realitybase - Journal

In this post, Mark Thoma quotes from a Paul Krugman post, elaborates on it, and links to Brad DeLong's post, all savaging the Chicago School orthodoxy that has been so influential for 3 decades. Krugman says economists who "have spent their entire careers on equilibrium business cycle theory are now discovering that, in effect, they invested their savings with Bernie Madoff." Thoma thinks "what has happened will have a much bigger impact on the profession and the models it uses to describe the world than most economists currently realize."

There are more comments than usual, many way beyond heartfelt. Interestingly, the defenders of the Chicagoans don't really defend their view as right on the merits but attack as worse what they assume is the alternative. Lots of speculation about why economists keep giving bad advice. Commenter "Not Mark T" says "My old poli-sci advisor used to smirk, "Better to be wrong than to be irrelevant."

On the other hand, Jeff Madrick mingled in person with thousands of economists early this month and found no self-awareness of any problems in the profession.

I could find no shame in the halls of the San Francisco Hilton, the location at the annual meeting of American economists that just finished. Mainstream economists from major universities dominate the meetings, and some of them are the anointed cream of the crop, including former Clinton, Bush and even Reagan advisers.

There was no session on the schedule about how the vast majority of economists should deal with their failure to anticipate or even seriously warn about the possibility that the second worst economic crisis of the last hundred years was imminent.

I heard no calls to reform educational curricula because of a crisis so threatening and surprising that it undermines, at least if the academicians were honest, the key assumptions of the economic theory currently being taught.

There were no sessions about why the profession was not up in arms about the deregulation of so sensitive a sector as finance. They are quick to oppose anything that undermines free trade, by contrast, and have had substantial influence doing just that.

The sessions dedicated to what caused the crisis were filled, even those few sessions led by radical economists, who never saw turnouts for their events like the ones they just got. But no one was accepting any responsibility.

I found no one fundamentally changing his or her mind about the value of economics, economists, or their own work. No one questioned their contribution to the current frightening state of affairs, no one humbled by events.

Maybe I missed it all. There were hundreds of sessions. I asked others. They hadn't heard any mea culpas, either.

Paraphrasing Not Mark T, maybe the necessary introspection and re-education would go faster if those who were wrong were made irrelevant. Hasn't happened so far in the Obama Administration.

Update on Wednesday, January 28, 2009 at 11:45AM by

Skeptic

Paul Krugman lands another salvo on the Fresh Water formations:

What this reveals, I think, is just how insular part of the macroeconomics profession has become. They just don’t read anything that doesn’t come from their cult circle; they just weren’t aware of major bodies of work that didn’t happen to be in their preferred style.

This insularity is asymmetric. Ask a PhD student at Princeton what a real business cycle theorist would say about something, and he or she can do that; ask a student at one of the freshwater schools what a new Keynesian would say, and I doubt that he or she could answer. They’ve been taught that there is one true faith, and have been carefully protected from heresy.

Update on Thursday, February 5, 2009 at 04:00PM by

Skeptic

Joseph Stiglitz says Davos Man is rejecting core Chicago School beliefs.

Equally striking was the loss of faith in markets. In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting.

The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory; now, the crisis provided further skepticism.

Update on Saturday, April 18, 2009 at 09:31AM by

Skeptic

This anonymous Economist blogger defends economists from criticisms that he/she seems deliberately to misunderstand. The burgeoning criticisms are not of all economists but only of the orthodox group of them that has dominated government policies for nearly 3 decades. He/she started by quoting this strong and articulate criticism from this Business Week cover story and then miserably failed to refute it.

The rap on economists, only somewhat exaggerated, is that they are overconfident, unrealistic, and political. They claim a precision that neither their raw material nor their skill warrants. Too many assume that people behave like the mythical homo economicus, who is hyperrational and omniscient. And they take sides in quarrels that freeze the progress of research. Those few who defy the conventional wisdom are ignored.

I hope his/her economics skills are better than his/her advocacy skills. Business Week got it right IMHO.