Monday, September 7, 2009

Where were the economists last fall?

Out to lunch, opines Paul Krugman, in this well written intellectual history ranging from Adam Smith to Ben Bernanke.
Until the crisis, efficient-market advocates like Eugene Fama dismissed the evidence produced on behalf of behavioral finance as a collection of “curiosity items” of no real importance. That’s a much harder position to maintain now that the collapse of a vast bubble — a bubble correctly diagnosed by behavioral economists like Robert Shiller of Yale, who related it to past episodes of “irrational exuberance” — has brought the world economy to its knees.

According to Krugman, our focus on "beauty" caused us to miss the "truth" of the credit, real estate, and asset bubbles.  His conclusion reminds me of one of Ronald Reagan's favorite sayings: "an economist is someone who sees something in practice and then wonders if it can exist in theory."

1 comment:

  1. See John Cochrane's response by googling (with quotes) "Why did Paul Krugman get it so wrong?"