Frustrations of the Heterodox
Paul Krugman, NYT
April 25, 2014, 10:09 am
It’s kind of a sideshow in the larger scheme of things, but something worth noting is taking place on the fringes (literally) of economic discussion: an upwelling of frustration on the part of heterodox economists. You see it in Thomas Palley’s complaint about gattopardo economics, which I discussed yesterday; you see it in the demands for a radical change in the economics curriculum, which Simon Wren-Lewis wrote about yesterday.
I understand the frustration, but the heterodox need to realize that they have, to an important extent, been working with the wrong story line.
Here’s the story they tell themselves: the failure of economists to predict the global economic crisis (and the poor policy response thereto), plus the surge in inequality, show the failure of conventional economic analysis. So it’s time to dethrone the whole thing — basically, the whole edifice dating back to Samuelson’s 1948 textbook — and give other schools of thought equal time.
Unfortunately for the heterodox (and arguably for the world), this gets the story of what actually happened almost completely wrong.
It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasn’t because economics lacked the tools to understand such things — we’ve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation — failure to notice the rising importance of shadow banking. Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realize that more than half the de facto banking system didn’t look like that anymore. This was a case of myopia — but it wasn’t a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis.
(More here.)
April 25, 2014, 10:09 am
It’s kind of a sideshow in the larger scheme of things, but something worth noting is taking place on the fringes (literally) of economic discussion: an upwelling of frustration on the part of heterodox economists. You see it in Thomas Palley’s complaint about gattopardo economics, which I discussed yesterday; you see it in the demands for a radical change in the economics curriculum, which Simon Wren-Lewis wrote about yesterday.
I understand the frustration, but the heterodox need to realize that they have, to an important extent, been working with the wrong story line.
Here’s the story they tell themselves: the failure of economists to predict the global economic crisis (and the poor policy response thereto), plus the surge in inequality, show the failure of conventional economic analysis. So it’s time to dethrone the whole thing — basically, the whole edifice dating back to Samuelson’s 1948 textbook — and give other schools of thought equal time.
Unfortunately for the heterodox (and arguably for the world), this gets the story of what actually happened almost completely wrong.
It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasn’t because economics lacked the tools to understand such things — we’ve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation — failure to notice the rising importance of shadow banking. Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realize that more than half the de facto banking system didn’t look like that anymore. This was a case of myopia — but it wasn’t a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis.
(More here.)
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