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Krugman: How Economists Blew It

Downturn blindsided big brains who thought markets were perfect

By Kevin Spak, Newser Staff

Posted Sep 4, 2009 11:42 AM CDT

(Newser) – Believe it or not, economists were, until about a year ago, congratulating themselves on a job well done. Now the dismal science is in shock, and Paul Krugman thinks he knows why. Economists, he writes in the New York Times Magazine, “mistook beauty, clad in impressive-looking mathematics, for truth.” They began to believe, as they had before the depression, that people were perfectly rational and markets perfectly efficient, allowing them to build elegant mathematical theories.

At the same time, they devalued or forgot about Keynesian economics, reverting to Adam Smith-esque free market ideologies with new, mathematically impressive veneers. They ignored even the possibility of bubbles. Going forward, the field will have to accommodate irrational behavior, return to Keynes’ ideas, and incorporate the grimy realities of finance. “Economists," Krugman counsels, "will have to learn to live with messiness.”

[Images (2)]

[Quotes (5)]

Nobel economics prize winner Paul Krugman speaks during a press conference at the Royal Swedish Academy of Sciences in Stockholm, Sweden, Sunday, Dec. 7, 2008. (AP Photo/Scanpix, Fredrik Persson)

English economist John Maynard Keynes, 1st Baron (1883 - 1946) in his study. (Getty Images)

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If you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable. - Paul Krugman

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. - John Maynard Keynes, on why he distrusted financial markets

It’s what you say with regard to disasters that could have been predicted, should have been predicted and actually were predicted by a few economists who were scoffed at for their pains. - Paul Krugman, on the all-too-common statement, 'Nobody could have predicted...'

In short, the belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. - Paul Krugman, on the housing bubble

Economists who inveighed against the stimulus didn’t sound like scholars. They sounded like people who had no idea what Keynesian economics was about. - Paul Krugman

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Krugman: How Economists Blew It