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November 23, 2012


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Luis Enrique

echoing your point, here Philip Stevens complains economists have been warning of a global balance of payments crisis, which hasn't happened:


I still think economists could have warned of the dangers inherent in our financial system, high leverage etc. and alerted us to the developing state of bank balance sheets, and helped prevent the crisis. Even if that would have left people wondering why economists predicted problems that did not arise, I don't think would leave economics in crisis in the same way that failing to warn of the biggest economic disaster of a century has (tempting fate there - the Euro hasn't collapsed yet. And economists did warn about that one).

I should qualify this by saying plenty of models did exist before the crisis to show us how financial markets could blow up, but nobody in positions of influence thought them relevant.

Luis Enrique

having read your link (thanks for that) I see Gorton says "Financial crises are not predictable, though the buildup of fragility is observable" - if the build up of fragility is observable, isn't the "probability of a crisis" also observable (just assume it increases with fragility) - that'll do as prediction, as far as I am concerned. And of course actions could in principle be taken to reduce observed fragility.


"Why, then, should we think economics is in crisis?

The obvious answer is that we didn't see the crash of 2008 coming."

This is true, but the fuller answer is that the profession created and provided ideological cover for the conditions in which it was inevitable.

George Hallam

Robinson goes out to buy cigarettes at the shop on the corner and is run over by a car while crossing the road.

As concerned citizens we meet to inquire into the causes of this tragic accident.
While we are trying to establish the facts relating to, the state of the road, the speed of the car, etc.,
“two distinguished gentlemen - I shall not attempt to identify them - burst into the room and begin to tell us, with great fluency and cogency, that, if Robinson had not happened to run out of cigarettes that evening, he would not have been crossing the road and would not have been killed..”

Robinson chose to buy cigarettes at a particular moment and decided to do so from a particular shop that was situated on the fatal corner. Obviously the conclusion must be that individual choices like this are impossible to predict.

What should we do in this situation?

E.H. Carr, like most ordinary people, had no doubts on this question.
“As soon as we can break into the flow of eloquence, we edge our two visitors gently but firmly towards the door, we instruct the janitor on no account to admit them again, and we get on with our inquiry.”

Carr wrote this in in 1961, though he wasn’t thinking of Shackle.

. file:///C|/Documents and Settings/Vidula/Local Settings/Temp/Rar$EX00.750/carr.htm (63 of 97)7/20/2006 11:28:45 AM /WHAT IS HISTORY

Nick Rowe

Good post.

One minor quibble: " The point is that forecasts can only be right if they are not believed."

That's not quite right. What happens depends on how much people believe our forecasts, and on what we forecast. But we can build that effect into our models, and solve for the semi-rational expectations forecast.

If we actually had any models that could forecast X(t+1) as a function of X(t) only. Which we don't.

Luis Enrique

You say economists have erred by neglecting ordinary life and aspiring to be policy makers, but didn't Keynes want to be a dentist to policy makers too? He was concerned with macro policy. And when economists try to reduce macro stabilisation to, say, a Taylor rule, what is that if not trying to be useful like a dentist.

(I'm not sure portfolio selection, contract design etc. really constitute ordinary life, either)

dick gregory

It's a marathon man, not a sprint.


Of course, there were a several economists who in real time stated that housing was in a bubble and that when it started to deflate, the loans and other financial assets based housing prices were going to collapse in value and that there would also be a huge collpase in demand due the unwinding of the "housing wealth effect" and the scuttling of HLOC loans. Bob McBride (Calculated Risk), Dean Baker, Robert Schiller, Barkley Rosser, Peter Dorman, and Paul Krugman were writing this stuff. http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/re-writing-the-history-of-the-housing-bubble-and-the-economic-cris.

I did listen to these folks and got my money out of the market near what turned out to be the peak in 2007 and put it into Treasuries. Thank you.

They of course could not know when the bubble would peak, but they did spot it start to unwind in 2006-07 and that the likely consequences would be a severe recession as contracted contracted and demand fell.


The social and political standing of economists has little to do with their functional usefulness and much to do with their ideological value. If the latter was close to nil, they'd have much the same standing as dentists.

Talk about a "crisis in the profession" currently serves to deflect criticism of the current order. With little widespread support for an alternative to neoliberalism, economists must take on the role of scapegoat, despite the fact that many correctly foresaw the growing problems.

greg byshenk

"Put this another way. Imagine economists had widely and credibly warned of a financial crisis in the mid-00s. People would have responded to such warnings by lending less and borrowing less (I'm ignoring agency problems here). But this would have resulted in less gearing and so no crisis. There would now be a crisis in economics as everyone wondered why the disaster we predicted never happened. The point is that forecasts can only be right if they are not believed."

Maybe I'm missing something, but this seems to be based upon a complete misunderstanding of the nature of scientific prediction, Scientists (and at least some economists are scientists) are not Delphic oracles or Macbeth's witches somehow foreseeing what is fated to occur, no matter what we do, but providers of -conditional- (and usually probabilistic) predictions based on (at least limited) understanding of cause and effect. That is, IF we continue to do X, THEN Y is likely to occur. If we cease (or limit) X, and Y does not occur, then that does -not- mean that the prediction was wrong.


The thing about dentists is there is an inherent conflict of interest. Keep the teeth on the edge of health and forward income is assured. Fix everything and bankruptcy ensues. Dentists avoid the moral hazard by being humble, offering maintenance and improvement, and swapping profit for the schadenfreude of inflicting pain and discomfort on paying customers.

Economists only do the latter.


Great point, very well made.
(and an excellent quote on top of that)

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