Thursday, August 13, 2009
I observe, he said rather grandly, that the economists are fighting back. Robert Lucas points out that, for forty years, the Efficient Market Hypothesis (EMH) has shown that economists are unable to forecast financial crises because, if they could, they could beat the market and the EMH proves that nobody can do that. Slightly more pithy is this blogger's reponse to the question posed by the Queen - 'Your Majesty, economists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it.' Now I don't feel quite as badly about economists as Nassim - spawn of Satan, basically - but I do think there's something of a rope-a-dope going on here. The econs are soaking up the punishment prior to bouncing back with the EMH sucker punch. The EMH performs the role of the Turing Halting Problem in computation or Godel's Incompleteness Theorem in mathematics or even Heisenberg's Uncertainty Principle in physics. It's an epistemological limit, a border we cannot cross even with limitless information at our disposal. It is just out there in the world and it has the secondary virtue that it is not understood by ordinary people. This allows Lucas and friends to say, in effect, 'But we told you we couldn't make predictions about big things like financial crashes. If you had just understood economics better you would have understood this.' To which the only intellectually respectable response is, 'Yeah, right.' For the point is that economists, as most of them presently define themselves, exist to make predictions. It's how most of them make their living. They must, therefore, do this while assiduously concealing from our gaze the momentous implications of EMH. And that, let's face it, is exactly what they did - unfurling the sucker punch only when things got really tricky.
The reality is that economists still can't come to terms with the fact that they are not scientists, they are, if anything, historians or social commentators. Perversely, the existence of the EMH probably strengthens them in their delusion - 'Look we have a real epistemological limit just like the computer geeks, the mathematicians and the physicists!' What they should be thinking is, 'We are proud to be dealing in real complexity, in the truly unknowable.' But nobody ever says that any more.
Posted by Bryan Appleyard at 5:57 am