by Mario Rizzo
Reportedly, Queen Elisabeth asked why didn’t any of the top-tier macroeconomists predict the financial meltdown and Great Recession. So now The Economist and other loyal subjects are trying to answer that question. The Chicago economist Robert Lucas, an American, has also added his opinion. It is deeply flawed but perhaps a comfort to the “Neoclassical Top Brass” (as my late colleague Ludwig Lachmann used to say).
This is not the time to go into detail regarding Lucas’s views of macroeconomics and on forecasting. However, I am intrigued that he uses the Efficient Markets Hypothesis (EMH) in a fairly strong form, I should think, to show why if the high-tech macroeconomists did predict the the meltdown it would have come earlier (immediately). There is an obvious paradox here.
In other words, he maintains EMH to show the impossibility of prediction. Does he not appreciate the degree to which strong EMH is under attack and in doubt?
I am in the strange position of agreeing with Lucas on the impossibility of prediction. However, I’d rather use the analysis of Friedrich Hayek in his “Pretence of Knowledge” and “Theory of Complex Phenomena” as my basis.
But what Hayek makes clear is that it would not be too much to ask of a theory that it at least point in the general direction of a problem. Lucas, and others, continue to think of recent events as purely a bubble phenomenon — and so there is a degree of randomness involved in the phenonemon, in their view. However, Hayek’s cycle theory pointed to an interest rate effects on higher-order investments that generally or systematically produce over- and mal-investment. But it says little about timing. Lucas seems oblivious to both.