Skip to: Content
Skip to: Site Navigation
Skip to: Search
THURSDAY, NOVEMBER 26, 2009
| Subscribe to Newser's RSS feeds RSS | Follow Newser on Twitter Twitter


 OPINION 
6

Krugman: How Economists Blew It

Downturn blindsided big brains who thought markets were perfect

Share

(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.”

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.
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.
English economist John Maynard Keynes, 1st Baron (1883 - 1946) in his study.   (Getty Images)
« Prev« Prev | Next »Next » Slideshow

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

« Prev« Prev | Next »Next » Slideshow
OFF THE GRID
11.24.09
Murdoch and Microsoft: The Mice Are Trying to Roar
11.23.09
Books Are Bad for You
6 comments
VIEWING:
 
Bambi
Sep 4, 09 12:22 PM CDT
Unfortunately, understanding economics does not just require rigor and commitment--it takes the somewhat unusual talent of engaging both the so-called 'left' and 'right' brain hemispheres simultaneously. Many aren't adept at operating both sides at once. For economics, not only is a naturally mathematical mind needed, but also a deeply intuitive and empathic awareness of the emotional foundations of desire, satisfaction and the causes of human 'happiness' (whatever THAT is!). As such, in practice, all economists must be at least mathematicians, but they can get their degrees while still lacking the deep understanding of emotions which the lesser among them are tragically inclined to refer to as the 'irrational' side. These so-called 'irrational' elements are not at all irrational when analyzed on their own terms, disconnected from mathematics, and rather connected to the pursuit of happiness. The top of the pyramid in all valuation schemes must be happiness, and money, therefore, can only be worshiped insofar as it is believed to buy off some of the obstacles in acquiring happiness. To anyone that is so confused as to think that 'more money' makes more happiness in any case...I'm sorry about that misconception. You might just be an economist calling the divergence between my money and my happiness my 'irrational side.' Reply
Vote up! Vote down!
+4
IN RESPONSE:
wwwonderer
Sep 8, 09 10:55 AM CDT
Well said Bambi. More importantly more money, means more THINGS, some necessary, some not:food, shelter, clothing, good health, the latest mix tape, some gym shoes, another yacht. Consumerism is the selfish-natural desire (not sure what to say) of free-market capitalism. There is nothing wrong with having things. There is nothing wrong with enjoying those things. But it seems like the more one places happiness in tangible things the less real, and more fleeting that happiness.
Vote up! Vote down!
0
JonmarkP
Sep 4, 09 2:50 PM CDT
They were making shitloads of money by fooling others, but first they had to fool themselves. They didn't have a mathematical model for self-delusion. Reply
Vote up! Vote down!
+1
nick
Sep 4, 09 3:28 PM CDT
Believing the illusion, so apply stated and justified by Gordon Grekko in Wall Street: "Greed is good", implying that greed is good for me, good for you, and good for the economy. Reply
Vote up! Vote down!
+1
Nwambe
Sep 4, 09 4:19 PM CDT
To be fair, Krugman's an idiot. Reply
Vote up! Vote down!
-1

View all 6 comments »

LEAVE A
COMMENT Comment Policy
Facebook ConnectPost this comment to Facebook?

After connecting you will have the option to post your comment on your Facebook profile.

 

Related Newser Stories

238 Stories

THOMAS FRANK

Give Thanks We're Not Thanking Wall St.

Be grateful for new skepticism on financial industry

Nov 25, 09 8:04 AM CST
(Newser) - There won't be a lot of people thanking the financial industry this Thanksgiving, and that in and of itself may be cause to be thankful, writes Thomas Frank. There's been a shift in thinking and newly skeptical Americans no longer believe that the market is omniscient or that colossal Wall... More »

MORE ABOUT:
Bush administration • stock market • recession • bank regulation • financial crisis • George W. Bush Policy Institute

 Buffett: 
 'Financial 
 Panic Is 
 Behind Us' 

He sounds optimistic note at Columbia University forum

Nov 12, 09 9:14 PM CST
(Newser) - Warren Buffett says the worst is over. "The financial panic is behind us," he declared at Columbia University. The Berkshire Hathaway chief acknowledged that the US economy "still is sputtering some," but he sounded a bullish note on investment opportunities around the globe. While he gave... More »

MORE ABOUT:
Warren Buffett • recession • Berkshire Hathaway • panic • financial crisis

9 Other States Have Calif.-Sized Fiscal Messes

Ariz., Fla., Ill., Mich., and NJ among others facing crises

Nov 11, 09 8:14 PM CST
(Newser) - California has by no means cornered the market on enormous financial problems at the state level, with a report out today saying Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island, and Wisconsin are also at tremendous risk. The Pew Center sees widespread unemployment, huge budget deficits, and the... More »

MORE ABOUT:
Florida • California • Wisconsin • Arizona • New Jersey • Michigan • foreclosure • recession • Oregon • unemployment • Illinois • Nevada • Rhode Island • budget deficit • financial crisis

238 Stories


Business  •  US 
TwitterFollow @NewserBusiness on Twitter

 
economics • recession • Paul Krugman • financial crisis • John Maynard Keynes • economists

from our news partners