Chaos theory throws it right out the window. It says that you can never predict certain phenomena at all. You can never predict the weather more than a few days away. All the money that has been spent on long-range forecasting — about half a billion dollars in the last few decades — is money wasted. It’s a fool’s errand. It’s as pointless as trying to turn lead into gold. We look back at the alchemists and laugh at what they were trying to do, but future generations will laugh at us the same way. We’ve tried the impossible — and spent a lot of money doing it. Because in fact there are great categories of phenomena that are inherently unpredictable.

The tension between chaotic behavior and perfect foresight was observed. Start with an equilibrium dynamics of a standard type derived from the hypothesis that future prices are predicted perfectly. Suppose that the solution to the difference equations characterizing the solution exhibits chaotic behavior. Is it realistic to assume that the future, even though deterministic, is in fact predictable? Clearly, part of the lessons drawn by natural scientists, especially meteorologists, from nonlinear dynamics is precisely the opposite; chaotic behavior implies that small errors of observation in the starting position may lead to virtually total unpredictability after some period of time. This creates no difficulties of consistency when the predictor is not part of the system being predicted. But when the predictors are the economic agents being examined, there is a fundamental inconsistency. This epistemological antinomy is reinforced by the empirical observation that actual behavior of prices of assets such as securities could never reasonably have been predicted; if it had, there would have been much more buying or selling at earlier stages.

History cannot be explained deterministically and it cannot be predicted because it is chaotic. So many forces are at work and their interactions are so complex that extremely small variations in the strength of the forces and the way they interact produce huge differences in outcomes. Not only that, but history is what is called a ‘level two’ chaotic system. Chaotic systems come in two shapes. Level one chaos is chaos that does not react to predictions about it. The weather, for example, is a level one chaotic system. Though it is influenced by myriad factors, we can build computer models that take more and more of them into consideration, and produce better and better weather forecasts. Level two chaos is chaos that reacts to predictions about it, and therefore can never be predicted accurately. Markets, for example, are a level two chaotic system. What will happen if we develop a computer program that forecasts with 100 per cent accuracy the price of oil tomorrow? The price of oil will immediately react to the forecast, which would consequently fail to materialise. If the current price of oil is $90 a barrel, and the infallible computer program predicts that tomorrow it will be $100, traders will rush to buy oil so that they can profit from the predicted price rise. As a result, the price will shoot up to $100 a barrel today rather than tomorrow. Then what will happen tomorrow? Nobody knows.

They believed that prediction was just a function of keeping track of things. If you knew enough, you could predict anything. That's been cherished scientific belief since Newton.'
And?'
Chaos theory throws it right out the window.

And now chaos theory proves that unpredictability is built into our daily lives. It is as mundane as the rainstorm we cannot predict. And so the grand vision of science, hundreds of years old — the dream of total control — has died, in our century. And with it much of the justification, the rationale for science to do what it does. And for us to listen to it. Science has always said that it may not know everything now but it will know, eventually. But now we see that isn’t true. It is an idle boast. As foolish, and as misguided, as the child who jumps off a building because he believes he can fly.

Chaos cuts with two edges. We have seen how it is impossible to retrieve past history from current observations. We will now show that it is impossible to predict future states from the current observations.

The problem of complexity is at the heart of mankind’s inability to predict future events with any accuracy. Complexity science has demonstrated that the more factors found within a complex system, the more chances of unpredictable behavior. And without predictability, any meaningful control is nearly impossible. Obviously, this means that you cannot control what you cannot predict. The ability ever to predict long-term events is a pipedream. Mankind has little to do with changing climate; complexity does.

Each of us must live within that reality. Forecasting is not an exact science—the future leaves no footprints. We cannot predict the future because we cannot precisely measure the present. Quantum mechanics proved that. We live in a probability-based world. We all know that the sun will rise in the morning. But even that’s just a high probability. Nothing is assured—nothing.

The field of economics is not exempt from the consequences of chaos and complexity. Marketplaces are indeterminate; value is subjective; and outcomes are subject to interpretation. Economic forecasting is just as nebulous, being based on the probability of statistical information that may or may not be accurate.

"No one is alone in this world. No act is without consequences for others. It is a tenet of chaos theory that, in dynamical systems, the outcome of any process is sensitive to its starting point-or, in the famous cliche, the flap of a butterfly's wings in the Amazon can cause a tornado in Texas. I do not assert markets are chaotic, though my fractal geometry is one of the primary mathematical tools of "chaology." But clearly, the global economy is an unfathomably complicated machine. To all the complexity of the physical world of weather, crops, ores, and factories, you add the psychological complexity of men acting on their fleeting expectations of what may or may not happen-sheer phantasms. Companies and stock prices, trade flows and currency rates, crop yields and commodity futures-all are inter-related to one degree or another, in ways we have barely begun to understand. In such a world, it is common sense that events in the distant past continue to echo in the present."

Politics, too, is a second-order chaotic system. Many people criticise Sovietologists for failing to predict the 1989 revolutions and castigate Middle East experts for not anticipating the Arab Spring revolutions of 2011. This is unfair. Revolutions are, by definition, unpredictable. A predictable revolution never erupts.

At another level, market crashes constitute beautiful examples of events that we would all like to forecast. The arrow of time is inexorably projecting us toward the undetermined future. Predicting the future captures the imagination of all and is perhaps the greatest challenge.

It is naïve to think that a [computer] model can predict future events on the Earth. To try to predict the future based on just one variable (CO2) in extraordinarily complex natural systems is folly.

Without precise predictability, control is impotent and almost meaningless. In other words, the lesser the predictability, the harder the entity or system is to control, and vice versa. If our universe actually operated on linear causality, with no surprises, uncertainty, or abrupt changes, all future events would be absolutely predictable in a sort of waveless orderliness.