Here’s the conclusion of “How Did Economists Get It So Wrong?” a long, brilliant piece in the forthcoming NYT magazine by the leading progressive economist:
VIII. RE-EMBRACING KEYNES
So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit “” and this will be very hard for the people who giggled and whispered over Keynes “” that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.
Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem “” neat, plausible and wrong.”
When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.
Read the whole damn indictment. Any politician, journalist or opinion maker who worships at the feet of the false gods of neo-classical economics is no better than Bernie Madoff (see “Is the global economy a Ponzi scheme?”).
Some of my friends would have liked a more searing indictment of all of economics, including microeconomics. As a humorist once said,
This piece doesn’t get into the necessary disemboweling of the entire global Ponzi scheme. And, of course, we have the catastrophic failure of the economics community in modeling catastrophic climate impacts (see “Harvard economist: Climate cost-benefit analyses are “unusually misleading,” warns colleagues “we may be deluding ourselves and others”).
But Krugman can’t be faulted for not taking on everything all at once, especially since he has been doing some great work on climate:
- Nobelist Krugman attacks “junk economics”: Climate action “now might actually help the economy recover from its current slump” by giving “businesses a reason to invest in new equipment and facilities”
- Nobelist Krugman takes on the “fantasists” of the “burn-baby-burn crowd” for opposing climate action that costs Americans 18 cents a day
- Nobelist Krugman calls climate science denial by House conservatives “a form of treason “” treason against the planet”
- Nobelist Krugman slams Reaganite Feldstein on global warming economics
- Nobelist Krugman: Fear of carbon markets and speculation is “99% wrong and bad for the planet”
- Nobelist Krugman strongly endorses Waxman-Markey: “The claim that carbon taxes are better than cap and trade is, in my view, just wrong.”
One final amusing note — the cartoon above comes by way of Greg Mankiw, who likes Krugman’s piece.