Why do economists fail to predict crises? | Jakub Jedlinský | TEDxVSE University

Quick Overview

Economists fail to predict crises because standard neoclassical models rely on assumptions of stable equilibrium, which are contradicted by dynamic system theories from Schumpeter, Minsky, and Keen, who argue that instability and change are inherent to the market, as demonstrated by the speaker using props like a bird model and a jar of water to illustrate how small external shocks can lead to systemic failure when the system is inherently unstable.

Key Points: Economists often fail to predict crises because their standard models assume a stable equilibrium, which is not representative of real-world economic dynamics. The speaker advocates for a dynamic approach rooted in the work of Joseph Schumpeter, Hyman Minsky (Financial Instability Hypothesis), and Steve Keen, who recognize that instability and change are inherent features of the market. The speaker demonstrated instability using a boomerang-like bird model that returns to its origin and a jar of water balanced precariously on the edge of a table, showing how a small external shock (a 'nudge') disrupts equilibrium. Minsky's theory suggests that periods of stability lead to speculative investing and increased indebtedness (represented by moving beads on an abacus), which eventually causes the system to overheat and crash. The speaker noted that while Warren Buffett and George Soros employ different strategies, both understand the market relies on disequilibrium rather than stable equilibrium. The 2008 credit crunch was predictable using dynamic modeling (like the predator-prey cycle analogy shown on screen) that accounts for feedback loops and momentum, unlike static neoclassical methods. The failure to predict crises is systemic, as mainstream economic models are built on equilibrium assumptions that ignore inherent instability and the possibility of large, unpredictable events ('Black Swan events').

Context: Jakub Jedlinský delivers a TEDx talk titled "Vision from Theory: Why do economists fail to predict crises?" at TEDxVSE University, arguing that the standard, equilibrium-based models used by most mainstream economists are fundamentally flawed for predicting financial instability. He contrasts this approach with dynamic system theories, referencing influential thinkers like Joseph Schumpeter, Hyman Minsky, and Steve Keen, who emphasize that instability and change are intrinsic to economic reality, not external anomalies.