Predicting crises presupposes a theory where they are possible3 June, 2013 at 21:37 | Posted in Economics | 4 Comments
Really, Noah Smith? The best you can do is go after Steve Keen for failing to successfully predict when, where, and how the crash of 2007-08 would break out?
Now, maybe Keen deserves a bit of stick for loudly proclaiming more “loudly and confidently than just about anyone else on the planet” that he predicated the global financial crisis. Perhaps that’s a bit brash.
But mainstream economists are the ones who dominate economic discourse. And they’re the ones who claim the scientificity of their approach to economic analysis is based not on the realism of their assumptions but on the predictive power of their models. And, finally, they’re the ones who, with few exceptions … failed to predict the more recent crisis.
At least Keen and other heterodox economists use theories that contain the possibility of crises occurring based on the endogenous tendencies of capitalist development … Mainstream economists don’t even admit of that possibility, although Smith has shown that at least a few of them have been able to successfully recalibrate one of their models (by adding financial frictions) and then to have successfully predicted the crisis—AFTER THE FACT.
Well, that simply doesn’t cut it. Either admit that mainstream economics is a failure because it didn’t successfully predict the crisis or give up on the idea that predictive power is one of the key criteria of economics, which has served as an excuse for attempting to demonstrate that what mainstream economists are doing is science and what the rest of us are doing is non-science. You just can’t have it both ways.