As the euro zone crisis deepens, economists in France, Germany and Italy have been forced to turn away from classroom theories and look at the real world – from insects to financial markets, from banks to brain scans – to better understand what’s going on. An increasing number of teachers argue that the textbooks, some by experts who didn’t see the crisis coming, are divorced from reality, inconsistent, dull, and, in a crisis that has gripped the globe for more than four years, even dangerous.
…To suggest economies were not generally efficient would, until very recently, have been heresy in many classes.
The modern theoretical framework began to emerge in the 1980s by Nobel Prize winner Robert Lucas, the John Dewey Distinguished Service Professor of Economics at the University of Chicago. Lucas said economic models should be something you could put on a computer and run – “a mechanical artificial world populated by interacting robots.” If it wasn’t in the model, it couldn’t happen. The collapse of the financial system, for example.
Others helped build on this idea. New Keynesians took a slightly different tack, including assumptions about market failure but still resting on the idea people behave rationally.
After the turn of the century, Lucas even suggested economists had cracked one of the profession’s biggest questions. “The central problem of depression-prevention has been solved,” he wrote in 2003.
Four years later, Roger Farmer, a professor of economics at the University of California in Los Angeles, was at a dinner at the Bank of England to celebrate the “Great Moderation”, a term coined to describe an era in which some politicians claimed monetary policy had ended boom and bust. “We had entered a new era of economic prosperity,” he recalled in a paper this February.
That night, British building society Northern Rock went under, heralding the start of Europe’s crisis and a global backlash against economists.
Why didn’t they see it coming, the Queen of England asked on a 2008 visit to the London School of Economics.
via Special Report: Crisis forces dismal science to get real.
Um… because they’re arrogant, dishonest, narcissistic jackasses, who get paid very well by their corporate sponsors (including those in academia) to engage in company line groupthink?
– Lee Adler
