How did economists get it so wrong?
“It,” of course, refers to the widespread failure of economists to sound an alarm about the upheaval that struck a year ago and continues to be felt today.
Writing in the New York Times Magazine, Paul Krugman recently posed that question and answered that “The economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” You’ve probably read Krugman’s essay by now, but in case you spent last week on Mars or in Toronto, he argued that the culprit was economists’ romanticized, sanitized version of the market, which led them to turn
bq. …a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.
Now, however, comes a different — and more conspiratorial — answer: Economists shy away from criticizing the Fed because they have, in effect, been bought and paid for:
bq. The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession …
That’s the claim of an investigative piece in yesterday’s Huffington Post. I’m not sufficiently acquainted with the inner workings of the economics profession to reach any conclusions about the validity of this interpretation, but it’s an interesting read. Perhaps, too, this episode should spark a new round of thinking about political scientists’ links, financial or otherwise, to political institutions of various sorts?