On predicting the crisis

Posted: 31 May 2013 in Uncategorized
Tags: , , , , , ,

Crystal-Ball

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 predicted 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 (like Nouriel Roubini, aka Dr. Doom), 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 (I know, and we’ve successfully predicted 15 of the last 5 crises). 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.

And beating up on Steve Keen is simply the coward’s way out.

Comments
  1. Magpie says:

    “And they [i.e. mainstream economists] are 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”.

    You are speaking of Friedman’s 1953 essay, and that’s a good point.

    But then, much more recently, Eugene Fama rather famously remarked that nobody saw the crisis coming… because bubbles cannot be predicted! I mean, how can we predict something that cannot happen?

    So, mainstream economics isn’t good at describing or explaining… and we can’t rely on their predictions, either!

    ———-

    On top, it turns out the data the model graphed _already_included_ the bankruptcy of Bear Stearns and Lehmann:

    “3.1 DSGE Forecasts of the Great Recession
    “We begin by estimating the DSGE model described in Section 2 based on macroeconomic data from 1964:Q1 to 2008:Q3.”

    “No the Negro DGSE model does not Predict the Great Recession”
    http://andrewlainton.wordpress.com/2013/05/30/no-the-negro-dgse-model-does-not-predict-the-great-recession/

    It’s not just that some make it their lifelong purpose to apologise capitalism. It’s that, on top of that, they are inept.

  2. Noah Smith says:

    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.

    “Brash” as in “false”…

    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 (like Nouriel Roubini, aka Dr. Doom), failed to predict the more recent crisis.

    Quite true.

    At least Keen and other heterodox economists use theories that contain the possibility of crises occurring

    Not really, no. Or at least, not “crises” that bear any resemblance to real crises. Look at those models (though Keen’s papers are nearly impossible to read, as JW Mason has pointed out). The “crises” in the models look NOTHING like real crises, and in fact look very similar to the crises in neoclassical Ramsey models.

    Either admit that mainstream economics is a failure because it didn’t successfully predict the crisis

    It failed, but that doesn’t mean it’s a failure! Chemistry was just useless alchemy for centuries before a few breakthroughs turned it into the most reliable science we have.

    And beating up on Steve Keen is simply the coward’s way out.

    I fail to see how this is cowardly…Keen is a dick, who writes papers that are deliberately obscurantist in order to obscure the fact that he has absolutely no idea how the economy works…see JW Mason, the noted heterodox blogger, for more on this:

    http://slackwire.blogspot.com/2012/04/case-of-keen.html

    • David F. Ruccio says:

      In all honesty, Noah, you can go after Keen all you want to. I simply don’t have a dog in that hunt.

      My only point was and remains that mainstream economists, who claim the superiority of their theories and models on the basis of their predictive power, failed spectacularly in the case of the crash of 2007-08 and the Second Great Depression. They dominate the discipline of economics, they failed to predict what was happening then (and continue to fail now), and they’re the ones you should be targeting for your criticisms.

      Whether that leads to better mainstream theories and models (but who will be the judge and by what criteria?) or the need to abandon the entire enterprise of mainstream economics (which is precisely what heterodox economists have decided, even when they don’t get a fair hearing), that’s the unpredictable consequence of critical thinking.

  3. Christian says:

    Dear Noah,

    As a doctoral student at a heterodox university, I have a dog in this fight (so does David as a respected dissenting voice.)

    I find it annoying how you characterize mainstream economics as a successful research program – it isn’t. Mainstream economics failed because mainstream economists apparently misunderstand the economy to the same extent as Steve Keen. (ex-post predictions are useless)

    Mainstreamers never care about disproof of their theories. Marx took apart Smith and Ricardo, Sraffa took apart Marshall (and partial equilibrium), Keynes took apart Marshall again, Robinson, Pasinetti, Garegnani etc took apart Samuelson and Solow (and marginal productivity theory), Garegnani took apart Arrow and Debreu (general equilibrium in all of its forms). Moreover, each of the aforementioned economists grappled with the mainstream on mainstream grounds, and WON. Alas, mainstream economists don’t care.

    Consider the case of the Capital Debates (Robinson, Pasinetti…). The debate didn’t simply invalidate aggregating capital for measuring total factor productivity – the debates also rigorously disproved the entire theory of marginal productivity (Empirically, MP is garbage too – no firm uses marginal pricing). Apparently, mainstream economists don’t care as much about ‘proofs’ as their textbooks lead on – not even New Keynesian rigidities get them out of the theoretical mess…marginal analysis it would seem is a failed program. Therefore, not one mainstream model describes any reality. (But who has changed their mind?)

    Plus, mainstream economists aren’t really that creative. Marx invented the ‘property rights paradigm’ with his ideas of class struggle, Joan Robinson invented imperfect competition, Veblen invented the ‘evolutionary’ method in economics, Wesley Mitchell was instrumental in developing national income accounting, etc, etc, etc. What do mainstreamers have to hang their hats on? Not a whole lot.

    And sure, maybe Steve Keen is a dick, but why should Steven Keen bow his head and get in line for the neoclassical establishment? Just because you went to U of M or MIT or Princeton or Chicago or won a Nobel prize means he should keep his voice down? But, as i turns out, mainstream economists are deaf to criticism anyway. So who cares what Steve Keen says, right?

    If I use your logic, I can argue Keen is on to something: “It failed, but that doesn’t mean it’s a failure! Chemistry was just useless alchemy for centuries before a few breakthroughs turned it into the most reliable science we have.” Maybe Keen is on the cusp of something (although, I don’t see the logic of his model) – who knows, but why listen to anyone else?

    By the way, a coward punches those who are in a position below them, which is exactly the treatment you gave to Steve Keen. Nice ‘take down’, you’re a tough guy. So much for a U of M grad favoring pluralism (my parents and sister – all U of M grads – would be disappointed.)

    So I’ll give you advice Noah – read some history of thought and apply your considerable intellect outside of the box in which you’ve closed yourself in before you go around punching the little guys in life.

  4. Magpie says:

    In November 2008, during a visit to the London School of Economics, HM, Queen Elizabeth, referring to the crisis, asked Prof. Luis Garicano, who was acting as a host: “Why did nobody noticed it?”

    Note carefully HM’s original question, as related by a witness. She never asked about technical details, probabilities, causality. What she asked later was translated much more simply as “why nobody saw it coming?”

    Garicano explained: “She was asking me if these things were so large how come everyone missed it.” He told the Queen: “At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.”

    Garicano later would add: “I did not stammer when the Queen asked me about the meltdown”.

    “The simple response is that many people did see it coming. To mention just two: Paul Krugman, this year’s Nobel prize winner in economics, has argued for years that a housing bubble was replacing the internet bubble; and in 2005 Paul Volcker”.

    Again, pay attention to the language: Garicano did not mention technical details. At the time, Garicano understood, together with pretty much every human being who read the news, that what HM wanted to know was why nobody had ever warned about the possibility of a crisis.

    Prof. Krugman, himself, has mentioned in his blog that he, among others, did indeed warn about the incoming crisis. He never claimed, to the best of my memory, to have predicted the details of it.

    And, in my opinion, he didn’t need to provide those details. That wasn’t what HM and the rest of the world were demanding. What they were demanding was a warning.

    And Prof. Keen, too, provided a warning.

    Now, Smith’s demand for a detailed forecast from Keen, and from Keen alone, seems at least unfair and cowardly. After all, I haven’t seen Smith demanding those details from Krugman, Volcker or from a whole lot of others. Why not?

    But it also seems disingenuous. After all, Keen failed to predict what colour Dick Fuld’s underwear was in the early morning of September 15th, 2008. Without that detail, the warning was entirely useless.

  5. Dismayed says:

    That’s why I now call Mr. Smith Noah Clue. Keen’s models, while simple, do simulate system breakdown and business cycles. That’s much better than the garbage models that I learned at U Chicago. External shocks? Really? Sticky wages? debt doesn’t matter? Idiots!

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