This is a very common argument on Twitter, especially by those keen on criticising "economics" (whatever that means - see some future post). Specifically, the assertion is that the efficient markets hypothesis (EMH) is WRONG, caused the crisis, and shouldn't economists be apologising for this?
The problem is that models and theories can't be wrong - there is no absolute metric for judging them, only relative - and relative to our current level of understanding.
And that level of understanding, contrary to those who think economists are just behind the curve on getting to a point where they know enough, will never be sufficient to say a model, or a theory, is wrong.
The simple reason is Type I Errors, couching ourselves in terms of statistical language. We may falsely reject a correct theory because we just cannot know whether it's true or false. We can collect data, we can observe the world, we can even come to something close to accepted fact in some cases, but we cannot know what leads to Y happening after X has happened. We are just not privy to the kind of knowledge regarding how and why nature or some other higher force. The name of this blog makes it very clear my beliefs regarding higher powers - but you don't have to be a Christian to recognise the obvious with levels of knowledge - as Sir David F. Hendry (anything but a Christian!) points out in the introduction to Dynamic Econometrics.
Given that we can't know things, as a result we can't know a theory is WRONG (or RIGHT), we can only document where the evidence supports, or disputes, a theory. If we reject theories out of hand we run the risk of rejecting good theories out of hand. If we accept them out of hand, we run the risk of accepting bad theories.
The point I'm making isn't that we should protect bad theories endlessly, it's simply that they are bad theories, rather than WRONG theories.
A side argument. It's often asserted furthermore that bad economic theories were responsible for the financial crisis - the idea being that economists advised politicians and they put in place regulatory regimes that subsequently caused the crisis. The interesting thing here is that the focus is on EMH, rather than all the myriad other policies put in place by governments that assume anything but EMH and some very different model of economic behaviour. The idea is that we can pinpoint everything that went wrong around the economic crisis to one single bad theory, and everything else was superfluous (i.e. has no explanatory power above EMH).
A few things:
(1) What responsibility must be attached to the politician(s) putting in place policies that led to the financial crisis? An argument is that economists oversold their favourite EMH theory and hence because they did that, they must accept some responsibility. They probably should - any serious academic ought to be humble enough to accept responsibility if a recommendation of theirs led to things going horribly wrong. The issue is whether there's a direct link from the economist recommending their theory and the events that went wrong.
(2) If an economist does ever sell a theory to a politician as being 100% true, they shouldn't be part of the profession (someone would assert I'm following the "no true Scotsman" cop out here, but the reality is I'm making an obvious statement that should apply to any academic profession).
(3) What about the various other government policies pertaining to financial markets that helped along the way in the crisis? For example, the competition policy (no doubt influenced by economic ideas) which thought that having large banks able to compete on a global scale was important, thus creating "too big to fail"? Is it really possible to argue without any doubt that the sole cause of the crisis was one bad economic theory? How do we rule out the lender of last resort policy, and competition policy, as significant contributing factors?
(4) Intervening to regulate markets further relies on economic theory regarding market outcomes - by and large another economic theory that's very hard to generate falsifiable predictions based upon (at least at the macro level). Why should we rely on those economic theories, but not on others? On what basis do we judge economic theories given that RIGHT and WRONG has to be ruled out?
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