News item: Alan Greenspan is the recipient of this year’s Dynamite Prize in Economics as “the economist most responsible for causing the Global Financial Crisis.” The once-lauded Federal Reserve chairman has been awarded the “Dynamite Prize In Economics” by his fellow economists, according to the blog Real-World Economics Review. The Real World Economics Review Blog has over 11,000 subscribers, and they have named Alan Greenspan its recipient for this prize. Finishing second and third were Milton Freidman and Lawrence Summers. (No, receiving this prize is not a good thing). Here is a line from the article:
This blog established the prize in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, “Black Swan” event. In reality, the public perception that economic theories and policies helped cause the crisis is correct.
(I first read about this here on the Huffington Post).
Their next prize will go the Revere Award winner:
The economics establishment has attempted to evade responsibility for the Global Financial Collapse by calling it an unpredictable, “Black Swan” event. But in fact some non-neoclassical economists foresaw the crisis and warned the public of its approach. The Revere Award aims to give these economists the professional and public recognition that they deserve, to encourage others to utilize their methods, and to increase the likelihood that, for the benefit of humankind, empirically responsible economists will be listened to in the future.
And I got to thinking. I have presented a synopsis of The Black Swan by Nassim Nicholas Taleb. I like the book, and I have bought into the philosophy of the book pretty enthusiastically. The book says that “nobody knows anything.” Here are the characteristics of a black swan:
• A Black Swan is an event which follows three attributes:
• First, it is an outlier. (rarity)
• Second, it carries an extreme impact.
• Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. (retrospective, though not prospective, predictability).
But these economists definitely call into question the explanation of the current crisis as an actual example of a “black swan.” And, I have been quite intrigued by Gawande’s simple formulation: the two great problems are ignorance and ineptitude. (see my earlier post here).
Maybe some of the events that we label as “black swans” are in fact knowable. The trick is to overcome enough ignorance, and find the right experts with the right knowledge, to be better prepared and make better decisions and take better steps… In other words, the crisis may not have been the result of ignorance, but ineptitude.
This much is clear. Some economists missed it – and others (fewer) got it right. It looks like we may have listened to the wrong economists.
Anyway, I’m intrigued by all this.