Robert Lucas’s forecasting disaster

16 April, 2016 at 20:20 | Posted in Economics | 5 Comments

In Milton Friedman’s infamous essay The Methodology of Positive Economics (1953) it was argued that the realism or ‘truth of a theory’s assumptions isn’t important. The only thing that really matters is how good are the predictions made by the theory.

Please feel free to apply that science norm to the following statement by Robert Lucas in Wall Street Journal, September 19, 2007:

uN7GNNaI am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.
 
 

Robert Lucas — a lousy pseudo-scientist and an even worse forecaster!

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  1. The justification of one’s beliefs or predictions is the heart of the matter.

  2. Disregarding those who were asleep or mere youngsters, most readers of this blog made the same forecasting blunder as Lucas in 2007.
    Otherwise all of us “lousy pseudo-scientists” would be very rich.

    • All of us? Does that include Wynne Godley, Steve Keen, Robert Shiller, Dean Baker, Michael Hudson, …?

  3. Did these legendary soothsayers have confidence in their own prognostications?
    Did they put any of their own money where their mouths were?
    http://www.investopedia.com/terms/s/shortselling.asp

  4. There is a great great essay by Monbiot in Saturday’s Guardian that also calls out the economics profession:

    http://www.theguardian.com/books/2016/apr/15/neoliberalism-ideology-problem-george-monbiot

    “Neoliberalism’s triumph also reflects the failure of the left. When laissez-faire economics led to catastrophe in 1929, Keynes devised a comprehensive economic theory to replace it. When Keynesian demand management hit the buffers in the 70s, there was an alternative ready. But when neoliberalism fell apart in 2008 there was … nothing. This is why the zombie walks. The left and centre have produced no new general framework of economic thought for 80 years.

    Every invocation of Lord Keynes is an admission of failure. To propose Keynesian solutions to the crises of the 21st century is to ignore three obvious problems. It is hard to mobilise people around old ideas; the flaws exposed in the 70s have not gone away”

    Many have said that the formalisation of economics since Samuelson and ‘pushed forward by Lucas and Sargent’ has been an achievement. But ultimately it has not produced anything substantial in terms of real ideas. Instead of taking on Lucas and Sargent and trashing the nonsense and coming up with real ideas as Keynes did, they decided to adopt their framework and arbitrarily add frictions to get the results they wanted.


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