{"id":85672,"date":"2025-09-10T07:18:41","date_gmt":"2025-09-10T06:18:41","guid":{"rendered":"https:\/\/www.taxresearch.org.uk\/Blog\/?p=85672"},"modified":"2025-09-10T07:18:57","modified_gmt":"2025-09-10T06:18:57","slug":"quantum-economics-part-4-quantum-uncertainty-and-economic-forecasts","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2025\/09\/10\/quantum-economics-part-4-quantum-uncertainty-and-economic-forecasts\/","title":{"rendered":"Quantum economics, part 4: Quantum Uncertainty and Economic Forecasts"},"content":{"rendered":"<p><span style=\"color: #000000;\"><em>This post continues the story of quantum economics, <a style=\"color: #000000;\" href=\"https:\/\/www.taxresearch.org.uk\/Blog\/2025\/09\/07\/discussing-quantum-economics-accounting-money-and-more\/\" target=\"_blank\" rel=\"noopener\">which began here<\/a>. There is a summary of posts to date at the end of this post.<\/em><\/span><\/p>\n<p><span style=\"color: #000000;\"><em>Can you please note when reading this post and others in the series that I am not suggesting that quantum physics and economics are akin to each other. Instead, I am exploring how quantum thinking might help build new economic narratives, which is quite a different goal.<\/em><\/span><\/p>\n<hr \/>\n<h2><span style=\"color: #000000;\"><b>Quantum Uncertainty and Economic Forecasts<\/b><\/span><\/h2>\n<blockquote><p><span style=\"color: #000000;\">\u201cIn this world nothing can be said to be certain, except death and taxes.\u201d \u2013 Benjamin Franklin<\/span><\/p><\/blockquote>\n<blockquote><p><span style=\"color: #000000;\">He might have added: \u201cand the failure of economic forecasts.\u201d<\/span><\/p><\/blockquote>\n<p class=\"p5\"><span style=\"color: #000000;\">Economics loves forecasts. Governments base their budgets on them. Central banks set interest rates in response to them. Businesses plan investments around them. Journalists report them breathlessly.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">And yet, if there is one thing more certain than the forecast itself, it is that it will be wrong. Growth turns out weaker than predicted, or stronger. Inflation runs hotter or colder. Recessions always arrive unannounced and seemingly by surprise.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">Why? Because economists still think in Newtonian terms. They imagine the economy as a machine tending towards equilibrium, disturbed only by temporary shocks. And they model the future as if it can be known with precision, given enough data.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">Quantum thinking shows why this is nonsense. The world is not determinate. It is uncertain, relational, and subject to uncertainties rather than probabilities. To treat the future as knowable is not just optimistic. It is fundamentally wrong.<\/span><\/p>\n<hr \/>\n<h2><span style=\"color: #000000;\"><b>First: the Newtonian fantasy of forecasts<\/b><\/span><\/h2>\n<p class=\"p5\"><span style=\"color: #000000;\">At present, the dominant macroeconomic models are Dynamic Stochastic General Equilibrium (DSGE) models. The name is impressive, but the assumptions are simplistic:<\/span><\/p>\n<ul>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\">The world is populated by rational economic agents (otherwise known as people, who always act consistently and as if possessed of the best possible knowledge of all possible economic data).<\/span><\/p>\n<\/li>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\">Markets invariably tend towards equilibrium, where supply always equals demand and best possible economic outcomes are achieved.<\/span><\/p>\n<\/li>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\">Random shocks are the only source of change because it would be irrational to assume otherwise, given the first assumption.<\/span><\/p>\n<\/li>\n<\/ul>\n<p class=\"p5\"><span style=\"color: #000000;\">As a result, these models pretend to predict the path of the economy by projecting forward from today\u2019s supposed state of economic equilibrium. These models reduce uncertainty to risk, assign supposedly known probability distributions, and claim scientific rigour. But as anyone who has lived through the past fifty years knows, the economy is not a pendulum disturbed by random nudges. It is much more like a storm system, generating its own turbulence, and it is impossible to reduce its behaviour to neat equations.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">In that case, forecasts based on equilibrium models are not just flawed. They are fraudulent.<\/span><\/p>\n<hr \/>\n<h2><span style=\"color: #000000;\"><b>Second: the quantum principle of uncertainty<\/b><\/span><\/h2>\n<p class=\"p5\"><span style=\"color: #000000;\">In contrast to this world of economic fantasy, in quantum mechanics, uncertainty is fundamental. <\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">Heisenberg\u2019s principle says we cannot know both the position and momentum of a particle at once. The more precisely we measure one, the less precisely we know the other. This is not a failure of measurement. It is a property of reality. The particle within quantum mechanics does not have both a definite position and momentum simultaneously. As a result, reality is at best probabilistic and definitely not deterministic. The consequence is that the future is, in quantum mechanics, uncertain.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">Applied to economics, the lesson is stark: the future there can also not be known in precise terms. The economy is not a machine running forward. It is a cloud of possibilities, collapsing into outcomes only as time passes.<\/span><\/p>\n<hr \/>\n<h2><span style=\"color: #000000;\"><b>Third: the forecast as a wave function<\/b><\/span><\/h2>\n<p class=\"p5\"><span style=\"color: #000000;\">In that case, we need to think of economic forecasts as a wavefunction. They describe possible states of the economy, with probabilities attached.<\/span><\/p>\n<ul>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\">The Office for Budget Responsibility predicts GDP growth of 1.5%.<\/span><\/p>\n<\/li>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\">What this really means is a cloud of possibilities: perhaps 0.5%, possibly 2.5%, and perhaps worse.<\/span><\/p>\n<\/li>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\">The mean is 1.5%, but the distribution is wide.<\/span><\/p>\n<\/li>\n<li><span style=\"color: #000000;\">And the outcome could be very different.<\/span><\/li>\n<\/ul>\n<p><span style=\"color: #000000;\">Worse still, people like the Office for Budget Responsibility and the Bank of England make a critical assumption in their forecasts, and that is that, as necessarily follows from the assumptions they make, the economy will always return to its mean projection, extrapolated from past economic activity. In other words, it reverts to the mean on all occasions, and as a result, there is, in effect, no uncertainty in their modelling at all.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">The problem, then, is that economists present the mean as the reality. They talk as though their forecasts are a specific outcome, and not one of many possibilities.\u00a0 As a result, they in effect collapse the wavefunction prematurely, misleading politicians and the public.<\/span><\/p>\n<hr \/>\n<h2><span style=\"color: #000000;\"><b>Fourth: fiscal rules as a denial of uncertainty<\/b><\/span><\/h2>\n<p class=\"p5\"><span style=\"color: #000000;\">The problem gets worse when we bring fiscal rules into the mix.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">Governments like to promise that budgets will be balanced \u201cover the fiscal cycle\u201d or \u201cwithin five years\u201d, or whatever else they alone choose. These promises do, however, depend on forecasts. Only if growth is as expected, if inflation is as expected, and if tax receipts are as expected, will the books then balance.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">But these are huge ifs. No one knows what growth will be. No one knows what shocks will occur. To tie today\u2019s policy and actions to forecasts of what might happen five years ahead is to deny uncertainty. Instead, what fiscal rules do is treat models of the future as if they deliver specific outcomes that can be treated as fact in the present moment, and that makes no sense.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">The result is paralysis. Governments cut spending now for fear of breaching a fiscal rule in the future that is based on a forecast that is almost certainly wrong. Public services suffer as a consequence because economists cannot admit uncertainty about the future.<\/span><\/p>\n<hr \/>\n<h2><span style=\"color: #000000;\"><b>Fifth: the illusion of precision<\/b><\/span><\/h2>\n<p class=\"p5\"><span style=\"color: #000000;\">To consider this issue, think about inflation forecasts.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">Central banks set interest rates based on forecasts of inflation two years ahead. But inflation depends on energy prices, wages, exchange rates, global events, and unknown shocks, most of them unknown, and in some cases unknowable in advance. The Bank of England\u2019s own record shows forecasts are wrong more often than they are right. Yet, they still claim the authority to manage the economy by pretending they know what inflation will be. This claim is based on an illusion of precision which cannot be justified. Quantum thinking would insist on humility: the acknowledgement that we cannot know.<\/span><\/p>\n<hr \/>\n<h2><span style=\"color: #000000;\"><b>Sixth: measurement as intervention<\/b><\/span><\/h2>\n<p class=\"p5\"><span style=\"color: #000000;\">In quantum physics, measurement changes the system. The act of observing alters the outcome.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">Economics is the same. Forecasts are not neutral. They change behaviour. For example:<\/span><\/p>\n<ul>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\">If the Office for Budget Responsibility predicts weak growth, businesses may cut investment, making weak growth more likely.<\/span><\/p>\n<\/li>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\">If the Bank of England forecasts high inflation, it may raise rates, slowing demand and altering inflation.<\/span><\/p>\n<\/li>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\">If government departments are told that spending will be cut in three years, they start cutting now.<\/span><\/p>\n<\/li>\n<\/ul>\n<p class=\"p1\"><span style=\"color: #000000;\">In that case, forecasts are not passive descriptions. They are interventions that alter the future they claim to predict. It appears that all too often this is not appreciated.\u00a0<\/span><\/p>\n<hr \/>\n<h2><span style=\"color: #000000;\"><b>Seventh: uncertainty versus risk<\/b><\/span><\/h2>\n<p class=\"p5\"><span style=\"color: #000000;\">Keynes knew this distinction well. Risk is calculable. You can roll dice and know the odds. Uncertainty is not. You cannot know the odds of war breaking out, or of a pandemic arriving, or of a financial bubble collapsing.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">Economists have collapsed uncertainty into risk. They use probability distributions to describe what cannot be described. They pretend that uncertainty can be tamed by statistics. It cannot.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">This is why Black Swans occur. This is why recessions come as surprises. This is why models fail.<\/span><\/p>\n<hr \/>\n<h2><span style=\"color: #000000;\"><b>Eighth: policy for an uncertain world<\/b><\/span><\/h2>\n<p class=\"p5\"><span style=\"color: #000000;\">So what would policy look like if we took uncertainty seriously? The following might be appropriate considerations:<\/span><\/p>\n<ol start=\"1\">\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\"><span class=\"s1\">The aim should be robustness, but not precision.<\/span> Instead of aiming for precise fiscal targets, policy should be designed to work under a range of scenarios. It is better to be roughly right than precisely wrong.<\/span><\/p>\n<\/li>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\"><span class=\"s1\">Automatic stabilisers should be emphasised.<\/span> This would mean strengthening benefits, emphasising progressive taxes, and public investment that expands when the economy weakens and contracts when it strengthens. These adjust automatically, without relying on forecasts.<\/span><\/p>\n<\/li>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\"><span class=\"s1\">Flexibility is key.<\/span> Budgets should be allowed to change as reality unfolds. This means that rigid fiscal rules should be scrapped and that plans must adapt.<\/span><\/p>\n<\/li>\n<li>\n<p class=\"p1\"><span style=\"color: #000000;\"><span class=\"s1\">Resilience is key.<\/span> Investment should be made in systems that can withstand shocks: renewable energy, public health, and social safety nets. If the future is unknowable, it is essential to build key strengths in areas where need is known rather than gamble on forecasts.<\/span><\/p>\n<\/li>\n<\/ol>\n<hr \/>\n<h2><span style=\"color: #000000;\"><b>Ninth: the politics of uncertainty<\/b><\/span><\/h2>\n<p class=\"p5\"><span style=\"color: #000000;\">Admitting uncertainty is politically difficult. Politicians prefer certainty. They like to promise that growth will be<strong> X<\/strong>%, that the deficit will fall by <strong>Y<\/strong>, that inflation will be<strong> Z<\/strong>. But these promises are always false. As a result, they always set governments up to fail. They create cynicism when forecasts prove wrong. They lead to damaging policies designed to hit targets that were meaningless from the start. A politics of honesty would instead admit uncertainty. It would say: the future is unknowable, but we will design policies that protect you whatever happens. That would be braver, and truer, and would restore political credibility.<\/span><\/p>\n<hr \/>\n<h3><span style=\"color: #000000;\"><b>Conclusion<\/b><\/span><\/h3>\n<p class=\"p5\"><span style=\"color: #000000;\">Economic forecasting is Newtonian fantasy. It imagines certainty where there is uncertainty, equilibrium where there is turbulence, and precision where there is probability.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">Quantum thinking shows the truth. The economy is a cloud of uncertainty, not a machine. Forecasts are interventions, not predictions. Uncertainty is fundamental, not reducible.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">If economics embraced this, policy would change. Fiscal rules would be scrapped. Forecasts would be treated with humility. Policy would focus on resilience, robustness, and adaptability.<\/span><\/p>\n<p class=\"p5\"><span style=\"color: #000000;\">And then, perhaps, economics would serve society better. Because only by respecting uncertainty can we fund the future.<\/span><\/p>\n<hr \/>\n<h3><strong>Previous posts in this series<\/strong><\/h3>\n<ol>\n<li><a role=\"link\" href=\"https:\/\/www.taxresearch.org.uk\/Blog\/2025\/09\/07\/discussing-quantum-economics-accounting-money-and-more\/\">Discussing quantum economics, accounting, money and more<\/a><\/li>\n<li><a role=\"link\" href=\"https:\/\/www.taxresearch.org.uk\/Blog\/2025\/09\/07\/quantum-economics-part-1-why-quantum-thinking-matters-for-economics\/\">Quantum economics, part 1: Why Quantum Thinking Matters for Economics<\/a><\/li>\n<li><a role=\"link\" href=\"https:\/\/www.taxresearch.org.uk\/Blog\/2025\/09\/08\/quantum-economics-part-2-money-as-particle-and-flow\/\">Quantum economics, part 2: Money as Particle and Flow<\/a><\/li>\n<li><a role=\"link\" href=\"https:\/\/www.taxresearch.org.uk\/Blog\/2025\/09\/09\/quantum-economics-part-3-entanglement-and-double-entry-bookkeeping\/\">Quantum economics, part 3: Entanglement and Double-Entry Bookkeeping<\/a><\/li>\n<\/ol>\n<hr \/>\n<h3><b>Comments\u00a0<\/b><\/h3>\n<p>When commenting, please take note of this blog\u2019s comment policy,\u00a0<a href=\"https:\/\/www.taxresearch.org.uk\/Blog\/about\/comments\/\">which is available here<\/a>. Contravening this policy will result in comments being deleted before or after initial publication at the editor\u2019s sole discretion and without explanation being required or offered.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>This post continues the story of quantum economics, which began here. There is a summary of posts to date at the end of this post.<br \/><a class=\"moretag\" href=\"https:\/\/www.taxresearch.org.uk\/Blog\/2025\/09\/10\/quantum-economics-part-4-quantum-uncertainty-and-economic-forecasts\/\"><em> Read the full article&#8230;<\/em><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[67,26,35,106,225],"tags":[],"class_list":["post-85672","post","type-post","status-publish","format-standard","hentry","category-accountancy","category-accounting","category-economics","category-politics","category-quantum-economics"],"_links":{"self":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/85672","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/comments?post=85672"}],"version-history":[{"count":6,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/85672\/revisions"}],"predecessor-version":[{"id":85763,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/85672\/revisions\/85763"}],"wp:attachment":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/media?parent=85672"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/categories?post=85672"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/tags?post=85672"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}