This particular approach transcends a false dichotomy concerning economists found in Reay10 and elsewhere: either the contemporary economics profession enjoys such a tight consensus around its unified orthodoxy that it is capable of imposing neoliberal policies on all manner of clients, or else the doctrines of neoclassical economics are so very fragmented and diverse that it is ridiculous to assert that the orthodox economists have fostered and sustained any political position whatsoever.11 This ignores the pivotal fact that modern political economy is the product of the interactions of two different groups, the Neoliberal Thought Collective and the academic economics orthodoxy, over the last half century. Some diversity may indeed exist in orthodox neoclassical economic doctrine, but it has been pruned in bonsai fashion by the growing strength of the NTC, and shoots were also grafted back onto the collective itself. This process has homed in on the precept that a certain amount of faux-dispute is actually beneficial for all concerned, within a narrow perimeter.
As Thomas Pynchon wrote in that great twentieth-century classic Gravity’s Rainbow, “If you have them asking the wrong questions, you don’t have to worry about the right answers.” Just as in advertising, the media are full to the brim trumpeting the shock of the new, when all that really happens is that you are being sold the same old jalopy under a new brand name. Thus the economics profession and the Neoliberal Thought Collective have attained coadjuvancy in a mutually beneficial symbiosis, whose product is the maintenance of an economic system and a financial sector essentially unaltered by the greatest global breakdown since the 1930s.
“Prediction of the Crisis” as a Useless Distraction12
Easily the Number One Topic on the tip of everyone’s cursor in the immediate aftermath of the financial crisis of 2008 was: Why didn’t the economists see it coming? For the median layperson, this was an extrapolation of the frequent and widespread misconception that the primal raison d’être of the economics profession is to give investment advice. For journalists, it simply reprised the way they had been treating economics professionals all along as soothsayers on the cheap. But beneath the surface, this conviction that it was the professional responsibility of economists to predict such calamities in fact conjured deep unresolved philosophical issues concerning the very essence of economics, which were triggered when many members of the profession felt impelled to respond to the cascade of derision.
The journalists’ complaint was broadcast from a number of platforms in normal times more respectful and subservient to economists, such as Business Week:
Economists mostly failed to predict the worst economic crisis since the 1930s. Now they can’t agree how to solve it. People are starting to wonder: What good are economists anyway? . . .
To be fair, economists can’t be expected to predict the future with any kind of exactitude. The world is simply too complicated for that. But collectively, they should be able to warn of dangers ahead. And when disaster strikes, they ought to know what to do. Indeed, people pay attention to economists at times like this precisely because of their bold claim that they know how to prevent the economy from sliding into a repeat of the Great Depression. But seven decades after the Depression, economists still haven’t reached consensus on its lessons.13
At first, a few candid members of the profession opted to second the judgment of the journalists with respect to the crisis. One of the most heartfelt, because cast in the format of an apology, was by Uwe Reinhardt at Princeton:
If, like every university, the American Economic Association had a coat of arms, its obligatory Latin banner might read: “Est, ergo optimum est, dummodo ne gubernatio civitatis implicatur.” (“It exists, therefore it must be optimal, provided that government has not been involved.”) . . .
These thoughts occurred to me as I attended the American Economic Association’s annual conference in San Francisco over the weekend. It offered a humongous smorgasbord of eloquent theory, clever econometric tricks, illuminating empirical insights and a few standing-room-only panel discussions on the shocking surprises the real economy served up as the economics profession was otherwise preoccupied during the past two decades or so.
Fewer than a dozen prominent economists saw this economic train wreck coming — and the Federal Reserve chairman, Ben Bernanke, an economist famous for his academic research on the Great Depression, was notably not among them. Alas, for the real world, the few who did warn us about the train wreck got no more respect from the rest of their colleagues or from decision-makers in business and government than prophets usually do.14
Far from merely echoing the antipathy of the man in the street, this refrain that the profession had suffered devastating failure by not predicting the crisis bore some emotional resonance among the rank and file for three substantive reasons. The first derived from the existence of the only self-identified methodological paper most contemporary economists had ever heard of, Milton Friedman’s “Methodology of Positive Economics” (1953). It was not irrelevant that it was the work of one of the icons of postwar neoliberalism. Even those who had never actually read it nonetheless were possessed of some vague notion that Friedman had stated that the truth of assumptions didn’t matter, just the success of predictions that the models emitted. We bypass whether that was the “real” or correct reading of Friedman’s message; the point here is, rather, that the Friedman dispensation had become one expedient in the lazy economists’ playbook, in the odd situation they actually had to defend the “scientific character” of what they were doing to a semiliterate audience. So the failure to predict the crisis tended to discomfit the last vestiges of what passed for philosophy in the training of the modern economist; concurrently, it also made “Chicago” look bad. No one wanted to reopen the old “unrealism of assumptions” debate, which the profession believed to have relegated to the dust heap of doctrinal history long ago. Hence, making a big deal of failed predictions summoned up a submerged world of humiliation that most economists would rather just avoid.
And then there was the second nagging source of relevance. It was a little-discussed attribute of the economics profession that, even in the last decade, many economists made their livings by producing predictions of one sort or another. Although it had become de rigueur in the commanding heights of reputable academic ivory towers to sneer at the very possibility of successful prediction (see below), the truth of the matter was that down in the trenches, where most economists lived, dealing in prediction was a bread-and-butter activity.15
“Prediction” had become the stereotypical outcome of most quotidian economic research, even though most players realized it merely signified a stylized denouement. As one MIT student reported:
There is a sentiment here from people I have talked to that if they want a model we can give them a model. We sit down and make up a model, and we play with it until it gives us the empirical result that we find, even though you could as easily have written down a model that would have given a different result. We have even had seminar speakers say, “Oh, I worked on a model that predicts it; of course I could have written down a model that predicts the opposite, but why would I do that?” In general, you can write down a model that predicts just about anything.16
If you worked for a firm or the government, you were simply expected to produce predictions like clockwork, and with a straight face. The Federal Reserve Bank of Philadelphia regularly surveyed “professional” economic forecasters; not unexpectedly, their forecasts for GDP growth and the unemployment rate for the year 2008 tended to bunch together in November 2007: their mean predicted GDP growth of 2.5 percent and an unemployment rate of 4.9 percent, even though the financial collapse by then had already begun. If you had aspirations to be a public intellectual, then one could not write op-eds or appear on television or radio without being importuned to predict something or other. If you didn’t comply, you wouldn’t be invited back; there were hundreds lined up, willing to prognosticate. This was captured in some interview responses: “it’s a Darwinian
process in this case where people who are willing to say something without hedging it can get on the news . . . my optimal strategy is to make interesting predictions.”17 The entire quotidian public discourse of professional economists continuously revolved around predictions, whatever they might say to one another in university seminars or academic papers. It is significant that careful inquiry into economists’ predictions had revealed a rather dismal track record long before the crisis had hit:
• The forecasting skill of economists is on average about as good as uninformed guessing. Predictions by the Council of Economic Advisors, Federal Reserve Board, and Congressional Budget Office were often worse than random.
• Economists have proven repeatedly that they cannot predict the turning points in the economy.
• No specific economic forecasters consistently lead the pack in accuracy.
• No economic forecaster has consistently higher forecasting skills predicting any particular economic statistic.
• Consensus forecasts do not improve accuracy (although the press loves them. So much for the wisdom of crowds) .
• Finally, there’s no evidence that economic forecasting has improved in recent decades18
Again, if this track record was widely known already to have been so very poor, then missing the onset of the crisis should not have caused such consternation on its own. Or conversely, the profession could set about writing down little models that could “retrospectively” have predicted the crisis, doing whatever worked in the past. While a few commentators dallied with one or the other, neither of those eventualities got to the heart of the uproar about “failures of prediction” in the public press. Rather, the crisis brought to consciousness for the lay public the portent that there was a specific bias in the orientation of the profession, a bias that ruled out of bounds predictions of the sorts of global system-wide breakdowns that had galvanized those living through 2008–11. Hence what the clientele thought they were buying—a sort of neutral reconnaissance of the near future, a species of early-warning insurance—did not correspond very well with what the economists had been proffering.19
And that leads us to the third Pandora’s Box opened by the mortification of failed prediction. Skipping over detail, it is sufficient to point to the fact that orthodox theories of macroeconomics since the 1980s had grown obsessed with the issue of prediction. Whereas earlier models in American Keynesianism had been constructed to be backward-looking (distributed lags, moving averages, etc.), both orthodox finance theory and the new macroeconomics adopted the neoclassical position that bygones are bygones, and from the “permanent income hypothesis” onward, therefore all relevant decisions were based upon agent expectations of the future. Furthermore, the rational-expectations school and the later dynamic stochastic general equilibrium models insisted that expectations were formed with the very same neoclassical models and econometric techniques that the orthodoxy endorsed. Thus the orthodoxy had effectively conflated the prediction of the economist with the predictions of the agent, and elevated it as a central theme of modern economic theory. There had always been pockets of resistance to this audacious theoretical move, but the crisis brought the qualms out into the open by suggesting that agents should not rely so heavily on the clones of the “rational” economists to ground their expectations. It wasn’t intentional, but the hue and cry over failed prediction tore the scabs off a number of repressed and forgotten wounds in the philosophy of the “rational economic agent.” This may explain why the journalists were so keen to indict the leaders of the “rational expectations” movement hard on the heels of the financial collapse.
The best evidence that the accusations of failed prediction were so rebarbative that they provoked a triumph of indignation over complacency can be found in the wildly bipolar reactions of economists to the indictment: one coterie insisted that economists were vindicated by the successful predictions of the few and the canny; whereas another insisted instead that good economists never claimed to be able to predict the economy in the first place. Viewed as a totality, this exemplified a larger tendency for the profession as a whole to simultaneously assert A and not-A in response to calumny.
The gambit to search for “successful predictors” among the economists seemed to have originated with journalists. Economists sat up and took more notice of the rebukes published in The Economist than the other news magazines, if only because those articles softened the condemnation with various potential excuses that the complaints found elsewhere had gone “too far,” and that the allegations only had partial validity.20 With regard to the accusation that “most economists failed to see the crisis coming,” The Economist averred that some had indeed issued warnings, and explicitly named Robert Shiller, Nouriel Roubini, and the “team at the Bank for International Settlements.” This set off the starting gun for a veritable silly season of all manner of economists being proposed as vindicated prophets and unappreciated soothsayers, as though the prescience of the few would redeem the dimwittedness of the many. This race to populate the Nostradamus Codex continued for more than a year, encompassing even an online ballot to vote for the best crisis prognosticator.21 A motley cavalcade of economists then jostled in an unseemly fashion to put themselves forward as having somehow anticipated the crisis, across not just from the orthodoxy, but spanning the political gamut from paleo-libertarians to left post-Keynesians.22 But worse, the scrum began to dissipate the definition of the moving object that stood as the appropriate target for prediction. In the rush to judgment, anyone who said or wrote anything about some kind of bubble or imbalance or financial instability sometime in the 2000s suddenly sought to be credited as rivaling the Oracle at Delphi, engaging in the most exquisite augury. Some Nobel winners in particular pushed this ploy well beyond the breaking point, eliding prediction proper, and instead suggesting that anyone who had ever produced a mathematical model mentioning bank runs or financial fraud or irrational expectations or debt deflation or (fill in the blank) was proof positive that the economics profession had not been caught unawares.23 It helped if the interlocutor stopped paying attention to what had been taught in the macroeconomics classes across the most highly ranked economics departments. It got so bad after a while that any mention of market failure or departure from equilibrium was supposed to function as a “get out of jail free” card in 2009. Here is one illustrative example:
Q: There’s been lots of criticism, for example from Paul Krugman, that the economics profession did not foresee the crisis. But from the way you’re talking, it seems there are existing models that predict that these crises will happen, and it’s a question of how you respond.
A: I don’t accept the criticism that economic theory failed to provide a framework for understanding this crisis. Indeed, the papers we’re discussing today show pretty clearly why the crisis occurred and what we can do about it. The sort of economics that deserves attack is Alan Greenspan’s idealized world, in which financial markets work perfectly well on their own and don’t require government action. There are, of course, still economists—probably fewer than before—who believe in that world. But it is an extreme position and not one likely to be held by those who understand the papers we’re talking about.24
Of course, the unstated lesson was that no one possessing a gold-plated Ivy union card (Greenspan was awarded a belated PhD by NYU in 1977) who acknowledged the “best journals” as revealed doctrine was caught unawares by the crisis. This whole quest to identify the predictive elect among the economists was therefore very rapidly driven to Bedlam, partly because it was so mendacious, but also because it twisted the meaning of predictive success beyond all recognition. In a sort of Protestant Reformation, everyone was sanctioned to read and interpret the Revealed (Journal) Scripture and the crisis portents in their own idiosyncratic manner, and then enjoy absolution, so long as they pledged their troth to the One True neoclassical economics.
Lest the reader get the impression that this was the only retort to the accusa
tion that economists had failed in predicting the crisis, they should be apprized that there was also a counterreformation movement. Primarily it was located among those economists found at the sharp end of the journalists’ stick, the high-profile leaders of the rational-expectations macroeconomics movement. In the heat of the downdraft, magazines such as Business Week and The Economist were not shy in naming names: “Count Harvard’s Robert Barro in this camp, along with Chicago’s Robert E. Lucas, Arizona State’s Edward C. Prescott, and the University of Minnesota’s Patrick J. Kehoe and V. V. Chari.”25 It was seconded in a broadside from Willem Buiter:
Most mainstream macroeconomic theoretical innovations since the 1970s (associated with such names as Robert E. Lucas Jr., Edward Prescott, Thomas Sargent, Robert Barro, etc., and the New Keynesian theorizing of Michael Woodford and many others) have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by internal logic, intellectual sunk capital and aesthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works . . . the manifest failure of the EMH in many key asset markets was obvious to virtually all those whose cognitive abilities had not been warped by a modern Anglo-American Ph.D. education.26
Their intellectual leader, Robert Lucas, was quick to respond in the pages of The Economist: you critics are holding us to a standard that our own theories tell us we could never meet. In other words, economics tells us that economists will never be good predictors:
One thing we are not going to have, now or ever, is a set of models that forecasts sudden falls in the value of financial assets, like the declines that followed the failure of Lehman Brothers in September. This is nothing new. It has been known for more than 40 years and is one of the main implications of Eugene Fama’s “efficient-market hypothesis” (EMH), which states that the price of a financial asset reflects all relevant, generally available information. If an economist had a formula that could reliably forecast crises a week in advance, say, then that formula would become part of generally available information and prices would fall a week earlier . . . The Economist’s briefing also cited as an example of macroeconomic failure the “reassuring” simulations that Frederic Mishkin, then a governor of the Federal Reserve, presented in the summer of 2007. The charge is that the Fed’s FRB/US forecasting model failed to predict the events of September 2008. Yet the simulations were not presented as assurance that no crisis would occur, but as a forecast of what could be expected conditional on a crisis not occurring.27
Never Let a Serious Crisis Go to Waste Page 33
