03 Sep 2009

Krugman On Why Economists Missed the Crash

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Tyler Cowen links to this 8-page Krugman essay–and be careful, you might have missed it if you merely check Krugman’s blog. (I.e. I didn’t see it linked from there; I think Tyler gets tweeted whenever somebody rips the free market.) Anyway, Krugman starts off great:

[I]n 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.

Wow! So a bunch of economists who either had the ear of government or were actively running policy, were horribly wrong. I guess that means we shouldn’t trust the government to pick experts to tinker with the economy then, right Paul?

Of course not. What this all proves is that economists worshipped the market because (a) there was so much money in touting pure capitalism and (b) they wanted to show off their fancy mathematical skills.

I know, you’re saying, “Surely you’re joking! Those are two reasons that Austrians usually give to explain the success of the Keynesian revolution. Wasn’t Paul Samuelson the godfather of mathematical economics?! Is he a free marketeer now?” Well no, I’m not joking, and don’t call me Shirley.

BTW I only skimmed the first page of Krugman’s treatise, but–if I may paraphrase the MarginalRevolution lingo–it is self-loathing, so go ahead and click it if you dare. I’m sure it must be packed with some great stuff about how unfettered capitalism just happened to blow up 16 years after the institution of the Federal Reserve.

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