Got It Right Project
In Milton Friedman’s essay “The Methodology of Positive Economics” he suggests that there are many sets of assumptions that can be chosen to base economic theories on. In judging which sets of assumptions are correct Friedman dismisses inquiries into the realism of the assumptions and suggested that “the question whether a theory is realistic ‘enough’ can be settled only by seeing whether it yields predictions that are good enough for the purpose in hand or that are better than predictions from alternative theories.” (Essays in Positive Economics. Milton Friedman 1953 p. 41)
Institutionalists reject the claim that only accuracy of predictions matter. In fact the idea that only predictions matter would suggest that Ptolemy had a conclusive work on astronomy long before anyone suggested that the earth was not at the center of the universe. Ptolemy was able to predict the motion of the planets, stars and heavens through complex equations that would tell the user exactly where a heavenly body would be at almost any time. However Ptolemy was wrong and the earth is not at the center of the universe.
Science is about far more than prediction, it is about explanation. Getting predictions right is not everything. In fact Keynes has been misquoted as saying it is better to be roughly right then precisely wrong. Whereas he may never have said it the sentiment is true. Yet if you look to mainstream economics the idea of prediction has become very important to the justification of the mainstream economic theories. Institutionalists are far more interested in understanding the economy and creating systems that make the lives of people better.
Yet it might be interesting to use Friedman’s ideas to evaluate the sets of assumptions used by mainstream economists and other economists that are often dismissed. It is inevitable that the economy will change and that is why AFEE concentrates on the evolutionary nature of the economy. Barring an end to the human race the economy will eventually improve and at some point in the future we will once again face an economic downturn. In the present system of capitalism this is inevitable. Yet for some reason few in mainstream economics have come to grasp this. Mainstream theory relies on outside shocks to explain the business process and in so doing they set up assumptions that can be evaluated. Institutionalists, and other heterodox
economists, have a differing set of assumptions wherein an explanation of the business cycle is built into the system. If we are to use Friedman’s predictability standard with respect to the recent crisis then the assumptions of mainstream economics seem inferior to those of many other Institutionalists and other heterodox economists who have been ignored.
In each new downturn a constant phrase comes out of the mouths of economists in the media; ‘nobody could have foreseen the current economic crisis coming.’ Yet in truth there are many economists who were predicting the current state of affairs both generally and specifically for some time. This page is dedicated to recognizing the writers who got it right. Perhaps at some point there will be a Nobody award that can be given to people like the authors listed below. Why the Nobody award? Because every time something like the current crisis happens the "leading" economic minds keep saying 'nobody' saw this coming. Well below are listed just a few of the nobodies that did see this coming. This list is not exhaustive. In fact just reading the source citations of the references for the writings listed below gives you a body of literature that could last a professional economist an entire career.
This page has not been written to boast about the superiority of one model over others for the heterodox community embraces the idea that it is impossible to understand the economy using a single model since it is an evolving system. Our ideas are influenced by Veblen and Commons who emphasized the constantly changing nature of the economy. Instead this page is here to point out that many serious researchers did get it right and will continue to get it right. However in our society it is not about being right, it seems to be about getting listened to. The ideas of the people listed on this page have little chance of being heard by the economic mainstream and thus this page has not been created for them. The words of the authors below have been available to the media and yet few news people call upon them to talk so this page has not been created for them. Instead this page is for the person who wants to learn about the economy from people who have theories that reflect and explain what we have seen in the real world.
This is just a beginning list, if you find more sources please drop a line to the people running the website and we will look at the source to see if it should be added. Perhaps if the list gets long enough more people may start to listen.
Before the list of nobodies who saw this coming there is a link to a wonderful piece by James Galbraith that discusses the economic community. This piece served as partial inspiration for this project and Dr. Galbraith lists some nobodies in the piece.
Who Are These Economists, Anyway? By James K. Galbraith
I also want to link to another piece that was very kindly referred to this site by Stephanie A. Kelton at UMKC. This piece is entitled “No One Saw This Coming: Understanding Financial Crisis Through Accounting Models,” and was written by Dirk J Bezemer. This paper gives a wonderful context to understand why certain economists were better at getting it right. If you are really interested in finding economists who got it right this paper is a must read. The list on this site has several sources discovered in this paper.
Now On to the Nobodies. If you have a potential source please send the title, author and where to find the piece to the managers of this site. All references should have a publication date before 2008 and should deal with some aspect of the current downturn. Please try to send sources with DIRECT references to key institutional failures of the 2008 crisis.
Articles with direct references to key institutional failures of the 2008 meltdown. Listed by Date.
March 1996: Brent McClintock, “International Financial Instability and the Financial Derivatives Market.” Journal of Economic Issues 30(1) pp 13 -32. (Contributed to this site by Eric Hake)http://personal.carthage.edu/bmcclintock/derivativesifi.pdf
1998 Brooksley Born, testimony as as head of the commodity futures trading commission. http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4221335
1999 Senator Byron Dorgan on the senate floor in opposition to the repeal of Glass-Steagall http://www.huffingtonpost.com/2009/05/11/glass-steagall-act-the-se_n_201557.html
February 1999: Jerry Jordan, member of the FOMC quoted in the FOMC minutes as saying "There are people making real estate investments for residential and other purposes in the expectation that prices can only go up and go up at accelerating rates. Those expectations ultimately become destabilizing to the economic system." http://www.federalreserve.gov/monetarypolicy/files/FOMC19990203meeting.pdf (Contributed to this site by Stephanie A. Kelton)
2000: L. Randal Wray, “Can the Expansion Be Sustained? A Minskian View. “ http://www.levy.org/pubs/pn00_5.pdf (Contributed to this site by Eric Tymoigne.)
March 2000: Godley and Wray “Is Goldilocks Doomed?” Journal of Economic Issues 34(1) p. 201 – 206. (Found by Dirk J Bezemer) (prediction of the last downturn before it happened)
July 6, 2000: Wynne Godley, “Drowning in Debt.” http://www.levy.org/pubs/pn00_6.pdf (Contributed to this site by Eric Tymoigne.)
October 2001: L. Randal Wray, “Are We All Keynesians (Again)?” http://www.levy.org/pubs/pn01_10.pdf (Contributed to this site by L. Randal Wray)
2002: Dean Baker, “The Run-Up in Home Prices: Is It Real or Is It Another Bubble?” http://www.cepr.net/documents/publications/housing_2002_08.pdf (Found by Dirk J Bezemer)
2006: Michael Hudson, “Saving, Asset-Price Inflation and Debt-Induced Deflation” in Money, Financial Instability and Stabilization Policy Edited by Randal Wray and Mathew Forstater. (Contributed to this site by Glen Atkinson)
2006 : Wynne Godley and Gennaro Zezza, “Debt and Lending: A Cri De Coeur.” http://www.levy.org/pubs/pn_4_06.pdf (Contributed to this site by Eric Tymoigne.)
May 2006: L. Randal Wray “Can Basel II Enhance Financial Stability? A Pessimistic View.” http://www.levy.org/pubs/ppb_84.pdf (Contributed to this site by L. Randal Wray)
December 2006: Stephen Keen, “The Lily and the Pond.” http://evatt.org.au/news/445.html (Found by Dirk J Bezemer)
January 2007: L. Randal Wray “Demand Constraints and Big Government.” http://www.levy.org/pubs/wp_488.pdf (Contributed to this site by Randal Wray)
2007: Christopher Brown “Financial Engineering, consumer credit, and the stability of effective demand”, Journal of Post Keynesian Economics, Vol. 29, No. 3, Spring, pp. 427-53.
August 2007: Eric Tymoigne “A Hard-Nosed Look at Worsening U.S. Household Finance.” Published in Challenge 50(4), P. 88-111. http://ideas.repec.org/a/mes/challe/v50y2007i4p88-111.html (Contributed to this site by Eric Tymoigne.)
December 2007: L. Randal Wray “Lessons From the Subprime Meltdown.” http://www.levy.org/pubs/wp_522.pdf (Contributed to this site by L. Randal Wray)
April 2008: L. Randal Wray “Financial Markets Meltdown: What Can We Learn From Mynsky?” http://www.levy.org/pubs/ppb_94.pdf (Contributed to this site by L. Randal Wray)
June 2008: Hyman Minsky (Foreword by Randal Wray), “Securitization.” http://www.levy.org/pubs/pn_08_2.pdf (Contributed to this site by L. Randal Wray)
Articles on the general instability of the financial structure of Capitalism. The concepts that form the models of the people listed above have been discussed in the Institutionalcommunity for over a century. This secondary list are sources not directly dealing institutions that are major parts of the current crisis yet they are useful sources that demonstrate a grounding of work underpinning the alternative models of the heterodox community. If you send sources for this section please make sure they deal with discussions on sources of financial fragility.
September 1989: Michael Carter “Financial Innovation and Financial Fragility.” Journal of Economic Issues 23(3) p. 779-793 (Contributed to this site by Eric Hake)
1998 James Cypher "Financial Dominance in the US Economy: The Increasing Relevance of Veblen`s Analysis in a Post-Keynesian Structure", in S. Fayasmanesh and M. Tool, Institutionalis Theory and Applications Vol 2, Cheltenham:Edward Elgar 1998: 66-88 (Contributed to this site by James Cypher)
June 1992: Raines and Leathers “Financial Innovation and Veblen’s theory of Financial Markets.” Journal of Economic Issues 26(2) p. 433 – 440 (Contributed to this site by Eric Hake)
June 1997: Victoria Chick “Some Reflections on Financial Banking and Finance.” Journal of Economic Issues 31(2) p. 535 – 541 (Contributed to this site by Eric Hake)