Go read a very nice article on Nouriel Roubini in the New York Times. It doesn’t go into too much detail about his ideas, it does seek to place him among other economists. My favorable opinion of him went up when I learned that even though he has high level math skills, his academic work does not rely on models.
When he gave the gloomy predictions in 2006, everybody thought he was being way too pessimistic and what he was forecasting could never happen. Since events have unfolded he’s admitted that his predictions actually weren’t gloomy enough. Back then, as dire as he was, he underestimated the extent of the housing and financial problems.
It’s a bit scary to think that Roubini might actually be an optimist…
Yves says: “My favorable opinion of him went up when I learned that even though he has high level math skills, his academic work does not rely on models.”
I agree with this comment but let me explain. It’s not that there is anything wrong in principle to the use of quantitative mathematical and statistical models in finance and economics.
As in all sciences, there are good models and bad models. The problem is that in the social selection of financial and economics models bad ones have traditionally come up ahead. In economics, models are cooked up to give substance and defend an argument. If you don’t know about the Sokal hoax, go read up here http://en.wikipedia.org/wiki/Sokal_affair
and references therein: all this applies to economics.
Models used for government statistics are constantly warped. Models for monetary policy are from outer space and don’t model money itself if not as an afterthought, ignoring derivatives altogether. Also derivative pricing models that are commonly used are dominated by industry standards and a lot is actively done to prevent going beyond those established standards. What happens then is that they are totally divorced from economic reality, creating a nirvana of pricing dislocations and bad capital allocations.
So let’s blame the quants, I’m all for it and it’s the right time. But not because they are using their math skills. Rather, because they are using them for the wrong purpose, not to build scientifically honest and good models but to give credence to what would otherwise shine as blatant nonsense.
Very well then. If we accept Roubini’s contention of a “subprime financial system”, don’t we have a conclusive answer on the deflation vs. inflation debate? Which proposition strengthens such system and which weakens it? I believe you have your answer.
All that said, Anirvan Banerji (mentioned in the article) is the more accurate forecaster generally. We should be giving more space to ECRI, and less to Roubini.
Popper is known for repudiating the classical observationalist/inductivist account of scientific method by advancing empirical falsification instead; for his opposition to the classical justificationist account of knowledge which he replaced with critical rationalism, “the first non justificational philosophy of criticism in the history of philosophy”