Thursday 19 Jul 2018 | 04:15 | SYDNEY
Thursday 19 Jul 2018 | 04:15 | SYDNEY

The state of economics post-GFC


Mark Thirlwell

29 April 2009 10:57

I have blogged before about some of the casualties of the current crisis. Another candidate for inclusion in this list seems to be the economics profession, at least according to a series of critical articles that have appeared in recent months. 

See, for example, this essay by Anatole Kaletsky which claims that ‘not only have economists, as a profession, failed to guide the world out of the crisis, they were also primarily responsible for leading us into it.’ The ever-provocative Willem Buiter has proclaimed the ‘unfortunate uselessness of most ‘state of the art’ academic monetary economics’, suggesting that ‘(m)ost mainstream macroeconomic theoretical innovations since the 1970s...have turned out to be self-referential, inward-looking distractions at best.’ And the bitter disagreement over the merits of fiscal stimulus as a policy response to the current downturn prompted Paul Krugman to declare that we are living in a ‘Dark age of macroeconomics.’ 

Now, in a stimulating piece for the National Interest, Barry Eichengreen has given his view on the proposition that ‘the basic economic theory informing the actions of central bankers and regulators was fatally flawed’. Eichengreen stresses that, contrary to the view that theory had nothing useful to say about the crisis:

In fact, large swaths of modern economic theory focus squarely on the kind of generic problems that created our current mess. The problem was not an inability to imagine that conflicts of interest, self-dealing and herding could arise, but a peculiar failure to apply those insights to the real world.

He then analyses the incentives of the consumers and producers of economic theory that led to this failure – an admirably economic explanation.

Finally, well worth listening to in the debate over the role of economic theory is the Lowy Institute’s Warwick McKibbin, who makes some important points about the continued usefulness of economic models in understanding our current circumstances in this short interview  with The Interpreter – a usefulness which was on display in his excellent Lowy Lunch presentation on the causes and consequences of the GFC.

Photo by Flickr user Grim Reaper with a Lawnmower, used under a Creative Commons license.