If you haven’t lived under a rock over the past decade, you probably are aware that the U.S. was thrown into the worst economic crisis since the Great Depression during that time. And if you’ve followed the press about the economics field since then, you are probably aware that professional macroeconomists are working on figuring out how to revise their models to better predict, and potentially ward off, such events in the future. And that probably sounds like excellent news for those hoping the chief stewards of our economy will not again eff up so badly in predicting when a major financial crisis is likely to swamp the economy.
But here’s what’s bugging me about the potential progress on that front: Will those geniuses think enough out of the box to come up with a sufficiently powerful new model (or set of models) to equip future macroeconomic stewards with the foresight to ward off an economic tsunami? Or will they make marginal changes to their existing models for fear of not deviating too much from the extant failed paradigm, only to achieve negligible improvements in their predictive power? Given intellectual inertia due to cognitive biases and vested interests, my guess is that this sub-optimal outcome is more likely to occur than the experts are likely to admit.
Why such the killjoy about this matter? Because the history of science suggests that substantially better scientific modeling often requires significantly deviating from the dominant paradigm.
So, which paradigm should economists abandon if they want to give themselves a chance to substantially improve macroeconomic forecasting? Well, I won’t claim to have the definitive answer to that question, but I’ve recently come across the work of someone in that field that warrants some attention. Read this blurb from an article in the The Economist earlier this year:
In Australia Steve Keen, an economist, [and a computational scientist] are developing a software package that would allow anyone to create and play with models of the economy that incorporate some of these new ideas. Called “Minsky”—after Hyman Minsky, an American economist celebrated for his work on boom-and-bust financial cycles—it places the banking system at the centre of the economy.
Not familiar with Steve Keen? Well, to be frank, he considers himself — and is probably considered — a sort of heretic in his field.
To date, Keen’s most notable publication, Debunking Economics, originally published in the early 2000’s and updated in the aftermath of the Great Recession, thoroughly screwers establishment macroeconomic modeling. And it probably doesn’t help his popularity in neoclassical-dominated academic community that he credits the communist movement-spawning economist/philosopher, Karl Marx, as an inspiration for his work. And he’s even spoken harshly about the soundness of this 2008 Nobel Prize-winning star-of-the-liberal-economics-community about his understanding of things macroeconomic:
With those caveats in mind, Keen does hawk a potentially fruitful departure from the dominant macroeconomics paradigm: ignore equilibrium conditions. And his motivation for doing so include:
- seemingly forgotten statements by long-dead-but-pioneering-economists who rationalized studying equilibria even though they fully understood that the macroeconomy resembles a system that is almost never in equilibrium;
- results from chaos theory that show that dynamical systems frequently never reach equilibria; and
- advances in computation science and computing power that currently allow relatively easy and powerful modeling of non-equilibrium economic systems.
Convinced yet that Keen’s ideas deserve some serious consideration? Would it help to tell you that a pair of independent economists who have studied the Krugman-vs-Keen debate suggest that Keen is a
So, are you ready to give an economic heretic of sorts some of your keen attention? If so, you can start by following this link to the first of several video lectures on non-equilibrium economics he has posted on YouTube.
Some words to note, though: The audio quality of these videos is pretty poor. And it’s possible that ProfSteveKeen spends a bit too much time in these lectures discussing details that are ancillary to a working understanding of non-equilibrium economics.
So, if you are willing to open your mind and crank up the volume on those video lectures, you might just learn something that hints of a coming revolution in the field of macroeconomic analysis.
The Tightwire Guy