Not even wrong


Nassim Taleb has written a typically clever-clever piece for The Economist – his forecast for “The World in 2036” is based around the folly of prediction.

Institutions and theories that are ‘over-reliant on prediction…hence fragile to unforeseen “black swan” events, will eventually break into pieces.’ His list of fragile and at-risk entities starts with the nation-state and the publicly-listed corporation.

At first I was going to pick out the following tip as the juiciest, and that most likely to be borne out (it seems more likely, at least, than the replacement of fiat money by commodity-backed currency):

Finally, what is now called academic economics will be treated with the same disrespect that rigorous (and practical) minds currently have for Derrida-style post-modernist verbiage.

While he says ‘academic economics’, Taleb seems to be talking more about his usual targets in quantitative finance and risk management: finite-variance models, Black-Scholes, reference-class forecasting, etc. These fit his argument about vulnerability to forecast error. To this group may be added DSGE and other macroeconometric models used by central banks.

Together, each of these involves estimating an expected value x of some variable or state y of some system at time t. Taleb seems to be saying that the difference between these forecast values and the actual observed values is so great that the predictions are worthless: ‘hardly better’, he’s said elsewhere, ‘than random guesses or the intuition of cab drivers.’ They have ‘the empirical and scientific validity of astrology’.

All said, they’re equivalent to postmodern theories that contain no propositions about the world at all.

I would put things a bit differently.

In what passes for its methodological statements, modern orthodox economics places a big emphasis on the testing of theory by empirical means: from the crude instrumentalism of Milton Friedman to the descriptivism of Paul Samuelson. To these have been added more sophisticated Bayesian procedures for model building and parameter estimation.

But the fundamental ideas about how markets and agents work were established – and their validity is evaluated – via axioms and rules of inference, not by observation or experiment. Mainstream economics is thus extremely robust to predictive failure, because it sometimes predicts almost anything.

By the 1970s, post-Keynesians had discovered that the Cobb-Douglas production function, with constant wage and profit shares, ‘will always provide an exact fit, for any data whatsoever’ relating output to capital and labour inputs. As Anwar Shaikh showed, this is a ‘statistical reflection of an algebraic  relationship’, ‘not some mysterious law of production’. Revealed-preference theory is trivially consistent with almost any observed consumer behaviour: ‘if an individual selects batch one over batch two, he does not at the same time select two over one.’ Its relationship to demand theory is also entirely circular. Meanwhile the efficient-markets hypothesis, as its foremost defenders now claim to have meant all along, ‘doesn’t check off easy “predictions”‘, and is compatible with almost any set of prices.

This approach says something about the social role of neoclassical economic theory.

There are “scholarly” or intellectual pursuits, whose real purpose is entertainment, status signalling, disinformation, black propaganda or apologetics, where predictive failure or practical irrelevance don’t matter. The scorn and ‘disrespect’ that Taleb foresees for orthodox academic economics need not disrupt such a role.

Consider: ‘rigorous minds’ might sneer at ‘postmodernist verbiage’, and most of the original practitioners may now be dead. But postmodernism nonetheless maintains a secure niche in the academy, across most disciplines of the humanities and social sciences. Its personnel are constantly replenished: by now we’re into perhaps the fourth advisor-student generation. Its influence radiates outwards into publishing and the media, and from there reaches popular thought. Its stars are Teflon men: ridiculed for intellectual sloppiness or academic impropriety, but sustaining no career damage. Slavoj Žižek, when caught making stuff up, is excused for what’s, after all, just a bit of inconsequential joshing. (Take this recent 250-odd-comment thread at Crooked Timber, where economists and philosophers rushed to defend Žižek from ‘out-of-date’ and ‘racist’ ridicule.)

Similarly, astrology will not go out of business any time soon. Meanwhile the professional agnotology of climate-change denial and industry shilling is a growth profession, based out of well-funded thinktanks.

Has Taleb considered that parts of mainstream economics – the fundamental welfare theorems, policy-ineffectiveness proposition, postulates of downward wage rigidity, as well as his hated asset-price models – have for many decades performed a similar function: convincing the curious that all is for the best in the best of all possible worlds? And that ‘practical minds’ haven’t found this to lessen the discipline’s credibility?

If he has, why does he think any of this should change by 2036?


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One Response to “Not even wrong”

  1. Go long on nonsense! Higher learning from the office tower « Churls Gone Wild Says:

    […] This, which Mirowski calls ‘epistemic Ponzi’, is a more lucrative version of a practice that is common across the humanities and social sciences. […]

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