As relates to the financial crisis, Quiggin has this to say: ‘The obvious criterion of success or failure for a macroeconomic theoretical framework is that it should provide the basis for predicting, understanding, and responding to macroeconomic crises. If that criterion is applied to the current crisis, the DSGE approach to macroeconomics has been a near total failure.’
But prediction need not always be the criterion for success of an economic model. Clearly, if we are judging a forecasting model, we want it to predict well, in some well-defined sense. But in other cases forecasting is not the name of the game. In arbitrage pricing, under some assumptions the model implies that changes in asset prices cannot be successfully forecast. By the criterion of prediction, the model is indeed a total failure. It tells you that a monkey could do as well at predicting asset prices as an economist who understands the model. Yet the model is actually not a failure, as it teaches us something interesting.
I understand what Williamson is getting at here, but this is essentially wrong. If economics is to be distinct from mathematics or aesthetics it has to predict something. Moreover, it is only different from mathematics and aesthetics to the extent that it does predict something.
Now, your prediction to might be: the number of people who consistently beat randomness at guessing asset prices will approach zero as the number of trials increases.
But, that is telling you something about the world.
This is important though because I have seen Williamson suggest that being able to predict financial crises is not important. Its hugely important if you care about financial crises. It may be impossible, sure. However, if there is some human or algorithm which is doing it, then for the study of financial crises that human or algorithm should dominate whatever other body of research you have.
I can’t help but say, this is because even if the world is simply a one-time pad, if someone has the pad, well then, they have the world. But, I hope Steven gets what I mean.