Addressing Economic Crises: The Reference-Class Problem

Addressing crises raises a sharp reference-class problem in economics. Namely, economic theory lacks an inclusive and consistent classification of crises. This problem stems from the fact that economists tend to adapt their views on crises to recent episodes, and omit averted and potential crises. They thus fail to imagine innovations in the forms crises can take. We identify three main factors that hamper the economic analysis of crises: the lack of imagination, sample biases, and the Peso problem. Using several historical examples, this paper argues that only an ex ante classification of crises derived from a conceptual approach would address the reference-class problem properly. Multiple-solution models offer a promising avenue to solve this problem.