Wednesday, November 25, 2009
How Did Economists Get It So Wrong?
What rationale does Prof. Krugman's cite for economists' in this country failure to see the oncoming recession? Which argument do you find most persuasive?
Subscribe to:
Post Comments (Atom)
Krugman stated that economists failed to see the oncoming recession because they mistook beauty for truth. They believed that any major problems could be fixed by "the all powerful Fed." Economists had the idea of an idealized market. Basically, Krugman argues that economists were blinded by the idea that capitalism is a perfect system. Obviously, this isn't true. And Krugman makes a good point in saying that economists need to start expecting irrational and unpredictable behavior. If the recession has taught us anything, it would be this.
ReplyDeleteEconomists believed they had overcome internal disputes and were doing well. This apparent success, along with the beliefs that investors and consumers tend to make rational decisions, left them unable to predict an oncoming recession.
ReplyDeleteI'm going to have to submit my agreement to Allison on this one. If anything, I think he states his reason in a sort of peotic manner, but with such conciseness making his ideas easy to point out. I also like that Krugamn emphasized that economists decided to flaunt there mathematical prowess. Economics is not a math! Though there is math involved, it is above all a social science that tries to explain the decisions of people and societies, and the effects of their decisions. Economists failed to predict failure in our market economy's long-run because of their blatant ignorance and their content with what the economy was doing before its collapse. Hopefully this is a wake up call for all of them and they will better be able to do their jobs of helping to protect the welfare of this country.
ReplyDeleteA great debate I saw on T.V. dealing with this very issue was between Joh Stewart and Jim Cramer on The Daily Show. If you haven't seen it, it's something I highly recommend watching. Here's the link to the episode of which you can just copy and paste into the url bar: http://thedailyshow.com/full-episodes/220533/thu-march-12-2009-jim-cramer
There have been some great points presented. I will have to agree that economists have made some bad decisions, which I believe were not on purpose. I believe that as Allison said they mistook beauty for truth. They did not think that something this bad would happen because of how good the economy was then. I do not think that they know what is really going to happen now either. I think that they should take this recession and learn from it. They should expect for things like this to all of a sudden happen even if it is bad for everyone.
ReplyDeleteEconomists took their success for granted. Few of them saw the oncoming recession we are, or "were" facing. They didn't think about the possibility of a recession coming because of how "stable" the market was back then.
ReplyDeleteI think another point Krugman makes is how people moved from supporting Keynes to supporting a more neoclassical view of economics. Keynes believed in government intervention mainly in times of need, when unemployment was high and the economy needed a jumpstart. People supported Keynes for a while, until Friedman came along and moved people back towards the neoclassical perspective, where there was very little government intervention. Basically as long as some banks kept money flowing in the system and banks were growing, that depressions could be avoided.
ReplyDeleteWith people embracing this frame of mind, it's no wonder we're in the situation we're in. How people can believe that with money being printed and banks growing could keep an economy stable is incredible. I think Keynes had the right idea. When the economy is screwed up, the government should help keep up from total desolation. Look at us now; debt and unemployment to go around!
In response to Christina: I agree with your point that perhaps people can't be trusted with their money, but I also feel that people are placing too much blame on the government when it was their lack of economic knowledge that got them to where they are. Most people didn't stop to think about the long-term affects of their impulse buying sprees, or removing equity from their homes. I think the major factor that economists forgot is this: the majority of people are idiots, and, in the end of the day, won't do the right thing with their dollar.
ReplyDeletebefore you all go bashing the free market and its economists, i feel you must be reminded on how we got into this mess. after the 2006 election congress decided to mandate that banks needed to give more people loans for houses, because the democratic controlled congress could never accept people having no home (how thoughtful right) so the banks went ahead and gave more people the loans congress wanted them to have and then a few years later.. the people could not pay back these loans so the housing market failed. (and i didn't even mention how the government created Fannie Mae and Freddie mac helped out a lot) when the housing market failed it started a domino effect that brought us to the depression we are in. thank you congress! it was not free market that got us here, it was the regulation on the free market that got us here.
ReplyDeletesorry, i meant recession not depression
ReplyDelete