Arnold Kling  

Blog on Causes of the Crisis

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Tea and Sympathy... What Would You Like to See on ...

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.

David Colander's perspective is this:

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.

In another post, Colander writes,

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.

Amen.


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COMMENTS (4 to date)
Chris Murphy writes:

Maybe instead of criticizing everyone who disagrees with him Krugman should be quiet for a few days and read some Hayek. The economy is an emergent order that cannot be explain thru simple models.

david writes:

I like how the "emergent order" meme is used by both sides of the fence to pretend that only the other side ever uses simple models.

Conveniently, while everyone agrees that some complexities must be included, the only acceptable complexities are the ones which support some given set of policy conclusions.

sub writes:

[Comment removed pending confirmation of email address and for rudeness. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog.--Econlib Ed.]

Lance Cross writes:

Regulatory capital forbearance done by regulators for the various banks as losses began 2.5 years ago snowballed so that the banks had too little equity. That, combined with bank debt that wasn't guaranteed yet, gave us a post-Lehman bank run. This forbearance was done using the judgmental attribute of our accounting rules, but it was done to an extent that makes the reported numbers far outside the reasonable range. The accounting output of the banks now regarding FAS 5, 114 and 157 is some combination of mass delusion and massive fraud.

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