That Nobel awaits

He’s right: economics cannot forecast something as important as a financial crisis. But what he did not add is why not, which is down to methodology. Economic forecasts are rational mathematical models. And most assume that behaviour tends to the mean: in other words, if there isn’t usually a crisis (and there isn’t) then there won’t be one coming up either.

Of course I simplify. We know that there are crises. We know that they happen on average every seven to eight years, and that means we’re overdue for one. We know that stock market highs, increasing debt and weak economic fundamentals (wage and trade stagnation, both of which look to be on the cards) at the same time suggest fundamental imbalances that can trigger the crash. So just by standing back and using human judgement we can say the chance of there being a crisis in the next five years is very high indeed. But economics can’t say that. Because it isn’t programmed to do so. Which just shows how far from reality it is. And what a useless exercise conventional approaches to economics represent for society as a whole.

So why not incorporate that human judgement into predictions and both make a mint and scoop the Nobel?

12 comments on “That Nobel awaits

  1. we can say the chance of there being a crisis in the next five years is very high indeed

    Wow, he’s really taking a risk with that narrow timeframe there.

  2. Couple of points:

    Murphy appears to be proceeding on the premise that ‘even a stopped clock is right twice a day’

    Even by historical standards, the Comments section of TRUK is dire – it appears to be exclusively populated by people with an IQ of below 50

  3. >So just by standing back and
    >using human judgement we can
    >say the chance of there being a
    >crisis in the next five years is very
    > high indeed. But economics can’t
    > say that. Because it isn’t
    > programmed to do so.

    economics isnt “programmed” to deal with/predict the business cycle?

    so all those classes about using kalman filters to predict cyclic time series i remember taking years ago as part of my econ major are just some delusion … like I’m Schwarzenegger remembering a false life in a Philip K. Dick novel ?

  4. We’ve closing in on Peak Murphy:

    1) I teach economics…
    2) Economics can’t predict the next crisis…
    3) Chances are high there will be a crisis within 5 years…

    Contradicting himself in the same post is old hat. I’m looking forward to Spud contradicting himself in the same sentence. Then we will have reached Peak Murphy.

  5. “we can say the chance of there being a crisis in the next five years is very high indeed”

    Meanwhile, every few weeks, he’ll be predicting an economic cataclysm. When, inevitably, there’s a recession at some stage, he’ll proclaim his sagacity and foresight – conveniently forgetting the many times he’s predicted a recession and it’s failed to occur.

  6. Sounds a bit Austrian Economics to me. Don’t tell Richard that though. It makes him upset.

    Von Mises said. “Every quantity that we can observe is a historical event, a fact which cannot be fully described without specifying the time and geographical point. The econometrician is unable to disprove this fact, which cuts the ground from under his reasoning. He cannot help admitting that there are no “behavior constants.” Nonetheless he wants to introduce some numbers, arbitrarily chosen on the basis of a historical fact, as “unknown behavior constants.”

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