If Paul Krugman Was So Right
September 3, 2009 8:00 PM   Subscribe

How Did Economists Get It So Wrong? - The Great Recession was the result not only of lax regulation in Washington and reckless risk-taking on Wall Street but also of faulty theorizing in academia. Can economists learn from their mistakes? (via mr & ev)

bonus :Pthat is all!
posted by kliuless (50 comments total) 34 users marked this as a favorite
Can economists learn from their mistakes? Sure, as soon as they realize that economics is not a "real science" that works in a perfectly configured bubble.

I have taken many an economics course in my life and my fundamental problem with economics goes back to a professor in college who argued with me that a lower priced hamburger at McDonalds will always win out over a slightly more expensive chicken sandwich at Wendy's, regardless if I wanted the chicken or not. In his world, the models of elasticity of demand and supply+demand curves ruled all. He made little space for that major fudge-factor known as...humanity.
posted by tgrundke at 8:07 PM on September 3, 2009 [2 favorites]

Oh, and as far as Krugman is concerned: there are times when he makes sane arguments, but I feel that he ultimately is doing what every economist and talking head does: hedge his comments so that he's right, regardless the outcome.

My personal take (this is the Austrian economist in me speaking) is that this is a credit and debt crisis that can only, ultimately, be resolved by paying down said debt. This involves destruction of credit, deflation, default and pain. Considering that this government is hell bent on continuing the failed policies of the previous (ie: propping up failed institutions), I see little cause for enthusiasm or light at the end of the tunnel.

I see things dragging out for an excruciatingly long time because we insist on keeping a failed system (current banking/investment establishment) afloat instead of winding it down as it should be and letting well-managed players take over. Much like the dinosaurs, this isn't the end of life, merely a transition. There are other banking institutions, far better run, who are more than ready and willing to take up the slack from the failed behemoths that are Citi, Bank of America and Chase. The only reason we prop those dinosaurs up is because they have direct contact with our Congresscritters, whereas we don't.

Sad state of affairs, huh?
posted by tgrundke at 8:13 PM on September 3, 2009 [1 favorite]

An engineer, a chemist, and an economist are shipwrecked and stranded on a desert island. Luckily, several cases of catering-size cans of food have washed up on shore alongside them. Unluckily, they have no can opener. They decide to think on it for twenty-four hours, then present their solutions to the dilemma.

The engineer goes first and says "I've calculated the strength of the cans based on a rudimentary finite-element stress analysis, and I think if we drop a large rock onto them from 6 feet, they'll burst open".

The chemist goes next and says "I've estimated the rate at which seawater could rust through the tinplate, and I think a couple more days in the brine will do it - the cans will just fall apart".

The economist goes last, and, looking pleased with himself, begins "Suppose we had a can opener ..."
posted by kcds at 8:16 PM on September 3, 2009 [27 favorites]

I think that economists are tempted to assign rationality to the consumer in order to compensate for what is fundamentally a game and not a science.
posted by Brian B. at 8:35 PM on September 3, 2009 [1 favorite]

The above is tldr but one element of forensic analysis I see ignored is the necessity of separating the firms from the agents within the firms. Wamu didn't write a single bad loan; its loan officers did, and they got paid without regard to how their actions affected the corporate entity that received their services. In many companies there was an actual positive feedback loop that rewarded risk; most if not all of these companies have blown up by now perhaps.

Bank of America and Chase

BAC and JPM are on the road to failure? I think this largely depends on whether we'll see another leg down in the housing market, taking prices from the 2003-2004 levels they are now back to 1998-99.

I was casually in the market for a house in late 2002 and prices are still easily 50% above where they were then. This is due to friction, 3.5% FHA loans, and of course the present 5.5% vs. 7.5% interest rates of earlier this decade. So another 20%+ drop is certainly in the cards, but whether we'll get that flop remains to be seen. If Japan is any guide [and I sorta doubt it but who knows], the grind will go on for most of next decade.

Real Estate IMO plays a vastly underappreciated (and feared) role in this economy. I've posted plenty on this under under nyms so I'll leave it at that ;)
posted by Palamedes at 8:36 PM on September 3, 2009

Can economists learn from their mistakes?

No. We are doomed to repeat our mistakes over and over. Cassandra screaming in a vacuum.
posted by nola at 8:36 PM on September 3, 2009

Test for echo!
posted by oncogenesis at 8:41 PM on September 3, 2009

test for echo
posted by fuq at 8:49 PM on September 3, 2009 [1 favorite]

Selection bias. The economists who get it right, you don't hear from (except to "explain" why you lost all your money, after the fact). The economists who push the party line, you do hear from.

That being said, the abject belief in a rational market is silly, as silly and denialist as a geneticist proclaiming the human genome optimized for simplicity.
posted by effugas at 8:52 PM on September 3, 2009 [2 favorites]

Economics and philosophy are the two disciplines in which an utter incapability for distinguishing the map from the territory is rewarded rather than punished.
posted by Pope Guilty at 8:59 PM on September 3, 2009 [1 favorite]

Treating economists as a monolithic entity: How could Metafilter get it so wrong? Can Metafilter learn from its mistakes?
posted by pompomtom at 9:04 PM on September 3, 2009 [6 favorites]

Did I fall asleep?
posted by The Whelk at 9:06 PM on September 3, 2009

There were plenty of economists who thought that there might be a US housing price bubble and there might be a crash.

I was talking to a hedge fund trader in 2003 and he said to me that he wanted to short housing because it was overpriced.

The Economist, in 2005 ran a cover story pondering what happens if the Housing Price Bubble bursts. It was posted to metafilter at that time.

For mutant and others in the finance industry there must have been plenty of conversations about how things were off track. Between the US trade deficit, US federal budget deficit, the wars and the very rapid rise in housing prices it was surely a good bet that things were going to come unstuck.

To say that all economists got it wrong is wrong.

Economics isn't physics where there are strong universal laws. It's a quantitative and qualitative field of study that aids in the analysis of situations that involve trade offs. It's also a field where there as many opinions as there are economists and the wise ones are aware of the limits of their predictive ability.
posted by sien at 9:14 PM on September 3, 2009 [3 favorites]

The finger pointing at the moon is more easily modeled than the moon.
posted by anthill at 9:18 PM on September 3, 2009 [2 favorites]

So did anyone actually read the article? 'Cause no one seems to be commenting on it.
posted by octothorpe at 9:21 PM on September 3, 2009

Can economists learn from their mistakes?

If economics weren't the political analogue to astrology, maybe.
posted by dirigibleman at 9:32 PM on September 3, 2009 [1 favorite]

My favorite part of my economics classes usually involved some variation on raising my hand in class to point to a particular location on a graph we were discussing and say, "So, the demand for food is also inelastic, right? So you're saying this, here, is the point where people are starving to death?"

My instructors were never especially amused.

I also started saying roundabout when I finished *high school* econ that I didn't see how rapid housing growth in a population that was not increasing rapidly didn't violate the laws of supply and demand. "Shouldn't this all fall apart at some point?"

When punk kids in the end seem to know more about economics than the economists, you really have to start asking who's steering this boat we're on and whether anybody out there actually knows what an iceberg looks like.
posted by larkspur at 9:49 PM on September 3, 2009 [2 favorites]


Demand for food is indeed extraordinarily inelastic -- see bread riots. A government that cannot ensure food for its people cannot last. One of the most interesting events over the last few years happened when the United States put a few percentage points of its corn supply into ethanol.

Corn prices in Mexico doubled. Doubled! I knew in the back of my mind we were a major exporter of corn, but wow. That was not expected.

The key isn't that the "economists" don't know. It's that some economists either don't know, or have made their career loudly not knowing, and this has given them an enormous pulpit from which to operate from. Between "I know" and "I do not know", the former gets much more attention -- especially when the message is in the interests of some.
posted by effugas at 11:22 PM on September 3, 2009

Economics isn't physics where there are strong universal laws. It's a quantitative and qualitative field of study that aids in the analysis of situations that involve trade offs.

Unfortunately enconomists are, collectively, remarkably dishonest about this. Economists with strong, typically right-wing, political opinions (and Milton Friedman and acolytes would be the poster child for this) tend to involve themselves in political debates with simple TINA arguments that lay claim to absolutes based on "economics".
posted by rodgerd at 11:26 PM on September 3, 2009 [1 favorite]

The Economist's cover image for July 18 shows an economics textbook melting down, with the caption Where it went wrong.
Robert Lucas, one of the greatest macroeconomists of his generation, and his followers are “making ancient and basic analytical errors all over the place”. Harvard’s Robert Barro, another towering figure in the discipline, is “making truly boneheaded arguments”. The past 30 years of macroeconomics training at American and British universities were a “costly waste of time”.

To the uninitiated, economics has always been a dismal science. But all these attacks come from within the guild: from Brad DeLong of the University of California, Berkeley; Paul Krugman of Princeton and the New York Times; and Willem Buiter of the London School of Economics (LSE), respectively. The macroeconomic crisis of the past two years is also provoking a crisis of confidence in macroeconomics. In the last of his Lionel Robbins lectures at the LSE on June 10th, Mr Krugman feared that most macroeconomics of the past 30 years was “spectacularly useless at best, and positively harmful at worst”.
Podcasts and slides for Krugman's Lionel Robbins lectures.
posted by russilwvong at 12:02 AM on September 4, 2009 [1 favorite]

Krugman's article boils down to "Princeton rules, Chicago Drools" but seeing as he was one of the few people talking about a bubble years ago, he's probably pretty close to right. It seems that the dominant free-market theorists refused to see anything that didn't fit in with their theories.
posted by octothorpe at 2:29 AM on September 4, 2009

Hey kliuless, thanks so much for the linkage. When en where will you be taking exams?
posted by ouke at 3:42 AM on September 4, 2009

Can economists learn from their mistakes?

In a just world: can laid-off economists learn enough to retrain for new careers in the global economy?
posted by transona5 at 4:21 AM on September 4, 2009 [1 favorite]

When en where will you be taking exams?

there will be no exams, but there are tests, and the consequences are far from academic :P i like the way nemo put it in the comments of What Is Finance, Really?
More precisely, I feel that genuine productivity should be rewarded. Value creation should be rewarded. Not "shareholder value," but real value; as in the difference between raw materials and a finished product, or between someone who is sick and someone who is healthy, or between a blank page and a sonnet...

I view the financial system as part of the "gears" of society, like (say) garbage collection. There is nothing wrong with being a garbage collector; it is a necessary function. But they will never be paid as much as the top innovators and producers. Neither should those in the financial sector, in my opinion.

That we, as a society, give so much of our wealth to people for doing approximately nothing represents a serious market failure, in my view.
like earlier this year simon johnson was saying: "the American financial industry gained political power by amassing a kind of cultural capital—a belief system." this is now being put to the test (on a number of fronts) as andrew sullivan concludes in The Rotten Core:
Obama is, in some ways, a test-case.

He was elected on a clear platform of reform and change; and yet the only real achievement Washington has allowed him so far is a massive stimulus package to prevent a Second Great Depression (and even on that emergency measure, no Republicans would support him). On that he succeeded. But that wasn't reform; it was a crash landing after one of the worst administrations in America's history.

Real reform - tackling health care costs and access, finding a way to head off massive changes in the world's climate, ending torture as the lynchpin of the war on terror, getting out of Iraq, preventing an Israeli-led Third World War in the Middle East, and reforming entitlements and defense spending to prevent 21st century America from becoming 17th Century Spain: these are being resisted by those who have power and do not want to relinquish it - except to their own families and cronies.

Nepotism is part of the problem; media corruption is also part; the total uselessness of the Democratic party and the nihilism of the Republicans doesn't help. But something is rotten in America at this moment in time; and those of us who supported Obama to try and change this decay and decline should use this fall to get off our butts and fight for change.
hopefully, then, we all can pass...

posted by kliuless at 4:45 AM on September 4, 2009 [3 favorites]

Yeah sure, blame any economist. Surely when a physicist doesn't discover in ten years how to make fusion viable, he should be sent to pick straweberries. Similarly, when an engineer doesn't figure out how to make a longer bridge while using less steel, he's to be sent to dig rock in a mine. Or when a biologist doesn't discover the cure for cancer overnight, let's send him to count medusae.

But when you enter an hospital and they can help you with your diabetes, when you pick up your cellphone and are able to call an ambulance on the spot, which can take the short route because there's a bridge..it's all a given.

Modeling the world through from an economist point of view is even harder, as you have to figure out how humans being behave given certain conditions, how to allocate resource in order to have a suboptimal allocation, knowing that the optimal one is just ideal and that thanks to the private proverty concept, which is entirely an human construct that simply doesn't exist in nature as a force such as gravity, one can't always allocate the resources even in a suboptimal fashion because sometimes the "goods owner" wants to extract more monetary profit from it, and fuck you if it's grossly inefficient from a technical point of view.

And then you have believers, who have decided that their economic model must be the the most rational one, disregarding facts suggesting that your normative model is so suboptimal than 50 million people in the richest country in the world don't know if they wil be able to receive healthcare, but that's all fine and dandy because you misquote Adam Smith to no end and have people believe there's really an invisible hand guiding your people to the promised land.

On top of this, you have to figure out a way to make economy sustainable from an technical and ecological point of view, as for instance crude oil is known to be a scarce resource period, but contrary to the common sense when quantitative demand for oil (barrels per day)decreases price will not necessarily follow, because there are fixed cost to be covered, a profit margin to be allowed for and research and distribution costs are to be covered somehow. When eventually technology allow for inexpensive research, extraction and refining of oil, its demand expands because oil is an excellent source of energy, more and more people find uses for it or the base demand expands because, for instance, more people in China have cars....so the price increases again.

And that's not the end of it, as you realize externalities such an pollution can't just be monetized away, as the cost will only be transfered down to the masses, but the masses don't want this neither the oil seller as that would stop his business cold, so you know what's the temporary solution ? Ignore the problem entirely or downplay it, makes gas guzzler happy, makes oil seller happy, makes government extract good tax money from mass sales. If 100 years down the road with have managed to fuck up the environment, who fucking cares i'll be dead by then.

Economists have it easy, surely.
posted by elpapacito at 5:13 AM on September 4, 2009 [1 favorite]

The best part was when your three reductio ad absurdum examples were taken from the physical sciences.
posted by Rat Spatula at 5:51 AM on September 4, 2009

"Late empires are known for several things: a self-obsessed, self-serving governing class, small over-reaching wars that bankrupt the Treasury, debt that balloons until retreat from global power becomes not a choice but a necessity, and a polity unable to address reasonably any of these questions - or how the increasing corruption of the media enables them all."

More analysis along the same lines in The Dawn of Scarcity Industrialism, focusing more on China's role in the decline:

"[...] the Chinese government is planning to ban the export of rare earth elements. Those of my readers who don’t track the latest fads in technology may not know that these have become crucial to many cutting edge technologies."

"[...] In effect, what the Chinese are saying is that they are no longer willing to accept the Third World’s designated role as a source of raw materials and cheap labor to be exploited for the benefit of somebody else; if the future is going to run on technologies based on rare earth elements, those technologies are going to come out of Chinese factories, and the wealth produced by them is going to be concentrated in Chinese hands."
posted by symbollocks at 6:11 AM on September 4, 2009

elpapacito: The physicist who cannot even explain or predict fusion period after ten years ought should be fired.

I could go on, but I try not to waste too much time on answers of such intellectual dishonesty.
posted by absalom at 6:26 AM on September 4, 2009

Okay, that was glib. Since I'm a hard sci-fi fan, I can appreciate the position that economics is a science every bit as valid as physics or biology.

But it's still nascent to the point of dubious utility. We've had our Aristotles and maybe our Leonardos, but not our Newtons, Leibnizen nor Einsteins.
posted by Rat Spatula at 7:00 AM on September 4, 2009

Is something really a science if you cannot reliably use it to predict things?

I mean hell, computer science is more of a science then economics, and it's only been around for like 60 years.
posted by Afroblanco at 7:02 AM on September 4, 2009

An economic prof at my school had this (paraphrased) on his door:
"An economist is one who believes things won't work in practice unless they work in theory."
posted by Chuckles McLaughy du Haha, the depressed clown at 7:15 AM on September 4, 2009

The best part was when your three reductio ad absurdum examples were taken from the physical sciences.

Because the products obtain from physical sciences are often more immediately visible and known to almost everybody, whereas the organization that led to the production of these good in mass quantities is not as popular. So if talk about cost estimation and optimization, accounting methods that consider inefficiencies as opposed to accounting methods that merely register the financial aspects of some event (traditional accounting, so to speak), I guess few will recognize what I am talking about.

Just to make an example to clarify how accounting can have a measurable impact on a production facility, consider the following:

1. you have a factory producing a certain good X, which requires using some A and B goods.
2. you keep the record of how much A and B is used to manufacture X and how much you have paid for it
3. you produce a quantity of X, say 100 of it.
4. you can calculate its cost by adding cost of A, cost of B, cost of workforce, cost of replacement of manufactuing tools, obtaining the total cost, say 1000
5. you divide the total cost by the number of X produced, so it's 1000/100=10 , therefore the cost of X is 10.

This is just an approximation of the cost, an average cost, that doesn't tell you much and may be grossly misleading about the cost of production of each additional X. If the production function is understood to be linear, so that each additional unit will cost 10, you'll soon find that a linear approximation doesn't always and at all times represent reality.

Accounting has evolved from mere, but not entirely useless, registration of financial events to more advanced attempts to represent cost by using cost functions. Yet sometimes these cost evade the most inquisitive modeling minds and thus the function may miss some important element, or sometimes the function is demeed to be worthless because its implementation requires additional costs that may be avoided by just using a less sophisticated method, that doesn't require additional costly measures.

But sometime this lack of attention or care leads to undesiderable inefficiencies. For instance, take the (real) case of a factory who bought metal alloys ingots to produce machine parts. They had a ratio of x piece produced per ingot and quite some metal was
wasted in the process. For a while nobody cared as the business was good, so why care, everybody is happy.

Further inquiry revealed that the waste was caused by the dimension of ingots, that were not optimal for the machining tools specifications. Nobody took the extra step to just ask the ingot manufacturer to change the shape of the ingots, because nobody tought about researching the topic, possibily because nobody immediately saw this research as immediately productive of a reduction of cost or increase in profit, so why should one invest in the unknown?

Sometimes, this lack of will to invest in research makes sense from a financial point of view, as it requires commiting scarce resources into a potentially fruitless research. Yet this aversion to risk may produce exactly the undersidered outcome, that of having an unefficient production methods or not being advanced enough to compete with others.

And consider that this example has rock solid foundation, it's an event that really has happened, a fact so to say, and not "just" a speculation on what may happen.
So why was it ignored? Sometimes, simply because it went unnoticed for a long time and you don't just change a production line overnight, just because you found a deficiency, you have many contrainst to struggle with.

Economists try to deal with these kind of problems, including optimization toward maximum efficiency, but sometimes have to deal with conflicting goals, scarce or inaccurate (sometimes deliberately so) information as you get so close to politcs (or exaclty into politics) that any attempt to shine a light may be seen as imcompatible with current government goals, or powers-that-be goals.
posted by elpapacito at 7:18 AM on September 4, 2009 [1 favorite]

elpapacito: The physicist who cannot even explain or predict fusion period after ten years ought should be fired.

I could go on, but I try not to waste too much time on answers of such intellectual dishonesty.

The fact people don't like to digest is that uncertainity exists, and outcome of a work can be uncertain for a very long while. Everybody wants results immediately, but guess what: it doesn't work like that. But of course you are right, close universities, invest only in something that delivers immediate results, that Pasteur guy you owe your life to was just another crazy researcher until he discovered something important, a madman really. Everybody knows that bacteria develop out of thin air it's nonsense to invest in him.
posted by elpapacito at 7:25 AM on September 4, 2009

If economists learned from their mistakes, they would be historians.

posted by jb at 8:10 AM on September 4, 2009

To be fair, I should add that all of the historical economists I have read/heard papers from have generally made lots of sense and based their understanding of economists on solid data and research. It's just a pity their theorectical brethen don't read more of that research.

Also, the behavioural economists are doing great stuff showing just how crazy and irrational we all are.
posted by jb at 8:15 AM on September 4, 2009

Everybody knows that bacteria develop out of thin air it's nonsense to invest in him.

And physics (back when it was "Natural Philosopy") has its share of such stories as well.

I think your ingot example is a bit poor, inasmuch as I can easily imagine that the guys in the factory would have come up with that problem and its solution on their own, without capital-E Economics.

It's not that I don't think economics warrants study, or can't be useful; but it has a problem that physics, chemistry don't really share; ethics. Medicine gets tangled up here too; see the famous AIDS-causing condoms of Africa.

This, combined with its nascency, makes it dangerous to believe things one reads.
posted by Rat Spatula at 8:15 AM on September 4, 2009

sorry - should be "based their understanding of economics..."
posted by jb at 8:16 AM on September 4, 2009

An economist goes back to his alma mater, and stops in to visit his favorite old economics professor. While there, he spots some quiz sheets the professor was preparing. He looks them over, and says "Wait, this the exact same exam you used 20 years ago!". The professor replies, yes, that is so, but the answers are all different now.
posted by fings at 8:31 AM on September 4, 2009 [1 favorite]

Also, the behavioural economists are doing great stuff showing just how crazy and irrational we all are.

I dunno that I'd describe behavioral economics believing or showing that people are irrational. Quite the opposite, actually: the reason that it's fruitful to add in some psychology and some sociology to modeling the behavior of "the consumer" is because individuals *are* rational, but subject to (knowable and measurable) cognitive biases. If people truly did behave in a totally irrational manner, responses would be totally unpredictable and there would be no point in trying to study or understand it at all.

Rationality is different from profit-maximizing, although economists often fudge the two and claim that rationality must imply that an individual behave in a way that maximizes expected profit. It's the leap between the two where behavioral economists say "wait a minute, let's stop and think a minute--does that really make sense?"
posted by iminurmefi at 9:25 AM on September 4, 2009

Predicting the economy is impossible over the long run, and not because of the EMH. The economy is a recursive, chaotic system in the first place, so without perfect initial condition information, prediction and actual behavior will diverge over time, often chaotically. An additional problem is that every new theory becomes part of that system. Any attempt to model the system dislocates it. I don't know how one solves these fundamental problems, at least in this Universe.
posted by Mental Wimp at 10:48 AM on September 4, 2009

Dan Ariely's book is called Predictably Irrational - so he's saying that we are irrational (in that we don't make rational choices), but we have patterns to our irrationality.
posted by jb at 1:46 PM on September 4, 2009

I have to say that given a choice between Krugman and Ferguson, I would go with Krugman every time. I'm not an economist, so I have no independent judgement on how solid Krugman's work is (apparently he got a Nobel - that sounds pretty good). But as a historian Ferguson has problems marrying his ideas to actual, you know, reality.
posted by jb at 1:51 PM on September 4, 2009

If historians were expected to predict the future, they'd have as much snark thrown their way as economists.
posted by anthill at 2:26 PM on September 4, 2009

I think your ingot example is a bit poor, inasmuch as I can easily imagine that the guys in the factory would have come up with that problem and its solution on their own, without capital-E Economics.

Certainly possible, the guys in the factory may have figured out on their own and possibly did well before any laureate economist did, just because they were the ones observing the phenomenon at that point in time before others
Indeed if my memory serves, in the Toyota models of productions, the Kaizen method of constant little improvements demanded the examiner to be present physically in the production line, to ascertain wheter the measuring methods and instruments were doing their job reliably and if something could be improved, merely by observation, without simply relying on distant proxy indicators, proxy that may not have been, after all, as reliable or representative of critical variables as they were designed and expected to be.

Exactly because the specialized worker may have noticed particular properties of his part of the task, a worker with the task of optimizing the whole process should pay attention to his remarks and by studying all of the production line should try to figure out how to optimize the chain without disrupting it, working WITH the other workers.

That doesn't require hierarchical power of a project manager, it could be a support function of the project manager or onw of the tasks of a PM. It's not merely a "management by leadership" normative goal setting fluff project, it demands the PM to figure out what is going on , actually, in the line.

The question is, why did was the ingot innefficiency unnoticed and unaddressed ? By analogy and on a wider scale, why was the gas guzzling inefficiency of many cars ignored or unnoticed? Is it possible that it was deliberately ignored because the quantity of gas sold is very relevant to some powerful interest, regardless of the fact that the owner of a SUV now is thinking twice about buying a car that has a lower TCO and is more likely to buy from an asian competitor?
Could it be that a part of the car industry was heavily subsidized or influenced by oil companies, in mutual interest with car companies who needed relatively cheap fuel to sell their massive cars who justify an higher price or are more desiderable to the current market?

How does that affect the bottom line of millions of people, the tax revenus of states and the whole federal budget? That's hardly the job of a guy working in the line or in the management of one company, even if he/she may have the potential to figure it out.
posted by elpapacito at 4:17 PM on September 4, 2009

Again, I think you do economics a disservice with your choice of examples. In the case of automobiles and fuel, you suggest collusion between the two industries. This, while likely true, does not strike me as a result of any but the most rudimentary application of economics. "Rich dudes plan further enrichment over a round of golf!" Thanks, Economics!

While I understand the application of simple economic analysis to, say, improve factory output, I think it's my own cynicism that prevents me from putting much stock in its wider-scale analyses. The factory example isn't so far removed from the capitalist's lemonade stand, with all actors rationally wanting more, faster, better, cheaper.

Finance is not a factory; it's a factory, a casino, a bank, a crime family, an insurance company and a thousand other things all in one. It requires a correspondingly more complex analysis, and the people doing that analysis all work for one interest or another. Unless you yourself are as educated as they are, and cagey enough to consider the messenger as well as the message, the utility of the messages is nil for the layman.
posted by Rat Spatula at 10:06 AM on September 5, 2009

I'm sure this thread is dead to most people, but John Cochrane just posted his own long response to Krugman's article:

[H]e calls for a return to the eternal verities of a rather convoluted book written in the 1930s... Krugman hints at dark conspiracies, claiming “dissenters are marginalized.”... It’s a disservice to New York Times readers. They depend on Krugman to read real academic literature and digest it, and they get this attack instead. ...

That’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and advice to spend like a drunken sailor are pretty superficial compared to all the fascinating things economists are writing about it these days.

posted by FuManchu at 11:27 AM on September 12, 2009

That's a Word DOC file link, be warned! sorry for the late alert
posted by FuManchu at 11:28 AM on September 12, 2009

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