Blog on Causes of the Crisis

I am definitely going to be a subscriber to this new blog. Thanks to Will Wilkinson for the pointer.

Several of the initial posts are pushback at Paul Krugman's piece on what economists got wrong. Nobel Laureate Vernon Smith chimes in with,

Economic scientists have precious little understanding of this rule governed complex order, and how to keep it on its demonstrated long term path of growth and human betterment without suffering too irreparably from the kind of unpredictable reverses that we are now mired in. Less pretence and a commitment to learn from the new data being generated as I write, will be both humbling and informative, after the inevitable human political impulse to blame one's long standing political adversaries has run its course.

in the 1980s, macroeconomics and finance fell into this "single model" approach. As that happened it caused economists to lose sight of the larger lesson that complexity conveys --that models in a complex system can be expected to continually break down. This adoption by macroeconomists of a single-model approach is one of the reasons why the economics profession failed to warn society about the financial crisis, and some parts of the profession assured society that such a crisis could not happen. Because they focused on that single model, economists simply did not study and plan for the inevitable breakdown of systems that one would expect in a complex system, because they had become so enamored with their model that they forgot to use it with common sense judgment.

The biggest general problem with the story Krugman tells is that it's so black and white. There's the good guys--the Keynesian gang, and bad guys--the Classical/Chicago gang. That, in my view, is seriously wrong. The real story is one of shades of grey, and full of nuances; it is a story in which it is hard to tell who are the good guys and who are the bad guys. The real story is one of systemic failure of the large part of the academic economics profession which led them to pretend, and some of them to actually believe, that they understood a complex system that they did not, and still do not, understand.

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