Good economists know that they know nothing
Stochastic models are a virus, which infected economic theory and practice in past twenty years. But it’s not their fault. They played their role. They were pretty useful in many instances and, at least, they managed to generate great profits for many years to one overblown industry. They are really not to blame. In the same manner as we can’t blame the Pythagorean theorem, if we use it to guess tomorrow’s lunch menu.
As always, not the tools, but the people who use them are to blame. People who believed that stochastic models are a word of God. Ninety-percent chance was considered a certitude. And you could always hedge with a similar certitude against the ten-percent chance of a failure. And then against the one remaining percent if you wish.
Models that failed are still widely used and, until they generate results and profits, they won’t disappear. And until there is demand for certitude in a world of incertitude, there will be more crises. Because everything cannot be predicted, as Nassim Taleb proved so elegantly. We can prevent some of the crises but we will fail one day. Again. The only way isn’t to prevent all of the crises, but to survive them. Through big buffers for bad times and strong democratic structures independent of the markets.
In economy, you can’t say anything with absolute certainty. Not even the simplest things. One of my Czech fellow commentators tried to answer the same question as I am answering now. To prove that some things are always true in economics, he suggested that corporate taxes always lead to lower investment. It sounds obvious. But if the profits were to go to stockholders who would then spend it on consumer goods and if the state were to invest the potential tax income… then corporate taxes would actually increase investment. Never say “never”. And in economics, never say “always”.
It’s not economics’ fault that it’s not an exact science. Its main fault is that it tries too much to be one and that many believe it actually is. So, what should economists know with such a certainty that they could always rely on, even in a hundred years? That nothing can be known with absolute certainty. Not even whether in a hundred years we won’t know everything with absolute certainty.
“I know that I know nothing”. When this sentenced was conceived, epistemology and ultimately science were born. It sounds as a useless assumption. It actually is. But it is what makes every search for truth so exciting. Including economics.
The text was published in Czech as an answer to the question “What do economists know today with such a certitude that it could be believed in a hundred years?” at Hospodářské noviny.