My American readers will not understand this post as it uses “liberal” in the the political theory/philosophical sense of the word. If they understood this they would realize they were all liberals and that was the reason they had a two party, single ideological system. But I digress. The point of this post is a workout of what I have come to term scientific liberalism. And it was inspired by a post by none other than a post by Mel Watkins over at the PEF.
At first I was quite struck by Nassim’s idea of Black Swans (indeed I threw a blog post up about it some good while back) but then when I started thinking about what he was saying it seem to me to amount to the fact that risk was not adequately priced in because the models being used on the street had effectively cut the last 5% of the left hand side of the distribution out from their models. His critique is reasonable enough. I think his story about about fat Vinny is compelling: the old wise man who has been around long enough to smell a bubble but whose warnings are ignored because the young bucks’ models only go back ten years and thus not only are rare events viewed as extremely rare they simply are not in the model . But I think the problem is deeper, much deeper.
Some critics have argued that liberal economists merely make the assumption of rational expectations because it makes the model tractable. That is, in absence of needing to solve the model liberal economists would not insist on rational expectations: it is just the necessity of precision.
I do not buy this argument and not because I think that the precision they have purchased is worthless with respect to reality (it bugs me but it is not a deal breaker). The problem I have is that at the ontological level (and let me coin a new term here) scientific liberalism, of which liberal economists are surely the van guard, are busy trying to prove that an economy in which property owners (not cars or houses but means by which society must reproduce itself) are free to do as they please with their property is not only a necessary condition of liberty but will on the whole lead to an ever increasing betterment of society in general.
Viewed from this angle, rational expectations is not merely a simplifying assumption necessary to make the model tractable it is necessary in the ideological sense of furthering the ideological project of liberalism. When a liberal economists demands: why do you not include me in the progressive camp? He (most probably) or she is not being disingenuous. In their mind they are the van guard of progress because they are busy via scientific liberalism of demonstrating the path to human betterment which is of course always defined as growth. Distribution of that growth or catastrophic failures of the system are just the price of the freedom dance.
Of course the high modernist cousin to scientific liberalism is scientific socialism: “just one more five year plan and we will get it right” said the commissar. There was a legitimacy to that position when the system was new, when there was no history; just a series of experiments where time would tell if they got it right. scientific liberalism cheats at this game: they want to prove the maximisation of happiness; and then when the gig is up they want to default to satisficing
So having removed the secondary and tertiary hydraulic back-up systems they proclaim the predetermined plane crash as a natural event when the original claim was that eliminating those systems would not jeopardize safety. It is fundamentally dishonest and a sad commentary on scientific liberalism that it can so effortlessly move from the best of all possible worlds to a necessary evil in the same breath. But unlike its cousin scientific socialism it (scientific liberalism) has yet to meet its Waterloo.