But the economists DIDN’T get everything wrong

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Paul Krugman has an epic, and really great, dissection of the state of economics in Sunday’s New York Times Magazine—headlined “How Did Economists Get It So Wrong”—that has already gone up online (thanks to Daniel Lippmann for letting me know about it). For those who only know Krugman from his NYT columns, it’s a wonderful glimpse of the expansive, unpredictable essayist whom my former boss Rob Norton (who disagreed with Krugman at least 60% of the time) called the best economics writer since Keynes. For me it’s a little frustrating, since large swaths of the article parallel the story told in my book, which Krugman said was a “must-read” in the NYT Book Review a few weeks back, but it never actually mentions my book. I’m going to assume that Krugman did mention my book in the draft he turned in, but some editor at the NYT removed it for reasons of narrative flow. And considering that I make such decisions in my column all the time (in fact, I did it in this week’s column; I’ll explain later), I really can’t complain too much.

Beyond that, the one big issue I have with the piece is that, while economists certainly got lots of things wrong before the crisis (as did almost all of us), many members of the profession have acquitted themselves pretty well since things turned really ugly last year. Krugman goes on and on about the “freshwater” economists (at the Universities of Chicago, Rochester and Minnesota) and their crazy ideas about perfect markets. But what’s telling is that the hardcore freshwaterites have had almost no impact on economic policy for the past year—neither in the Bush months or the Obama ones. Sure, Nobelist Ed Prescott, a former freshwater economist who now teaches in Phoenix and thus should probably be described as a no-water economist, made the statement that:

“I don’t know why Obama said all economists agree on [the need for a stimulus bill],” Prescott said. “They don’t. If you go down to the third-tier schools, yes, but they’re not the people advancing the science.”

Unless you believe that pretty much anyplace other than Arizona State University is a third-tier school, this is patently untrue, evidence of the extreme isolation of the remaining true believers in rational expectations and real business cycles and other such elegant but profoundly unhelpful macroeconomic theories developed since the 1960s. Even some of the true believers seem far more aware than Prescott that the past year’s events have challenged their theories—as the University of Chicago’s Robert Lucas told me last fall, “everyone is a Keynesian in a foxhole.” Among economists with actual influence on policy over the past year—Philip Swagel in the Paulson Treasury, Larry Summers and Christina Romer and Austan Goolsbee and etc. in the current White House—there’s been a great willingness to experiment and accept that markets don’t always deliver optimal results. The result: an economic recovery that seems to be gaining strength. So don’t totally count the economists out.

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