The Economic Oracle
and other Stories ...

The1960s was a very interesting decade for Ireland both in the economic sphere and beyond it.

It was the first full decade of economic programming and development since the foundation of the State. Ireland had applied for membership of the Common Market and was twice rejected (with the UK). Between rejections we had embarked on an independent bilateral programme of tariff reduction with the UK to adapt the economy to a competitive environment in preperation for eventual EEC membership.

Beyond the economic sphere the Vatican Council sowed the seeds of a new era, not least in church/state relations. The end of the decade saw men walking on the moon, and the persistence of the civil rights movement in the US, and its spread to Europe and here, both North and South. It also saw the escalation of the Vietnam "war", the reverberations of which were felt beyond the US and the Asian theatre, while at home the assertion of its rights by the Northern minority saw the start of a bloody conflict that was to last over thirty years.

Meanwhile back at the ranch (Department of Finance to you), the wonders of econometrics and economic modelling were exploding into cult status. In retrospect it seems like a piece of science fiction but in its day it was very much for real.

Michael Viney's 1968 Irish Times article (below) on the "Economic Oracle" beautifully captures the econometric flavour of the times.

The Irish Times

10-11 August 1968

Planners get
Computer
"Oracle"

New device to aid Third Programme

By Michael Viney, Our Economic Development Correspondent

A NEW ECONOMIC DEVICE, which uses a computer to map out in detail the consequences of Government decisions, is neariug completion in the Department of Finance.
Asked by the Minister for the effects on the economy of, for example, an increase in petrol tax, it will tell him what would happen in trade, employment, consumption and investment-all in about one minute.
The device is a mathematical "model'" of the Irish economy, expressing its complex inter-relation�ships in the form of about 100 equations. When the first phase is completed, at the end of this month, the model will be used in developing the Government's Third Programme for Economic Expansion.
Its construction has been directed by Dr. Abul G. Khan, an O.E.C.D. consultant who specialises in econo�metrics - the mathematical calcula�tion of economic relationships. Dr. Khan, aged 36 and an Indian-born American, is associate professor of economic and social development at the University of Pittsburgh. He has acted as government consultant in America, France, Norway and Puerto Rico.
His performance at a training seminar on mathematical models in Dublin last September enthused officials of the Department of Finance, most of whom are inex�perienced in the newer econometric techniques. In December, Dr. Khan was appointed senior economic adviser and consultant to the Government. Preparation of the model has been considered an experiment to aid the training of civil servant economists, but it now seems certain to become a permanent tool of Government decision-making. Similar models are used by the government economists of most developed European countries, the most advanced being the Netherlands. In America, a model sponsored by the federal government is maintained by the University of Pennsylvania. It is currently being used to forecast the effects on the U.S. economy of an end to the war in Vietnam.
Dr. Khan has been assisted by a team of eight Government officials, principally from the Department's budget, development and short-term forecasting divisions and from the Central Statistics Office. He has used the computers at CI E and in Trinity, but to select the final hundred-odd equations for the model, he flew back to Pittsburgh to run some three thousand equations through the university's later and bigger I.B.M. computer.

ASSISTANCE

In the second stage of the model's development, it will be linked to an exceptionally detailed "input-output table" drawn up by Mr. Eamonn Henry of the Central Statistics Office. An input-output table is a huge mathematical chart which condenses all the transactions between industries, and between industries and consumers. It can be used to show the relationships between all the components in industry, including labour and capital investment.
 The Second Programme drew on an input-output table of only some ten industrial sectors. Mr. Henry's new table charts no fewer than 169 sectors. When the central model is used to give annual predictions for the components of the economy, these can also be fed into the input-output "matrix" to give production levels in the different industrial sectors. A further table prepared by Mr. Henry, tracing the origin and destination of industry's capital goods (goods which are used to produce a further income) will also be linked to the central model.
The preparation of the model and of Mr. Henry's tables has made unprecedented .demands on the civil service's supply of facts and figures. By international econometric standards, Ireland's statistics are still somewhat "primitive". They have traditionally served to describe the economy, rather than be organised to feed its month-to-month planning.

UNCERTAINTY

Dr. Khan has found that Ireland's small scale makes cross-checking easier and that the inter-dependen�cies of the economy are fairly simple compared with those of more developed countries. He agrees, however, that the country's dependence on export markets in�troduces "a high degree of uncer�tainty" and that the shortage of hard data on emigration and unemployment has forced some "assumptions" in the employment sub-model.
He is confident, nevertheless, that the central model can indicate reliably the priorities for invest�ment giving maximum growth, and say how a given resource should be allocated to encourage a specific sector. Despite the social un�certainties of emigration, he believes that it can tell the Government how a given decision would affect, for example, the drift from agricultural employment.
The model may shortly be used to present the Minister for Finance, Mr. Haughey, with a selection of policy "menus" to demonstrate its versatility in matching specific planning action to given policy goals. Although its use of a com�puter could provoke public fears of government-by-machine, a model of this kind is potentially a far more neutral servant of the Government will than is the fore�casting by economic advisers with strong theoretical convictions. It will simply show the scatter of consequences from any proposed decision which changes an econ�omic variable. It can't, in other words, come up with its own ideas.
Dr.Khan himself would disapprove of a "mechanistic use of the model which reduced economic planning to mere arithmetic. The model, he insists, "is just a tool, an extra dimension." And his in�fluence in the formulation of the Third Programme is likely to make it, if anything, less rigid in its targets and more fluidly responsive to the actual course of events than was the Second Programme.
In the same way, he sees the model as a device to be revised and added to constantly, as new information becomes available. He speaks - while apologising for the jargon - of "a man-machine inter�face" in keeping it up to date.
A valuable addition to the model's information would be data to help it assess for the Govern�ment the prospects of success for new industrial projects. While some individual projects might be too small to register on its digestion, a venture the size of Potez. could well be its meat.
Meanwhile, the model now seems likely to be maintained by the Economic and Social Research Institute, whose staff Dr. Khan will join on September 1st. Apart from its annual forecasts and its interim use in Government planning, the model may also be accessible to private industry, who would pay for special computer runs to answer specific questions - on, for example, market shifts.