Steve Keen explained why the mainstream economists have completely failed to learn from their past failures at Brainstorm:
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.
I thought this was an unusually good event, even by the high standards of Brainstorm. We’ll try to get the transcript cleaned up and out to the members within the next two weeks or so.