a complex system arising from the interactions of countless individuals, businesses, and governments. Therefore, simple theoretical predictions alone cannot accurately capture actual economic trends. Consequently, economic policymakers must respond swiftly to the changing economic environment through continuous observation and analysis.
