I was listening to the lecture by Paul Krugman as mentioned in my previous post, Krugman Lectures on the Depression.  He described  how he was convinced by another Nobel Prize winning economist, Milton Friedman. to abandon what he learned from John Maynard Keynes’s analysis of the great depression.  He now realizes how Friedman looked at the wrong data to come up with his erroneously convincing theory.

I have recently been reading the book, The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb.  This is a perfect example of what Taleb thinks is wrong about the way we study history.

Taleb is all in favor of histories that tell you what happened in the past.  He is very suspicious when historians try to provide a narrative that explains why they happened.

I’ll try to recall one of Taleb’s thought experiments from his book that describes the problem.

Suppose you see an ice cube on the floor.  If you have sufficient knowledge of physics, you will be able to predict the resulting puddle that will be there when the ice cube melts.

Now consider the case, where you walk into a room and see a puddle on the floor.  It does not make any difference how much physics you know, you will not be able to say for sure what the ice cube looked like before it melted. There are many possible ice cubes and non-ice cubes that could be responsible for that puddle.

Likewise, in history, there are many plausible explanations that would explain how events unfolded as they did.  It is not very likely with our limited knowledge of all the details that we will be able to know with any certainty which explanation, if any, is true.  More likely, none of the explanations are true, because we each have our own biases and knowledge limitations in choosing what we think are the major factors that caused the events. Taleb has explanations, that I won’t descibe here, of why we don’t attribute what happened more to luck than we ought to.

Taleb talks about using common-sense.  Although common-sense is not always so common.  In the case of the Keynesian explanation of the causes of the prolonged depression, they make a lot of sense.  There is a lot in what Keynes’ said to show that  Friedman’s alternate explanation is not likely to be the right one.  If people like Krugman had not forgotten what they had learned, they would have delved deeper into how Friedman misled them.  They would not have waited until 2008 to figure it out.

Why do I have to be the one that responds to Krugman, “Well, duh?”, when Krugman finally comes to his senses and realizes that the explanation that Keynes’ gave is much more reasonable than the one Friedman gave when applied to the conditions that prevailed during the depression.