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Monday 21 Aug 2017 | 00:07 | SYDNEY
Monday 21 Aug 2017 | 00:07 | SYDNEY

Our consensus future



3 September 2010 10:48

A recurring theme on The Interpreter is the problems associated with making predictions. The recent financial crisis is just the latest piece of evidence of a failure to forecast, and one of the big lessons we are now being encouraged to take away from it is that we no longer live in a normal world: instead of those nice bell-shaped curves with their thin tails, we are faced with much flatter probability distributions and fat tails. Or, to be a bit more poetic about it, we live in a world of black swans.

All of which makes it all the more striking that we continue to hold a very clear view of what the future for the world economy will hold.

This 'consensus future' is the world of what I have described as the Great Convergence: it is the product of rapid catch-up growth in some of the world's most populous emerging markets, which is taking us to a future where many of the biggest economies are middle income economies, and where these economies are increasingly the home of a new and expanded global middle class.  And it's a future where all of the transition problems that this process entails are (more or less successfully) overcome.

This is a view of the future that is shared by international financial institutions, by investment banks, by consultancy firms, and by think tanks. It's also the view that underpins much Treasury and RBA thinking about Australia's future. Fair enough; this is pretty much my base case for the world economy, too.

And yet. Shouldn't all of our past lessons about predictive failure serve as a warning here' 

So, if you took a range of scenarios for the future of the world economy and assigned a probability to each, then I think that the one with the highest probability score would indeed be some version of what I have described as 'our consensus future'. But note that's not the same thing as saying that the probability assigned to that scenario is especially high. In fact, my hunch is that, right now, many of us are placing too high a probability, either implicitly or explicitly, on this particular forecast of the future. An example of the overconfidence effect at work'

For more on our consensus future, see my recent Lowy Institute Perspectives paper on the subject, available here.

Photo by Flickr user mrbendy, used under a Creative Commons license.

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