Book Reviews 91

hypotheses, for learning about and further under- standing the operation of economic systems’. Business-oriented models incorporate the model- builders’ ideas of economic theory but the modellers are prepared to use shortcut and/or idiosyncratic methods in order to generate accurate short-term forecasts. It follows that questions of size, adjust- ment and evaluation depend on which type of model is being considered. On the question of size, a paper by J. B. Taylor, ‘Economic theory, model size, and model purpose’ sets out the arguments succinctly. He concludes (1) that the research objective of a model- building effort is the most important determinant of the appropriate size of a macro-econometric model, (2) that the role of economic theory in determining model size becomes significant only when a well- specified set of. objectives is known, and (3) that the appropriate decomposition of a model into smaller isolated parts depends on the purposes t o which the model is put. This open approach to the question of model size is also reflected in a paper by G . Fromm and L. R. Klein. ‘Scale of macro-econometric models and accuracy of forecasting’. They show that, con- trary to what many have asserted, large models are no worse at forecasting than small models. This view is also endorsed by F. Modigliani, ‘The choice between large and small is not a matter of theoretical principle but rather a purely pragmatic one’. Certainly the conference did not establish that there was some optimum size for a model regardiess of the uses to which it was to be put.

The question of ‘massaging’ forecasts clearly de- pends on the purpose of models. For scientific models, ‘tender loving care’ applied at the stage of model construction or of forecasting invalidates their scientific status. However it is well established that successful forecasting requires adjustments to incorporate extraneous information. Since the major models are part scientific and part business-oriented the use of add-factors does raise serious problems in evaluation but there is no question of ending the practice.

There are three papers on model evaluation in addition to the many comments on the general question of whether macro-econometric model building is a worthwhile activity. There is also a paper by T. Shapiro and D. M. Garman, ‘Per- spectives on the accuracy of macro-econometric forecasting models’ which reminds us that if fore- casts are bad enough the forecasting service that produces them can disappear. H . H. Kelejian and B. Vavrichek in ‘An evaluation of the forecasting performance of macro economic models, with spec- ial emphasis on model size’ conclude that there is little evidence of a strong relation between size and forecast accuracy. S. K. McNees in ‘The method- ology of macroeconometric model comparisons’ draws on his considerable experience in this field. He

is sceptical about the value of comparisons with time series equations; as he says, such exercises avoid rather than solve the problem of how to compare models. He also records the difficulties involved in all comparative exercises, particularly in relation to the treatment of exogenous variables.

At the time the conference was held the general questions about macro-econometric model-building were being debated with rather more heat than they are a t the moment. This was because it was widely asserted that the models had failed to forecast the developments of the mid-70s+specially the com- bination of high unemployment and rapid inflation-and that they were particularly vulnerable to the ‘Lucas critique’ which not only purported to explain that failure but also appeared to question the entire validity of the use of macro-econometric models in policy analysis. Since the models under discussion are generally designed for forecasting and policy analysis these were serious charges. Four years later one feels that the debate is now rather calmer. It is reminiscent of the stages in the debate about time-series versus structural forecasting. As fdr as the rational expectations debate is concerned, the early criticisms have been moderated and the model-builders have proved less resistant to the new ideas.

In summary, this volume with its wide range of papers and discussions can be recommended to all those who are directly interested in macro model- building or who are interested in the model-builders’ activities.

ALAN BUDD London Business School, Englaiid

BEING NUMBER ONE-REBUILDING T H E U S . ECONOMY, Schwartz, Gail Garfield and Choate, Pat, Lexington: Lexington. Mass., 1982. Price: E l 1 ($25).

Skimming the opening pages could cause a careless British economist to ask: ‘So what’s new? But the description of the permanence of inflation, decline of productivity and high rate of unemployment refers not to Britain but to the United States. The supposed need for such a book, with the implication that if radical dramatic action is not soon taken we shall be talking about the American disease, certainly is new.

Most of the book is devoted to cataloguing the problems currently facing the U S . economy-the decline in the efficiency of capital, rate of innovation, effectiveness of R & D, international competitive- ness. The list seems endless: indeed, a major weak- ness of the book is its lack of guidance as to the relative importance of the various explanations for

92 Journal of Forecasting Vol. 2, Iss. No. I

what is going wrong with the American economy. The reader staggers from one set of depressing facts to the next, and becomes numb to their significance. Is there anything in particular in need of remedy, or has the whole magnificent edifice of the U S . economy suddenly become unsafe for human habita- tion, about to collapse at the slightest extra strain‘!

An alternative response is simple disbelief. America is the richest country in the world, and the gloomy picture the authors paint does not accord with casual-or not so casual-empiricism. This may be drawing conclusions about time-series from cross-sectional data.

Talking about forecasting is an appropriate cue to mention that while the authors are concerned to suggest policies to make the future of the United States more attractive, there is very little overt attempt to establish what that future might actually be. I t is all implicit. Trends are indicated in table form, and the reader usually left to infer that the future will be much as the present, or worse. It may be harsh to condemn such a common practice, but some justification for what is, after all, the most elementary of methodologies would have been welcome.

Waiting for the authors’ prescriptions for all the problems presented recaptured my youthful feelings as an addict of the ‘now get out of this’ genre of adventure stories. After watching one intractable problem piled upon another, I waited fascinated to see what solution would enable our hero-in this case the U.S. economy-to escape its awful fate. Imagine my disappointment to discover that the proposed way out lay with ‘development-orientated sectoral policies’-the intellectual equivalent of ‘with one leap he was free’.

The point is that most European countries have seen it all before. Put senior staff of an industry’s principal companies round a table, add represen- tatives from government and trade unions, and perhaps the odd academic and-so the theory goes- a winning strategy for that industry can be thrashed out, probably underpinned by some form of govern- ment assistance.

The grand phrases of Schwartz and Choate about what such committees would achieve mirror those in industry white papers (or their equivalent) in most European countries: even now the British Labour Party is proposing to revamp the ill-fated Sector Working Parties, presumably including ‘strategic’ in their more impressive new title. But the depressing truth is that this sort of planning can achieve little in the face of underlying weaknesses in an economy, and can indeed d o great harm. It is not that that state intervention is necessarily bad: for any number of reasons market forces may not lead to socially optimal solutions. and the British economy is a clear

example of the consequences of myopia and risk aversion exhibited by a capital market. Rather it is that industry-level committees cannot d o a better planning job than the relevant departments within constituent companies, and certainly will not be able to adjudicate between the various competing groups within the industry. How can such committees recommend that one company’s interests should be promoted at the expense of another’s, or that labour should take a wage cut or share-holders a freeze on dividends? Instead they produce bland reports call- ing for government subsidies and tariff protection, and implicitly develop ‘industry views’ about price- levels and other aspects of competition. Established inefficiencies are thus maintained, no-one rocks the boat, and a ‘them-and-us’ mentality develops vis-a- vis other industries-precisely the opposite of good planning.

Schwartz and Choate write as if proposing new policies. In fact they have merely reinvented the wheel, and would be well-advised to study planning in practice in other countries before pontificating about its application in the United States.

GRAHAM HALL Munchester Business School England

T H E SEVEN DEADLY SINS O F FORE- CASTING

FUTURE ENERGY POLICIES FOR T H E UK: AN OPTIMAL CONTROL APPROACH, Basu. D., London: Macmillan, 1981. Price: f 2 0 ($36).

Reading this book prompts me to wonder whether it would be worthwhile agreeing a set of ‘Seven Deadly Sins of Forecasting’ which could be writ large in the Journal of Forecasting so that practitioners could be spared books such as Basu’s. As my contribution to this, I would like to put forward my own provisional list with illustrations from the above book.

I . MisspeciJcation of the problem Basu in his introduction correctly observes the poor economic performance of the U .K. rela- tive to Japan and Germany in the post-war period and he also correctly observes the high rates of investment in Japan during this time. Making the simplistic assumption of cause and effect he proceeds to build a macroecon- omic model which aims to rectify this underin- vestment on a grand scale. For the con- sequences of this decision see Sin No. 7 .

The macroeconomic model is based on Cobb-Douglas production functions where

2 . Use of happropriute technique