notes-econ-onTheCapabilitiesOfEconomics

However, I disagree with the contention that financial crises prove that there is something "faulty" with economics.

Rather than say that there is something faulty with the structure of knowledge in the domains of finance and economics, I would say that there is something faulty with the assumption that knowledge in the domain of finance and economics implies the ability to avoid losing tons of money. This is rather like saying that Challenger disaster, in which a space shuttle blew up despite the fact that NASA employs and collaborates with top physicists, shows that there is something wrong with the structure of knowledge in physics.

The goal of economics research is to better understand the production, distribution, and consumption of goods and services (some wording taken from Wikipedia:Economics). I would say that economics research has indeed greatly advanced humanity's understanding of these things, and therefore, it is incorrect to say that "financial theory and economics does not work".

It is widely acknowledged among experts that present-day economics is not up to the task of avoiding meltdowns. Imo most present day financial and economics experts will say that "there is no reward without risk", and "the macroeconomy cannot be predicted with high certainty", and many would say "there may be no way, even in principal, to avoid recessions".

So, the fact that institutions run by economists sometimes lose massive amounts of money does not point to any flaw in the conception or structure of economics. The only flaw is in the assumption that it is possible with present-day economic technology to avoid financial and economic meltdowns.

There are domains of knowledge for which even a perfect understanding does not lead to predictably successful application. For example, it is thought that weather is a chaotic system and hence inherently unpredictable with high certainty at long timescales. Another example: all the game theory in the world will not give me a 100% chance of doing well in a prisoner's dilemma tournament, because I cannot guarantee that I will not be assigned to play with other players who will simply choose to defect no matter what I do.

A priori one cannot assume that even with a perfect future theory of economics that this theory will permit a person to make money without substantial risk, or permit a macroeconomic forecaster to predict the future of the with a high degree of certainty, or permit a government to manage an economy without recessions. Economics may turn out to be inherently unpredicable and uncontrollable.

Since it is not yet clear if even a perfect future theory of economics would enable us to avoid meltdowns, I suggest that rather than postulating that these tragic events will go away when we learn to do things right, that people should assume that occasionally seemingly safe investments will fail, occasionally large numbers of seemingly safe institutions (such as banks) will fail at once, occasionally there will be recessions and perhaps even mass unemployment and depressions, and to plan our lives and our societies with these assumptions in mind.