It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes ”” or so they believed ”” were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.
Last year, everything came apart.
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.
The wisdom of John Kenneth Galbraith comes to mind, that economists are always experts in what brought on the most recent economic crisis, but seldom can predict when and why the next one is coming. The same can be said about earthquake predictors.
Indeed, Galbraith’s own prognostications bear his statement out.
Krugman, however, does have the prediction of the Asian crisis behind him. And there were a few who did predict the current one. The article is about why economists have gotten things wrong: too much belief in rationality, for one.
The article is thorough. It brings in insights from behavioral finance and gives a pretty well-defined history of the different economic schools. I love the story of the coop.