The Future of Forecasting in a Post-Covid World

by Calum Nicholson

When we reflect on the last half decade – from the domestic politics of the ‘west’ in the age of social media, with the rise of neo-nationalism on the right and neo-puritanism on the left; to the rise of China and its increasingly bold foreign policy; to the worldwide socio-economic effects of the pandemic – one word that often comes up is ‘apocalypse,’ in the sense of cataclysm. This is particularly the case with regard to the integrity of the post-cold war order that has been globalized in the image of what was – for about 25 years – the world’s only superpower: the United States.  

Implied in a lot of the discussions we have is a concern for forecasting how cataclysmic this period will be, and what changes it will impose on all areas of society. In terms of our efforts to forecast, few topics are analysed as much as international trade.  

While most analysts are preoccupied with the question ‘what is the future of trade?’, there is perhaps a more fundamental one that we should be asking: is meaningful forecasting even possible anymore?  

There is an argument to be made that any attempt to forecast is now nearly pointless, for we are not facing a situation in which we are examining the effects upon a system from a change to a single variable, but the effects of a change in a system upon any variable we care to consider. 

 Typically, we forecast based on an assumption of continuity and stasis, and/or a change in a particular variable – like the introduction of a new technology, law or treaty.  But in our current situation, we are attempting to forecast the implications not of a change to a specific variable, but of the whole backdrop against which any such variable is meaningful, and against which it’s significance can be measured. 

 In the face of all this flux, how can it be anything more than wild conjecture to try to forecast the future of trade in any specific or quantitative sense? We cannot really know the extent to which the pandemic, for instance, will have apocalyptic – in the sense of cataclysmic – implications for economies and trade in the long term. But we can perhaps talk of its apocalyptic effects in the original sense of the word. It’s not widely known that while the modern meaning of ‘apocalypse’ is ‘cataclysm,’ the original meaning is ‘the revelation of what has previously been concealed.’ 

This latter sense of the word has as much meaning, when applied to the last half decade, as does the former one. For if nothing else, our recent period of political and societal flux has thrown into sharp relief things that were previously disguised, albeit in plain sight. What are the Trump and Brexit phenomenons, if not symptoms of longstanding societal pathologies, namely the evisceration of hinterland communities by the inexorable march of the market, and the forces of globalization? And as much as it has been a cataclysm for public health, the pandemic has also been a revelation, literally revealing how fair-weather many of our political systems, economic institutions and cultural norms in fact are.   

By analogy, we can think of the political, geopolitical and socio-economic crises we currently face as akin to a prism. If you have a beam of white light, and you shine it at a prism, it will be refracted into its constituent colors. We can take white light here to be analogous to the rhythm of our previous normality – a set of assumptions we had about the nature of the economic and trade system in a globalized, free-trading, interdependent world. These component assumptions – which have gone largely unexamined – are now being exposed as the articles of faith they perhaps always were.  

Perhaps no assumption has been more consequential – and so blinkered and blinkering –  than the assumption of mastery implied in the idea that the contemporary west represented the ‘end of history.’ That is, the assumption that the extra-economic world – its politics, its cultures, the biosphere itself, be it in the form of pathogens or climate – are a ‘neutral sandbox’ within which economics and trade could be rationally conducted on their own terms.  

But what we’re seeing now is that the terms are no longer their own, and that our economic and trading system is being threatened, in both principle and in practice. Specifically, we’re seeing the exposure of the conditionality of the legal principles that frame and underpin the idea of an ‘international order’ – the comity among nations in which they each respect one another’s legislative and judicial acts, which of course is the basis of a global system of free trade. 

 China has long been suspected to be engaged in systemic technology transfer and intellectual property theft, violating international law in the process. And in a future and increasingly likely ‘no deal’ Brexit scenario, the UK might well – as it has now threatened – simply flout any legal agreements or obligations, exposing just how unenforceable international law is, or at least, how the power of the ideals of international law or treaties are entirely and explicitly subject to the realities of political and economic power.  

If China’s approach threatens the west’s ‘system’ from without, the UK’s actions threaten it from within. The result could be a breakdown of the international system that we’ve known for several decades, arguably since World War II, and certainly since the end of the Cold one.  

But we’re also seeing the exposure of the conditionality of the practices of free trade, and international supply chains in particular, largely due to the advent of the pandemic, or perhaps more accurately, the ‘lockdown’ measures taken to mitigate its spread. In the UK, the ‘supply chain shock’ from the lockdown measures may well become a ‘double shock’ if and when a no-deal Brexit scenario plays out. Again, what the imposition of these extra-economic variables demonstrates is that the long-standing assumption that the world is a ‘neutral’ sandbox within which markets can play out was perhaps always a delusion. That it existed for a few decades – for the west at least – reflects not some achievement, but rather good fortune of historic proportions.  

The very idea that we may forecast our economic future – an idea popular in modern macro economics, which as a rule of thumb tends to work from an assumption that the extra-economic world is, to all intents and purposes, politically, culturally and biologically stable and neutral in any analysis – seems to reflect less something about the objective nature of the world, and more something about the subjective norms of the society that gave rise to such a conceit.  

To take an analogy from physics, it can be said to reflect a classical or Newtonian view of the world – where the flow of time – and in this case history, with its dilating and contracting politics and culture and fortunes – is neutral in the analysis. But the real world is perhaps better understood with a more relative and Einsteinian model, in which we realize that we can take nothing for granted – that the passage of time is relevant – that the river of history and its vicissitudes of fortune cannot be ‘overcome,’ cancelled out, and corralled through some institutional formula, but rather continues, winding its own path, inexorably, regardless of our attempts to direct it.  

All this matters because free trade is one of modern society’s great achievements. But to maintain this system, we’ll need to realize that the challenges we face are not historical exceptions, but likely the rule – the rule being that extra-economic circumstances are rarely neutral. Rather, the era of post cold-war frictionless trade was probably itself the historical exception.  

This being the case, the changes we need to make to maintain it require a macroeconomics based on a certain humility in the face of extra-economic factors, rather than on a hubris that says those factors are hardly worth paying attention to. We’ve been lucky for some decades, but the world is different now. We’ve returned from an exceptional period – in which forecasting gained credibility due to unprecedented extra-economic stability – to the rule, and that rule is, arguably, one in which the rules no longer apply, and forecasting is no longer possible.

Calum Nicholson is the UK correspondent for The Economic Standard.

Source: https://www.austriancenter.com/forecasting-in-post-covid-world/