Vox Day interviews academic economist Steve Keen about the problems some economists have adjusting to reality:
VOX: Why do you think the mainstream economists failed to learn anything from the 2008 crisis, given the fact that these minor school economists, the post-Keynesians and the Austrians in particular, have been correct about the crisis coming? Generally speaking, isn’t the idea that if the predictive model works, maybe we should pay attention to it?
KEEN: The reality is that economics is basically a set of competing religious schools. The case of the post-Keynesians predicting a crisis and some Austrians getting their heads around it as well and the Neoclassicals not predicting it is like saying the Muslims had discovered the body of Jesus Christ. The apt reply back from the Vatican is, no, you haven’t, because it isn’t here, it’s in heaven. So, in that sense, the religious side of it came out and they have their own interpretation of the crisis. It was an exogenous shock.
VOX: From where, Mars?
KEEN: Yeah, they were looking for the meteor right now to see where it landed. It was an exogenous shock from outside the solar system! So this idea of an exogenous shock became their explanation. There’s a classic paper over it by a guy who I think is named Peter Ireland, he’s actually from Boston College, and he began a paperback in 2010 saying that we failed to see the crisis coming but it doesn’t mean our models are useless. He dismissed the type of dynamic modeling that I do while simultaneously showing that he didn’t understand my modeling. He wasn’t reading a paper of mine, he was just saying that you can’t make a deterministic model of this sort of phenomenon, showing he knew nothing about complex systems. But he then said what actually caused the crisis was an exogenous shock just like those that caused the 1992 crisis. However, the shocks lasted longer and they got bigger. Which means, of course, that a randomly distributed variable, which is what the exogenous shocks have to be, remained permanently negative and got bigger while still remaining randomly distributed.
So therefore there has to be, at some point, a really big shock in the opposite direction which hasn’t arrived yet. So they just went back into saying that – and I have seen this happen so many times – that you can’t predict the crisis because in our model a crisis can only occur if there’s a large exogenous shock. Which, by definition can’t be predicted, therefore, you can’t predict it.
Now it really reminds me of one of the little questions I had in my mind. I said, how did Ptolemic astronomers explain comets? And it finally was explained to me that in that era, comets were considered an astronomic phenomenon because of course comets couldn’t occur in the heavens because the heavens are perfect. It’s the same thing with neoclassicals.
VOX: Yeah, it’s interesting to me how in any field of science or even quasi-science, you can almost always tell whose models are ineffective and who really doesn’t know what they’re talking about because they always have to bring in some sort of bizarre epicycle to explain things away. The more epicycles and explanations that they have to come up with, the more certain you can be, even if you have no idea what they’re talking about, the mere fact that they are engaging in the circles and epicycles means that you can be pretty confident that they’re going to be wrong.
An interesting exchange, where both talk about what Stebbing-Heuerites would call Belief Preservation, in the face of tactical indicators being at odds with strategic assumptions:
- some economists couldn’t ‘fit’ the financial crisis (a tactical indicator) into their mental models (sets of strategic assumptions) of how the economy works;
- rather than re-assess their strategic assumptions, they explained the crisis away as being an ‘exogenous shock’ which doesn’t form part of the mental model and therefore 1) couldn’t / can’t be predicted, and 2) required no adjustment to that mental model on their part – ‘carry on as before’;
- allowing them to preserve their belief in their mental model ‘as is’, even in the face of what non-believers would see as a serious predictive failure of that mental model, and despite the fact that mental models exist, partly to explain reality, and partly to provide indications of what the future will hold, and thus ought to be updated as required.
The vignette of the Ptolemaic astronomers’ inability to incorporate the reality of comets into their model is pleasing – although not knowing much about this topic I can’t say if it’s true, or if Keen is verballing the Ptolemaics in order to provide a straw man with which to support his point.
The reader should also be aware that, not so long ago, Dr Keen’s mental model had its own shortcomings in forecasting reality. And Dr Keen is still having trouble saying ‘I was wrrrrrrooooooong‘.
Belief preservation is a human trait, caused by the way our minds work. Everyone is vulnerable to it. Calling its victims members of ‘religious schools’ isn’t helpful – religious schools, like all other institutions, certainly suffer from it, but the reality-denial of the religious is symptomatic of belief preservation, rather than being a cause of it.
Point belief preservation out when you see it, certainly, but best to do it from the humble perspective of ‘there, but for the grace of god, go I’.