The River and the Billiard Ball 19

forecast the positions of small bundles of molecules in a uid, treating

them like Newtonian objects leading to very precise models of turbulent
ow.
All such models rely on the assumption that the most important
variables can be precisely specied and that the premises underlying the
model do not change in any fundamental way. Unfortunately, in most
important realms of forecasting, neither of these assumptions is likely to
hold. Variables such as culture, values, beliefs, and behavior have proven
to be very dicult to rigorously and precisely specify. They are not ob-
jective like the ination rate. Human consciousness enters into all of
these variables and, as a result, makes them self-referential and vulnerable
to surprising shifts. Culture shapes values and beliefs, which shape what
we selectively pay attention to, and reinforces culture and values.
The assumptions underlying models are also vulnerable to surpris-
ing and sudden shifts. The oil shocks of the 1970s threw most economic
models out the window. The Phillips curve, linking unemployment and
ination, predicted that when ination rose, unemployment would fall.
Ination results from growth in excess of the real potential of the econ-
omy. So high growth leads to tight labor markets, high wage growth,
and high ination. But a reallocation of global energy income toward
OPEC led to ination, low growth, and rising unemployment. Stag-
ation entered the economic vocabulary in the 1970s. In the 1990s the
economists were fooled again. They could not imagine that productivity
gains from new technology could be so large as to restore a high growth,
low ination environment. Fortunately, the chairman of the Federal
Reserve, Alan Greenspan, was not too much a prisoner of the models.
He kept searching for hints that the rules might be changing and man-
aged the U.S. monetary policy accordingly.
As I noted earlier, the intellectual orientation of the forecaster also
inuences the choice of the model. There seem to be two very dierent
kinds of intellectual mindsets. One sees the world as mechanistic and
reductionist. A forecast should lead to a correct prediction. The intel-
lectual problem is simply one of better models and better data. These
forecasters will invest all their energy and eort in rening and elabo-
rating their models and the pursuit of more data. This is the route to the
right answer. The other intellectual orientation sees the world as in-
trinsically complex, holistic, and indeterminate. For those who follow
this orientation, learning and better decisions are the goals not better