An economist seems to have predicetd the 2008 crisis way back in 1997

Mason Gaffney writes this nice paper on the topic. As the queen asked why did economists miss the crisis, we have seen it is not that econs could not see the crisis. It is just that some who saw it were ignored by the dominant minds then.

In this paper, Gaffney brings to light a paper by Fred Foldvary who seemed to have predicted the crisis way back  in 1997. He concludes in the paper:

The geo-Austrian synthesis provides a theory of the business cycle with more explanatory depth than conventional theory, is consistent with economic history, and is comprehensive in that it includes both the financial and real elements and their interconnections. It does not provide the only explanation for cycles, but does encompass the major booms and depressions. The Austrian and geo-economic theories have been incomplete, and the synthesis is mutually complementary, Austrian theory providing the role of interest rates and the capital-goods structure, and geo-economics identifying the key capital-good malinvestment and the role of land speculation and fiscal policy.

The 18-year cycle in the US and similar cycles in other countries gives the geo-Austrian cycle theory predictive power: the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war. The geo-Austrian synthesis provides a research agenda that can test historical cases in more detail. Much work needs to be done on empirical studies linking the money supply, real estate markets, and business cycle. However, given the evidence as presented here, the Georgist component of the geo-Austrian synthesis is testimony to the insight of Henry George, who originated one of the earliest theories of the business cycle, a theory which has been confirmed by subsequent history as a relevant and important explanation of booms and busts.

(emphasis is mine)

Can it get more prescient than this?

Thanks to Gaffney for this amazing pointer. In his paper he further writes to point a contest which awarded to those economists which predicted the crisis.  Fred Foldvary did not even make it to the shortlist despite his paper being nominated:

In 2010 two contests were held by the Real-World Economics Review Blog—henceforth RWERB. One contest was the Dynamite Prize to select the economists most responsible for the crash of  2008. The other was the Revere Award for three economists who best explained and predicted the recession and crash. It was named for Paul Revere, who famously warned “The British are coming!”

RWERB invited nominations. The blog-post inviting and containing the nominations is no longer listed in the archive, but, as of this writing, still live at this URL . I duly nominated Foldvary’s 1997 article, as did (in chronological order) Rick Heggem, Daniel Klein, Rainer Friedrich, Roy Langstan, Jeffrey Smith…

But somehow the blog’s community of authors saw fit to exclude Foldvary from the shortlist. Another blog-post of March 31, 2010 opened the voting: Through consultation with contributors to the Real-World Economics Review Blog, the following shortlist of twelve economists has been selected for the ballot: Dean Baker, Wynne Godley, Michael Hudson,Steve Keen, Paul Krugman, Jakob Brøchner Madsen, Ann Pettifor, Kurt Richebächer, Nouriel Roubini, Robert Shiller, George Soros and Joseph Stiglitz. (RWERB, March 31, 2010, link

Apart from this, there was no Taleb, no Rajan no William White and Claudio Borio as well.

Winner was:

The winner was Steve Keen of the University of Western Sydney. The 2nd and 3rd place finishers were Nouriel Roubini (New York University) and Dean Baker (Center for Economic and Policy Research). Keen and Baker are central players at the Real-World Economics Review Blog. Links to their websites are included among the RWERB’s “Family Links.”

He then looks at both Keen and Baker’s papers and says none were as prescient as Foldvary. And no credit to him at all.

However, there were others as well:

I would like to add that Foldvary’s ideas are not the work of a lone seer. As noted, Hanke sees value in incorporating land and real-estate into cycle theory. Economists sensitive to the uniqueness of land have long followed these ideas and anticipated a crash. Consider a work by Fred Harrison also published in 1997. Harrison wrote: “The consequence is predictable. By 2007 Britain and most of the other industrially advanced economies will be in the throes of frenzied activity in the land market to equal what happened in 1988/9. Land prices will be near their 18-year peak, driven by an exponential growth rate, on the verge of the collapse that will presage the global depression of 2010” (Harrison 1997, 27)

The aim of the paper is to simply recognise these economists:

My aims in writing the present paper can be summed up by the words that RWERB offered in explaining its aims in conducting the Revere Prize: “to give these economists the professional and public recognition that they deserve, to encourage others to utilize their methods, and—most important—to increase the likelihood that, for the benefit of humankind, empirically responsible economists will be listened to in the future” (RWERB March 31, 2010, link).

Amazing stuff….Came to knwo of many such economists/papers which looked differently. Some might say well it was just a guess which worked. Well much of economics is grey with some getting things right others wrong. Even those who are credited with calling the crisis correctly were just extrapolating what could happen given the facts. Same applies to others like Foldvary as well who used economic framework to predict the crisis like others did as well.


One Response to “An economist seems to have predicetd the 2008 crisis way back in 1997”

  1. Martin Adams Says:

    Yes, Fred Foldvary did, indeed, predict the 2008 crisis in 1997. As did another economist, Fred Harrison ( Read more here:

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