What imponderables drive the economy? Golfing and forecasting are similar in that they require an understanding of non-linear topographies.
This note is for Cedric who wants to become a proficient derivatives manager.
This is not an idle question as it defines the outcomes that we see from the economy. My view changes from time to time just as the imponderables that drive an economy change from time to time. The driving forces behind economic activity are akin to states of mind. They are almost just as ethereal in appearance, but in effect they are very real, just as states of mind are very real and can have driven outcomes.
Economies are extremely complex in many ways, but they are not unpredictable. They are extremely predictable. They are predictable just as states of mind are predictable and weather is predictable. To predict an economy one needs oversight, an ability to see over the whole landscape of what forces drive an economy. Ronald Brech the author of 'Britain 1984' taught me many things about economy forecasting and most important was that the economy was a balancing act like a teeder-tauter, but one in which there were many vectors that were in or out of balance.
Oversight means that one has to have in view all the vectors that matter in view and comprehend how they are balanced, then apply a host of understandings about what drives each vector in or out of balance and then how each vector's balance with affect the other.
Unfortunately, models of the economy are still very partial examinations of the vectors driving an economy, and that us because of the way habit persistence in the theory of economic forces persists.
Forecasting requires thinking outside the boxes of conventional theories to get an oversight of what is going on. Some vectors will be like a clear day while others will be like a hazy day and still others like a foggy day. A good forecast comes only when all vectors are like clear days and the topography relatively easy to understand. At such times it is relatively easy to make a forecast of a vector and know it will happen as envisaged. At such times we say that the forecast is predefined because the vectors are driven. With a driven system it is easier to see where things are going.
The problem remains of non-linearity. Getting a forecast right is like playing golf and get the ball in the whole. The course has non-linearities and the green has non-linearities. Approximating with a line put will not get the ball in the whole. No linear forecasting system works and no linear golfing system works because the topography is eternally non-linear!