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September 6, 2009
Paul Krugman has has interesting article in the New York Times entitled How Did Economists Get It So Wrong? He says that last year, everything came apart and that:
Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy...As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth...the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
He adds that:
Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.
Many neo-classical economists say that are actually good for the economy recessions and that mass unemployment represents a voluntary reduction in work effort.
Krugman says that economists will now have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.
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It's all so theoretical for these economists- how would they feel to be a bright competent worker but unable to earn a living? Humph to "voluntary reduction in work effort" and what about professional women who suddenly can't even get a social security benefit because they have a male wage earner in the house? It's not socially acceptable to suddenly have nothing. So many worthwhile workers are living this "financial crisis" while the perpetrators are still living comfortably on money they had sneakily salted away in case they got found out. Most of us never even get the opportunity to salt anything away because we have too few financial high points before the next disaster.