Krugman's blog, 11/27/13
The second post yesterday was "The Trouble With Economics Is Economists:"
That's in large part what Simon Wren-Lewis is saying in this post defending mainstream economics. And I largely agree.
It is deeply unfair to blame textbook economics either for the crisis or for the poor response to the crisis. The mania for financial deregulation, for example, didn't come out of standard economic analysis — in fact, it flew in the face of the canonical model of banking crises, Diamond-Dybvig, which suggested both a crucial role of government guarantees to prevent self-fulfilling panics and the need for regulation to control the moral hazard such guarantees would create. It's true that few economists tracked the rise of shadow banking that bypassed the traditional safeguards — but that was a problem of vigilance, not bad theory.
Efficient markets theory arguably deserves more blame for the failure of too many economists to recognize the housing bubble, but textbook economics always presented EMT as a baseline, not a revealed truth.
As for the crisis response, the remarkable thing has been the determination of policy makers to do the opposite of what textbook macroeconomics said they should have been doing. Slashing spending when interest rates are zero, jumping at any excuse to raise rates, aren't about orthodox economics being applied — in fact, the amazing thing has been to watch the proliferation of newly invented models to justify doing the opposite of what Econ 101 says.
The problem, of course, is that this wasn't just a case of ignorant or bull-headed political appointees ignoring economic wisdom: many prestigious economists were all too eager to turn their backs on standard macro, even when it was working very well, on behalf of their political leanings.
And that, I think, says that there is something wrong with the structure of the economics profession. We don't seem to need different economics as much as we need different economists.
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