

The state of economics

The other-worldly philosophers

Although the crisis has exposed bitter divisions among economists, it could still be good for economics. Our first article looks at the turmoil among macroeconomists. Our second (see article) examines the foundations of financial economics

See article

Readers' comments


Ravi Ratnasabapathy

Could the bubble have been caused by printing of money? Minsky described the problem accurately enough: that the instability to the system was caused by excessive debt. He did not however uncover the cause of the excessive debt.

The Austrian schools holds the view that the excessive debt is caused by money printing. As long as the debt in the system is matched by savings, there is no problem. However Central Bank credit, which creates newly printed money, is the root cause of the boom and bust cycle.


What could macroeconomists possibly expect to glean from a period of greed, excess and reckless abandon of sensible principles that would contribute to their ability to solve contemporary or future economic problems? those are traits that transcend all disciplines.

Francisco J. M. Costa

The article focus too much on the assumptions, that they are not real and should not be trusted. However, the point is not the assumption.

For example, when we are driving in a road we use a paper map (or a GPS) on two dimensions. Anyone have a doubt that the road has three dimensions, however, people knows that the map is a reduction of the reality (in fact, it has one dimension less), but the point is that we believe that this reduction is helpful for that task, i.e. people believe that the dimension ignored by the map is not relevant for the driver in that moment.

The same happen with economic models, they are maps. What makes a good or a bad map is not the assumptions necessarily, but the map by itself, i.e. the output of the model given the assumption. For example, if your model states that prices contain all information available and you observe that banks and governments spend millions of dollars in research, something is wrong, independently of the assumptions.

Otto von Kronq

First, it must be noted that based on his talk show appearances, Dr. Krugman is an opportunist with a left-wing political agenda attempting to shape policy. He hardly can be seen as a neutral academic. Second, what all of these theories and models fail to account for is the unaccountable: human nature. Whereas one may theorize that the multiplier of a public dollar spent will yield more than a dollar in carry-forward spending, what is happening today is a public dollar spent goes into the bank to be saved-- not further spent. What economic theory failed to account for is the shock and awe that a major recession has on human behavior to realign "commonly accepted" human spending habits. That theoretical defect, Dr. Krugman, includes Keynesian theory.

Juan A. Hervada

jensks writes: "it is interesting that most econometric models have consistently proven to be very poor at foreseeing the the turning points and dynamics of cycles." Well, that's a kind understatement.

As an old believer in econometrics I may have a tendency to be particularly negative about the logical framework behind its techniques and aggressively argumentative regarding whatever "finding" based upon a model that goes beyond fairly simple processes with bedrock trustworthy statistical series. Yet in the context of this crisis I feel authorized to point fingers at econometrical zealots working for, literally, brainless banking institutions.

Institutions that competed with each other to make the process of taking a decision –any decision- as close to automatism as possible. Economists hiding behind defensive barricades of dubious parameters and impenetrable regressions. The misery of avoiding responsibility by means of esoteric equations and creative statistics becomes painfully evident at the end of the day (of the cycle, if you want).

Behavioral economics may just be yet one more label of tenure seeking academic snake oil peddlers, but somewhere in this crisis one can sense the need of a new theoretical frame for the economy, probably more axed on cognitive science than ever before. Cognitive analysis of economics can explain somehow how come that hundreds of thousands of individually rather smart persons in the banks, as in ministries and universities could turn themselves into some sort of stupid zombie.

Ironically enough, society hasn't found a better alternative than to elect into office a master of rhetorics, expert in selling the snake oil of social engineering. Forward to a catharsis of sorts?


In order to revive the world economic system, jobs must be created.One cant rely on trade forever.The economies of the east need to consume more and save less.Higher consumption needs to come not through low rates but higher current incomes.



The destruction of this statement is one of the most unappreciated and most profound accomplishments of the 20th century. The sad thing is many economists still believe this statement today. Which is why we really are in the dark ages of macroeconomics. Supply-side economics holds that only supply must be encouraged because demand is a given. Again, no one would ever decide to hoard green pieces of paper. It would either be spent or invested. But this is NOT TRUE! People become irrational and save little green pieces of paper like their life depended on it in certain moments of panic. And hence this is why we have the Fed, to stimulate demand.

The importance of this cannot be understated. Recently the Economist featured a book about the Industrial Revolution in its book review section. And the goal of the book was to find out why did the Industrial Revolution begin in England. The conclusion was because there was demand due to relatively high wages due to a relatively small labor pool. So, it is demand that drives supply and with it all of the wonderful innovation and productivity miracles that we have experienced the past few centuries.


Economic models need to be simpler so that everyone can understand them.DGSE models and New Keynesian central banking models are rather complex and futile.Economic models should be more humane.Try telling a defaulter that markets work efficiently or that central banks follow time inconsisent policies!.

This fascination with rock bottom interest rates amazes me. Try balancing the interest rates for the benefit of savers and borrowers for a change.This would make the world a happier place.It would encourage savers and help to cope with business cycles.In the current set up, some (bank executives) have it all while others (those on dole) really suffer.


The gist of this trio of articles is that economists are flopping around in the dark, looking for solace in ever-more-complex models, theories, and formulas. Seems to me they need to go back to basics.

We're in trouble now because a credit bubble has collapsed. Why was there a credit bubble? Well, because the inevitable outcome of flexible monetary policy is the endless expansion of credit. Successive crisis become more and more serious as overall leverage in the economy increases, and the central bank invariably fails to "mop up" all the credit that was previously made available - can't cause a recession now, can we? This system collapses every few decades and sends economists scurrying to come up with yet more theory to explain the dilemma - but they just move further and further into fantasyland.

Why don't The Economist whiz kids explain to us why a central-government planning committee should have responsibility for setting the price of money? The Communist experiments failed because central planning doesn't work, not because Gosplan was insufficiently "independent" or lacked a sufficiently detailed financial model.


Dirk Bezemer (Dutch Professor) has made a paper summing up 12 economists who timely foresaw the bust of the housing bubble and its consequences.

Please read the following link.

This paper has many interesting findings on how to combine existing theories.

As one of the economists on the list I have found it interesting how little attention was given to the massive credit expansion in new loan types during the boom years. In a historic perspective such a credit boom has followed the rules of Hyman Minsky.

At the same time it is interesting that most econometric models have consistently proven to be very poor at foreseeing the the turning points and dynamics of cycles. During the boom years economic models were to rosy and therefore contributed greatly to the creation of a credit and asset price bubble.

Wise Man

Read this article makes one understand why Economists have been so dead wrong. The writer repeatedly refers to Economics as a "Science." Since when did Economics become a science ? Economics has always been part of the humanities. Scientific theories can be tested by anyone and everyone for accuracy. Scientists are neither arrogant nor ideologues, like many economists are. Indeed its not a surprise that we are in such a mess.

Economics cannot be put to any useful use unless the limitations of economics theories are clearly understood, not the least by central bankers and policy makers.


I always thought classical economics with its stress on the connectedness of politics and economics was far superior to anything more recent. Additionally it would not have made the error of current so-called Keynesians in embracing gov't deficit spending when the sky was dark and times were bad, and eschewing it in sunshine when times were good.

Gordon Brown is the best example of embracing gov't spending in any weather and in good times and bad. Britain has much to thank this man for.

K Lim

The fundamental problem of macroeconomics is that all the models have failed to capture the reality of today's global economy: that of free-flowing finance. Even Keynes' model was predicated on a closed economy, and has since been modified. But is it sufficient to make significant progress?

Don't get me wrong, the basic concepts in my decade-old A level textbook adequately allow me to understand what is happening in our world. That is the best contribution of macroeconomics, I believe. I have not heard of any significant macroeconomic contribution that has added any value since. The rest should be left to other social scientists who do not use maths to model people's behavior.

So first off, scrap the Nobel Prize for Economics, there is no value in such an award.


I've always found it odd that there has been such disagreement between economists, but it exists because theories are as varied as opinions and there is no way to test them and prove anything. Even if a theory accounts for past events there is no real way of telling if it is coincidence or fact, and if the past is predicted the future is always in doubt.

The question is why? For one, the field is young. A century of economics is infancy compared to math, physics, or biology, but very similar to psychology. The comparison to psychology brings up the second point, which is that theories are pushed by personalities and not consensus or proof. Freud and Keynes would have been great friends I'm sure. For all other truly scientific fields there are central tenets that are cannonized as correct and immense proof would be required to overturn them. In economics, all it takes is a flashy model and a persuasive presenter. Is this bad? Hard to say really, but I think it moves the field away from science and towards humanities, which is unfortunate.

Unfortunate because economists are not humanists. They are trained in numbers and percentages not emotions and interactions. Unfortunate because economics as a humanity/science hybrid is intensely complicated, moreso than any other discipline. What other field requires a person to be able to predict a worldwide chain of events based on human actions and mathematical calculations? In sciences there are laws which narrow the possible, and in humanities the possibilities are endless yet generally inconsequential to more than a few people.

And the last problem I see is that suppose a computer program was inputted with every single economic actor's decision making matrix (or matrices if the model could change variables, as it should) and it somehow spit out the best way to run policy. A miracle it would be, but the second that policy was implemented it would change the economic actor's mindset and render the program useless. People are constantly changing their behaviour as the economic environment changes and I for one am truly hesistant to believe it is in any sort of controlled, progressive way. I think it is more likely that it changes quickly and unpredictably.

I don't pretend to have any answers, but as a general recommendation I would offer that a good start to rebuilding the esteem of the profession would be admitting its limitations and work to broaden the scope. Also, economists seem to be on a solo journey for tenure, peer adulation, public adulation, or a Nobel prize. Where is the harm in collaboration for the greater good?



http://www.sec.gov/rules/proposed/s71903/wmccir122203.pdf December 22, 2003.



Investors and the public are at risk."

http://www.sec.gov/rules/proposed/s71005/wcunningham5867.pdf February 6, 2006.


From a modelers perspective (in health) and some faint memories of undergraduate economics, I am surprised that the word "micro" wasn't mentioned once in the text. The unpopularity of macro-economic models among students was the limited explanatory power of them coupled of the limited data available to test them compared with micro-economics and micro-econometrics.

So the micro-foundation of macro-models is already an agreed fact and recent micro-economic models are already much more advanced than the used macro-economic models in terms of how the model rationality (read: messy). So the author is right in claiming the macro-economist tend to opt for convenience. But the science of economics does have (at least some) tools and insights to make the models better. Because to explain the world scientifically (which might not be the best way to do it) , models are indespensable.


"ROBERT LUCAS, one of the greatest macroeconomists of his generation ..."

Surely you jest.
A more accurate description would be "successful economist" or perhaps "leading economist" of his generation

Remember, this is the gentleman who claims that there is no such thing as "involuntary unemployment" - that all unemployment is purely voluntary. No doubt he believes that what happened during the Great Depression, and what is going on now is really an epidemic of laziness.

As the article points out:

To refer to an economist whose theories were in large part responsible for much of the above as 'great' is a somewhat unorthodox use of the word indeed.

Finally a memorable quote from the 'great' Mr Lucas:

...the central problem of depression-prevention has been solved, for all practical purposes...”

- Robert Lucas, Presidential Address to the American Economic Association 2003.

Perhaps we should leave it to history to judge the greatness of Mr Lucas and the usefulness, if any, of his contributions to economics.


Has anyone ever tried Keynes' Keynesianism ? It seems that only the pump-it-up deficit side has been run, never the tax increases and spending cuts that are supposed to accompany a strong economy, and pay off the debt incurred in stimulating the economy. That, of course, would take political courage. Rather, since 1981, the US has run a strange Keynsian/anti-Keynesian program of tax cuts and increased spending even when the economy is healthy. Does any macroeconomic theory suggest that a government can spend 21% of GDP and collect taxes of 18% forever ?


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