Predicting crises presupposes a theory where they are possible

3 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?

DFRNow, 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.

David F. Ruccio

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4 Comments »

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  1. Was mainstreams failure not they did not accurately predict the crisis but in fact they never believed what did happen was even a possibility?

  2. See, what I don’t like about this comment is the “either/or” nature.

    Just because mainstream macro totally missed the crisis doesn’t mean Steve Keen (or other critics of mainstream macro) got it right.

    I’ve looked at Keen’s models. The “crises” they have, which are just explosive solutions of systems of ODEs, do not look like real crises.

    Saying that Keen’s models “contain the possibility of crises” is just wrong, because those crises don’t look anything like the one we had!

    It’s a bit like when the “Austrians” say “we predicted the crisis”, when what they actually predicted was hyperinflation and a run on the dollar. Sure, it’s a “crisis” of some sort, but not like the one we really had.

    So while I agree that mainstream macro utterly failed, and I give Keen credit (in my post) for talking about the possibility of the crisis, I strenuously deny that Keen has made models that show the possibility of crises.

  3. Huh? Surely, he has developed models that show the possibility of crises. The issue, as you point out so well, is that they are simply model “simulations” of the possibility of crises of various sorts that don’t really correspond to anything except after the fact!

  4. The act of modeling and trying to make predictions based on maths and statistics is as far as I can see, the small childs wish that everything stays the same.

    You are modelling current and historic data, in a model which you claim, can predict the future. If your model is used to control policy or control decision making, you are actually perpetuating the behavior that you modeled, steering behavior towards your model. A childish idea of propelling what was and the now into the future. But the future is full of other people, entities and ideas, which means that a certain action don’t have to give the same result. The childs mother will eventually die, no matter how careful he was to always do the same thing, no matter how carefully he tried to keep things the same.

    Behavior models is much more useful for understanding economists than economy. :)

    I guess modeling keeps the economist busy while he/she is doing nothing. Economy is not a natural phenomenon, it is a tool and a tool you wield and make it work for you. But I guess that’s never going to happen, it is so much easier to pretend to do work than actually doing any, or working to keep things exactly as they are, like a child with OCD.

    I think it a moot point anyway, economy is a thing of the past, it became a redundant tool for humanity the moment we built a wast network of machines spanning the globe. A network of machines capable of instantly connecting output with need and/or demand anywhere on the globe. After thousands of years, economy no longer serves no purpose, currency no longer serve a purpose.

    First thing to go is banks, they can be replaced by a software next week, all of them. They actually provide the very software that is needed make them redundant, yet maintain the functions necessary for society. The human activity in the banks today when everyone does their own banking is suspect at best.

    Bankers and economists, don’t forget to turn off the lights when you leave!


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