How to make a bad financial decision

I have a confession to make: I made a really bad financial decision in 2003, my first year of earning a (lump sum, non-permanent) income. I guess what surprised me this week when I made this discovery was not the fact that I made a bad decision – that I already knew – but, after seeing the share price of Naspers hit new records, I realised, for the first time, the extent of my financial folly.

I earned roughly R20 000 (roughly $3000 at the time) through a holiday job that year, a job that paid really well. My decision was about what to do with this extra cash; I remember thinking about my options, but then more urgent things (student life!) got in the way, and the money eventually ended up in some money market account, the easiest and quickest solution for a disorganised student. I actually remember considering buying Naspers (a South African media company listed on the Johannesburg Stock Exchange), as I had always had an affinity for the media, was part of the editorial staff of the student newspaper (which meant we were invited to a fish-and-chips-in-newspaper dinner with CEO Koos Bekker every year) and, in truth, I knew little about the other companies on the JSE. In my counterfactual world, instead of a money market account, I would have purchased R20 000 worth of Naspers equity.

So here’s what has happened to the Naspers share price since: an increase of 3100%. That’s R620 000 (roughly $70 000) if I had cashed out on Friday, meaning I could have owned my own Stellenbosch student flat today, or an FJ Cruiser paid for in cash, or enjoyed a year-long holiday touring the world. Instead, that money market account was closed somewhere over the years, the money probably used for some black hole debt. Of course I realise that hindsight is always perfect; that Naspers may have gone the route of most media companies, with declining market shares and dwindling profits. But it didn’t, and in my counterfactual world I’ve done a bad deal.

What are the lessons I’ve learned? 1. Don’t think that a small amount is not worth investing. (Of course, I probably could’ve invested more, if I had bet all my savings at that stage on Naspers, but that would’ve been too many eggs in one basket and is therefore not a realistic counterfactual.) 2. Prioritize financial decisions and don’t be lazy. Savings in a money market account is not a good financial decision, except perhaps if you’re close to retirement, but it was the easy thing to do. No one ever made money by doing the easy thing. 3. Invest in brilliant people and the projects they pursue. Anyone who met Koos Bekker in 2003 could’ve seen there’s something exceptional about him; his vision to acquire sizeable shares of Tencent and Mail-ru (Naspers’ Chinese and Russian holdings, now contributing a sizeable share of its profits) was eccentric and ingenious. And 4. Have some luck. When I could have made my oh-so-important investment in Naspers, Facebook didn’t yet exist, and social media was an expression used for celebrity TV-shows. Not me, not Bekker and not anyone else could have predicted the rapid growth of social media, or of China, or of social media in China.

Which of course raises the all-important question of what to do with today’s savings? Is Naspers still a good bet? Given their earnings per share ration, perhaps not. The record prices of the JSE in recent weeks also suggest that we’re closer to the peak than the trough. But who knows? I’m certainly not the one to give sound financial advice.

Africa’s investment opportunities

Daniel Altman, Harvard-trained economist and journalist, has created what he calls a Baseline Profitability Index. In short, the index aims to rank markets for foreign investment based on asset growth, preservation of value, and repatriation of capital to help investors decide where to “really put their hard-earned cash”. Altman’s BPI seems to be an index of indices: he’s used the World Bank’s Worldwide Governance Indicators, Transparency International’s Corruption Perceptions Index, the Property Rights Alliance and Americans for Tax Reform’s International Property Right Index, Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer’s index of investor protection, and Menzie Chinn and Hiro Ito’s index of financial openness. All thrown in the same pot, the magic potion is stirred (according to Altman the alchemist’s algorithm) and out pops the BPI.

The full ranking (published in Foreign Policy) includes 102 countries, 17 of which are African (14 are sub-Saharan African). The top 50, listed below, include 12 African countries, with three of the top ten being the African countries of Botswana (second), Rwanda (fifth) and Ghana (tenth). South Africa ranks 41st, scoring high on the Preservation of Value-category but performing worse than all other African countries (except Nigeria) on the Repatriation of Capital. I’m not sure what the reason for such a low ranking is (and, to be honest, it is surprisingly low), but it could possibly be due to South Africa’s still-existing capital controls or the threat of expropriation (in mining, for example) over the last few years (although the threat has considerably weakened since the ANC’s policy conference in December 2012.) Interestingly, two African countries that have received a lot of press coverage over the last few years – Kenya and Nigeria – are amongst the worst performers on the list: Kenya comes in at 67th, while Nigeria can only reach 95th. Altman’s index has a clear warning for investors with dollars in their eyes: don’t only consider potential growth of these markets, but the preservation of value and repatriation of capital too.

There are a few surprises, too. Germany, one of the few European countries to witness positive growth over the last few years, doesn’t feature in the top 50 (it’s 53rd). In fact, Eastern Europe seems to be a lucrative destination: Estonia, Lithuania, Poland, Bulgaria, Latvia and Slovakia all feature in the top 30. Only two of the so-called BRICS are in the top 50: China (21st) and South Africa (41st). Surprisingly, Brazil (91st) and Russia (98th) languish at the bottom. Is Burkina Faso really a better investment opportunity than Brazil?

Fifty highest-ranked countries on Daniel Altman’s BPI. African countries in bold. Source: Foreign Policy 2013

As with any list, there are weaknesses. Why are other African gems (like Tanzania, or Malawi, or Namibia, or … yes, Zimbabwe) not included on the list? Presumably it’s data constraints, but this should be corrected in a future BPI. Also, could a 2000 ranking not be calculated from the same data sources? Tracking the change over time, especially for African countries, could be interesting and, perhaps, suggest some policy implications.

Altman’s list provides more evidence of the profitability of African markets. But it also shows that investors should not be be blinded by the bling of big bucks. A careful assessment of risk and return remains the cornerstone of a sound investment.

A roadmap to prosperity

Image by Erik Johansson.

I’m only at chapter 14 of Deirdre McCloskey’s Bourgeois Dignity (there are 46), but it’s already been worth the read. I wish I could prescribe it to all our Economics students, not only because it’s clever and brilliantly written but also because it’s entertaining, at least as entertaining as discussing the causes of the Industrial Revolution can be. While most of the book is about the Industrial Revolution of 200 years ago, the first few chapters deal with growth today: why some countries prosper, and why other’s take longer to do so. (In the end, we’ll all be rich. My quip, not hers.)

There are many memorably passages, but Chapter 13 mentions South Africa, and I’d thought I’ll follow her advice and “borrow” her ideas. Here’s selected paragraphs from pages 121-124:

England in the eighteenth century could not possibly have experienced the present-day Chinese growth rate of real incomes per head of 10 percent per year, even in its greatest booms. The doubling of income per head in a mere seven years that the Chinese rate implies could not happen before very recent times, with gigantic piles of already-invented ideas such as the power loom or the light bulb or the printer circuit waiting to be borrowed, if one will but let people use them for the profit due a person with a newly borrowed idea, and cease from sneering at and stealing from and executing those who earn the profits. The historian of technology David Edgerton speaks of “the shock of the old,” in which people – even very poor people in the favelas of Brazil – keep finding new uses for old technologies, such as sheets of corrugated iron.

China and India, in other words, can take off the shelf the inventions laboriously developed by the Watts and the Edisons of the past three centuries – and by the Chinese and Indian inventors of earlier centuries, together with the Incan potato breeders and the brass casters of Benin, all of whose inventions had been taken up eagerly by the curious Westerners. Indians invented fine cotton cloth, which then became the staple of Manchester, but latterly in its fully mechanized form became again the staple of Mumbai. The Chinese invented mass-produced pig iron, which then became the staple of Swedish Uppland and English Cleveland and American Gary, but latterly with some additional chemical engineering the staple of the Kamaishi Works in Japan and now the Anshan works in China. And so Sweden in the late nineteenth century and then Japan in the early and middle twentieth century and China in the early twenty-first century caught up astonishingly quickly.

Richard Easterlin would agree with the speed implied by the metaphor of “taking technology off the shelf”. He wrote in 2003 that “since the early 1950s, the material living level of the average person in today’s less-developed countries…, which collectively account for four-fifths of the world’s population, has multiplied by threefold”, much faster than presently rich countries grew in the nineteenth century. It has led to Paul Collier’s Top Four to Six Billions. Similarly rapid has been the rise in life expectancy and the fall in fertility and the rise of literacy: on all counts, notes Easterlin, it is “a much more rapid rate of advance … than took place in the developed countries in the past”.

Good policies are boringly similar: rule of law, property rights, and above all dignity and liberty for the bourgeoisie. The happy countries end up looking similar, because each has automobiles, computers, higher education. Good policy allows taking technology off the shelf, and achieving a pretty good life for ordinary folk in two or three generations. It has happened repeatedly, as when the United States adopted British manufacturing, or Germany the same. Consider such recent miracles of leaping over putatively inevitable stages as Taiwan or Hong Kong or Singapore. Perhaps we should stop being gob-smacked every time it happens. Give people liberty to work and to invent and to invest, and treat them with dignity, and you get fast catching up.

In other words, what does not need much scientific inquiry is how the Indians and the Chinese, having been denied innovation for decades by imperial edict and warlord pillaging and socialist central plan and lack of widespread education, can get rich quickly by gaining peaceful access to well-stocked shelves of inventions, from the steam engine to the forward contract to the business meeting. Routine economics predicts that, after decades of disastrous economic luck, the misallocations and spurned opportunities will be so great that considerable fortunes can be made pretty easily, and the average income of poor people can be raised pretty easily, too. If Brazil and South Africa can be persuaded to adopt the liberal economic principles that are presently enriching China and India (and that had enriched Britain and Italy more slowly and therefore less obviously), there is no reason why in forty years the grandchildren of presently poor Brazilians and South African cannot enjoy something pretty close to Western European standards of living. That’s not ideological prejudice, some neocon fantasy in support of American imperial power. It’s a soberly obvious historico-experimental fact, which has already curbed American power. On the other hand, if Brazil and South Africa persist in unhelpful economic policies (such as South Africa’s labor laws based on German models), they can retain a gigantic, unemployed underclass and an inferior position relative to the United States, just as long as they find that attractive.

If it’s so infallibly simple, why are we so unfailingly ignorant?

Chickenomics

It should come as no surprise to South Africans that chicken is our most consumed protein. Whereas South Africans may idealise the braai as our traditional dish, chicken is our staple, consumed by rich and poor, urban and rural.

Which should make the request by the South African Poultry Association to increase the cost of chicken in the country by a massive 30-50% a national disaster. Instead, it hardly registers a (chicken) breath.

Over the last few years South African chicken producers have found it increasingly difficult to compete against a rising tide of chicken producers globally. They allege that these producers, notably those in Brazil, are ‘dumping’ chickens (whole or parts there-of) on the South African market, hurting the profit margins of these firms and, ultimately, costing the economy jobs. They therefore request ITAC (the South African commission that decides about trade policy) to impose heavy tariffs on imports from Brazil. Here’s an excerpt from the an article by the Amanda Visser in the Business Day of 19 April:

The association says imports of extremely low-priced frozen chicken meat grew from 97,565 tons in 2008 to 238,582 tons last year. Kevin Lovell, CEO of the poultry association, says the situation is compounded by restrictions on South Africa’s regional exports.

If the application is not successful and the flood of low-priced chicken meat continues it may lead to 20,000 job losses. The industry employs 48,000 people with the five largest producers – Rainbow Farms, Astral Operations, Sovereign Food, Afgri Poultry and Supreme Poultry – employing more than 22,000 people.

Mr Lovell fears a reduction in the food security position of the Southern African Customs Union (SACU) could occur, with lower rates of investment in the industry and a reduction in the contribution of the poultry sector to the gross domestic product (GDP).

According to the association, poultry represents a quarter of the animal product contribution to GDP, which amounted to R25bn in 2011, compared with R19.8bn in 2008. Profit margins at the five major producers had been reduced from double-digit figures in 2006 to margins ranging between 2.4% and 5.9% last year.

“The world’s major poultry producers are targeting developing countries such as South Africa and others in the SACU region to dispose chicken portions for which there is little or no demand in their domestic markets”, Mr Lovell says in his affidavit filed with Itac.

The association is asking for a general increase in the tariffs of carcasses, whole birds, cuts and offal, boneless cuts and bone-in portions. In the case of carcasses, it is asking for an increase of R9.84/kg up to the maximum bound rate of 82% agreed to in terms of the World Trade Agreement – from 27% at present.

In the case of whole birds the South African Poultry Association is asking for an increase of R11.07/kg, subject to a maximum rate of 82% when the currency conversion has been made.

A few minor points first: comparing the rise in chicken imports between 2008 (the midst of the financial crisis) and 2012 is, to put it mildly, problematic. Chicken imports from Brazil increased by 8% between quarter 4 of 2011 and quarter 4 of 2012, less dramatic than the industry claims. Similarly, comparing profit margins of 2006, a boom year, with 2012 is equally distorting. Compare any company profit margin between 2006 and 2012 and you should find the same rapid decline. It’s clear that the years are chosen for effect.

The numbers may also simply be wrong: Below I list the statistics from the International Trade Center’s TradeMap database. According to them, the value of chicken imports from Brazil only increased by 5% per annum between 2007 (before crisis) and 2011. The quantity of chicken imports only increased by 1% annually. Note also that South Africans already pay a 17% tax on these imports, so the domestic industry is already heavily protected against foreign competition. Compare this with the imports from the Netherlands, an EU country which has zero import tariffs, from which imports have grown by a massive 469% annually and now make up 11.5% of our total imports.

Data source: TradeMap (2013)

But even if Company profits have fallen and even if 20 000 jobs may be lost, the imposition of higher tariffs to prevent further imports from Brazil – I want to emphasise – will be deeply harmful to the South African economy in general, and to the poor in particular. Here’s a post by Colin Phillips early last year:

Say a South African consumer is considering buying two identical products – the Brazilian chicken product costs R20, but the local is lekker equivalent costs R30.  If the consumer chooses the “patriotic” route, then R30 stays in the country, to help create the 7000 jobs the DFPO promises.  But if the consumer chooses the Brazilian equivalent, they have R10 more to spend on something else, which helps stimulate growth in that industry (which, yes, creates jobs).

Again, it is the poorest in South Africa who spend a larger proportion of their income on food. Perhaps the rich can afford to switch their buying patterns from chicken to beef (a boon for the bovine industry?), but the poor do not have that luxury: they will be forced to substitute some other expenditure (perhaps clothing, schooling or health?) to afford the more expensive chicken. Do we really want to force all South Africans (all 52 million of them) to pay 30% more for chicken to “protect” 20 000 jobs, jobs that will be created elsewhere in the economy if all South Africans can buy their chicken cheaper?

Of course, the 2007/2008 impact of quotas on Chinese imports of clothing and textiles also suggests another result of the chicken tariffs: import shifting. Instead of buying (expensive) local clothing, retailers simply switched their imports from China to cheap clothing manufacturers in other countries, like Bangladesh, Vietnam, India and even Zimbabwe. A tariff on Brazilian chickens will simply force South African food retailers to switch imports from Brazil to other countries (with which we have fixed free trade agreements), like the Netherlands, the United Kingdom, Denmark and Ireland. The Dutch are licking their fingers, so to speak.

Other countries are also affected by South Africa’s decision. ITAC speaks not only for South Africa, but also Botswana, Namibia, Lesotho and Swaziland. To the extent that these countries do not have a domestic chicken industry – and I would expect, apart from Namibia, most do not – consumers in these countries will be taxed on chickens with no benefit to their domestic industry (read: the poor will suffer).

Higher chicken prices will also not, as Mr Lovell suggests, increase food security. Producing chickens locally is not food security; but providing the citizens of South Africa access to affordable food is (for a definition of food security, here’s an earlier post). Tell me, should we also produce all our own rice or coffee?

More fundamentally, though, this affair suggests a complete lack of understanding of the benefits of international trade. Think of trade as a new technology that a famous South African scientist develops, a machine where you input something – like iron ore – and out comes chickens. Would we use this machine? Of course! We will dig up iron ore, feed it into the machine, and out would pop chickens. Marvellous. But this is exactly what international trade is: South Africa currently exports iron ore to Brazil ($124 million* of it; or if you don’t like the sound of our natural resources leaving the country unbeneficiated, let’s go far car engines, of which we currently export $72 million* to Brazil) and in return we buy chickens from them. We are better at making iron ore than Brazil is, and Brazil is better at making chickens. South African producers of iron ore win, South African consumers of chicken win, and so does Brazilian consumers of iron ore. Trade is win-win, that great insight from Adam Smith.

In the end, Mr Lovell and the South African Poultry Association has a job to do. Like any producer union, they have the interests of their producers at heart, which is to protect profits. To do this, they have to lobby government for protection against more efficient producers (which happens to be located in other countries). Credit must be given to Minister Rob Davies, who in December turned down a first proposal to increase tariffs. Cynics argue that this was only to keep the peace with Brazil in expectation of the BRICS summit in Durban a month ago. Perhaps, but at least it shows a government able to reject harmful lobby requests. Let’s see how he stands up to repeated requests.

ITAC, the media, and all South Africans should remember that Mr Lovell’s story is a partial one, one that neglects to consider the welfare of all South Africans. Higher taxes on chicken imports from Brazil will have large, negative consequences for the South African consumer, especially those at the bottom of the income distribution. To argue the opposite is not only wrong, it is irresponsible.

* These are all 2011 figures. See TradeMap.

An Economic Freedom Day

Today is Freedom Day in South Africa, the day we celebrate South Africa’s first general elections in 1994. It is a day that many South Africans remember vividly: long lines of patient people awaiting their chance to vote, many for the first time. A day of optimism and hope. For change. For a prosperous future.

But history doesn’t stand still. It’s nineteen years since that memorable day. And now, one generation later, it’s a day that South Africans will begin to reflect on the changes in our society since 27 April 1994. Were the aspirations and hopes of millions of South Africans met? Was it reasonable to expect that it could be? Have we, since achieving political freedom, also achieved economic freedom?

The consensus, both on the far left and the far right (if that distinction can be made in South Africa), seems to suggest that we haven’t. Populist politicians tend to point to the stark inequalities that permeate South African society. We are still an extremely unequal nation, yes, but the type of inequality has changed since 1994. As surveys suggest, between-group (black-white) inequality has fallen remarkably, which means that inequality within racial groups have increased. Here’s a startling fact that few people know: if all whites are removed from South Africa’s income distribution, the Gini-coefficient would be exactly the same. This is not to say that the average white South African is not more affluent than the average black South African: they certainly are. But we should remember that they continue to be a tiny minority, less than 10% of the population and declining as a proportion.  Inequality – globally and throughout history – is a symptom rather than the disease itself, and the best way to ‘cure’ it would be address the underlying cause: differences in the productive capacity of people. If we are to address inequality in South Africa, the large differences within the black population should be our greatest concern.

Others focus, instead, on poverty. The quip ‘ the rich are growing richer, and the poor, poorer’ is often employed  for dramatic purposes and is rhetorically appealing. It is also hogwash. Yes, the rich have grown richer, sometimes faster than the poor. But the South African poor is most definitely better off than they were on 27 April 1994. This we know from a variety of surveys and censuses, but its easier to just point to one invention that has remarkably changed the lives of the poorest of the poor: cellular phones. On 27 April 1994 no one in South Africa had ever seen a cell phone, today there are more cell phones than people in the country. To make a phone call in 1994 was a luxury for a lucky few, today it’s a basic human right. (And, oh yes, we have something called the internet today. And Google. In seven South African languages. Note: unregulated, unenforced.)

Others blame government policy: Solidarity, a predominantly white trade union, recently released a report in which they claim that “almost all South Africans, including black people, are poorer thanks to BEE” (page 5). The report, which was widely cited in the media, provides no evidence to support this claim. That is probably because it doesn’t exist. Firstly, all South Africans are not poorer. On average, South Africans are wealthier, much wealthier, than they were in 1994. In fact, our incomes are today approximately double what they were in 1994, which means we can buy double the amount of food, clothes and other luxuries than then. And this doesn’t account for the vast improvement in the quality of these goods, like cell phones and the internet. But I don’t think this is exactly what Solidarity implied. They claim that black economic empowerment makes black South Africans poorer compared to a counterfactual world of no BEE. I’ve voiced my concerns, too, with BEE, especially in the way it distorts incentives for black entrepreneurs, but even in the counterfactual no-BEE world there is no guarantee that South Africans would have been poorer. BEE is an attempt to address the inequalities of the past. Who is to say alternative attempts at redistribution would not have had a far worse impact on South Africans’ incomes?

We have not achieved economic freedom to the extent that all South Africans have an equal opportunity to prosper. But we have also not moved backwards, become poorer, or failed as The Economist would have us believe. Today, we suffer the anxieties of those that expected a radical transformation but found only a gradual improvement.

The future of news

I’m sure I was not the only one to follow the tragic but thrilling Boston shooting story yesterday. In short, police were first alerted to a robbery and a car-jacking, where a police officer and one of suspects of the Boston bombings were killed, before a massive manhunt began for the second suspect. After several hours they discovered him in a boat in someone’s backyard and made an arrest.

What made this event more intriguing is that I did not need access to the traditional news sources – CNN, BBC – for my updates. In fact, had I done that, I would have completely missed the story, because CNN had followed a wrong lead, reporting on an arrest of ‘The Naked Man’, a man thought to be the suspect, forced to undress, but then released. Instead I followed Reddit, an online site where anyone can report news and post content. On Friday morning while at work I could follow a minute-by-minute update of the events in Boston, courtesy of JpDeathBlade, who live posted the news from police scanners. More extraordinary, I could log on to the police scanners myself, and half a world away, follow the search over my computer speakers – as it happened – for suspect 2.

It is, or should be, no surprise that the internet changes the way we consume news. The fate of newspapers to report ‘breaking news’ has long been proclaimed; gone were the days where newspapers could wait till morning to break a news story to an unsuspecting audience. But, in my opinion, the Boston events showed just how obsolete, and disappointing, TV news is.

Does that mean the end of newspapers and TV news channels? Certainly not. But it does suggest that a different type of journalism is required, a focus on more investigative journalism: instead of asking what happens, authoritative news agencies will have to investigate why it happens. When a newsworthy event happens in our area, Reddit and other such sources allow all of us to become reporters on the ground. The Oscar Pistorius saga is a case in point; most of South Africa stood still while his bail conditions were read, even though we followed tweets from those within the courtroom. To know what happens, we can rely on the law of large numbers.

But the law of large numbers falls apart as soon as we begin to question the why. (Again, the Oscar Pistorius case is a brilliant example. Here’s a warning: don’t read the comments section on any Oscar news article.) JpDeathBlade may bring me live coverage of the events as it happen in Boston, but I’m not sure I care much for his opinion about why it happened. That requires an thorough investigation; interviews with family members and friends of the suspects, sifting through tons of documentation, picking up clues, following hunches. And it requires high-quality writing. All of these require the skills of a trained professional.

For newspapers and TV news stations to prosper in future, answering the why is more important than reporting on the what. The internet can supply the latter much more accurately (and cheaply); the former is a product worth selling.

2020 vision

One of man’s eternal quests is to predict the future. We all want to know what will happen tomorrow, next year, or twenty years from now, not only because we are curious beings but because it has a real effect on how we behave today: I have one year left to live? Well, perhaps I should go on that expensive vacation. The economy will boom within the next five years? Well, perhaps I need to buy that property today.

Modeling the future is therefore one of the activities economists and other scientists tend to do and, if they are relatively successful (i.e. accurate), are rewarded for richly. Take New York University economist Nouriel Roubini who famously predicted the collapse of the US housing market and the consequent recession. Here’s his entry on Wikipedia: “As Roubini’s descriptions of the current economic crisis have proven to be accurate, he is today a major figure in the US and international debate about the economy, and spends much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Although he is ranked only 512th in terms of lifetime academic citations, he was #4 on Foreign Policy magazine’s list of the top 100 global thinkers.” They neglect to say he makes a ton of money. (Roubini continues his bearish stance on the economy which provides a clear lesson for future economists: pessimism sells.)

But it is not only economists who attempt to forecast the future. Historians such as Niall Ferguson (Civilization) and Ian Morris (Why the West Rules – for Now) use the past to map the future. Morris’s contribution builds on Jared Diamond’s Guns, Germs and Steel to argue that the reason the West ruled was mostly due to geography and, importantly, how societies adapt to the changing climate and environment. Ferguson argues that Europe developed six ‘killer apps’ that ensured that they ruled the world after 1411. Both authors paint pessimistic pictures for future Western domination. Economists often get heavily criticised for projecting or forecasting trends two, three years or even a decade into the future. Much of the criticism is true; the world is complex and by projecting what will happen even a few months down the line, economists risk looking like fools. And ask any investor. Despite (or perhaps because of) no quantitative evidence, these historians have found a gap in the market: Using mega-histories to explain the rise and fall of societies, they claim to be able to see far into the future.

Enter the mathematicians. As an article in Nature (and a new one in Wired) suggest, a group of mathematicians have taken up the forecasting crusade by using newly digitised historical data and undertaking cliodynamics. They claim to find cycles of upheaval in society: as the graph illustrates, every 50 years (1870, 1920 and 1970) have seen major social disruptions. They predict that 2020 will see a new flood of protests, riots and/or terrorism.

There is much to disagree with: Is this only true for the US, or a global phenomenon? Were the US really a peace-loving society between 1780-1840? Are three data points enough to statistically predict future trends? But the problem is more fundamental: the US (and world) economy today is very different from those of earlier periods. What would be the justification that similar patterns would emerge today when, in economics jargon, the data generating process is fundamentally different?

Finding historical cycles is an old fantasy (Isaac Asimov’s Foundation spells out the science of Psychohistory). But it is little more than fantasy. Historical statistics can tell us a lot about history (or help us reinterpret history, i.e. cliometrics), but, like the long-run predictions of historians, it has little scientific merit for making (accurate) predictions about the future.