Peter Radford in his blog, Real-world Economics Review, who examines Professor Krugman's response and makes the case for why the response fails:
In his discussion this morning he is critical of a defense of the hedge fund managers made by Jesse Eisinger. That defense rests on the notion that economists have no clue about the economy as demonstrated by their inability to predict the bubble and subsequent collapse.
There were, of course, many economists who did predict the bubble, but they were not influential enough to have an impact. They remain mostly without influence due to their being outside the profession’s orthodox traditions.Please re-read the highlighted text as Mr. Radford has nicely summarized that it was the non-mainstream economists who predicted the bubble and that they lack the ability to influence the profession.
Krugman, however, defends the profession against Eisinger’s criticism, and this is where he goes wrong.
It does not matter that some economists were correct.
The central orthodoxy of the profession, the source of most advice to policy makers and business people, and the basis of most commonly taught textbooks, totally missed both the possibility and then the existence of the bubble. Economics was horribly wrong.Please re-read the highlighted text as your humble blogger has been saying and ironically Professor Krugman agrees with the notion that policy makers should not listen to economists or business people who totally missed both the possibility and then the existence of the bubble.
As the Bank of England's Robert Jenkins observed, it was amazing to watch policy makers turn for advice to the very bankers who created the bubble.
As I added, it was even more amazing to watch policy makers also turn for advice to economists who rely on models that exclude the financial sector.
In their search for advice, the only individuals the policy makers were unwilling to turn to for advice were individuals like myself who predicted the financial crisis and offered before the crisis began a solution for how to moderate the impact of the bubble's bursting.
It hasn’t recovered since.
Instead it is stuck in an unproductive self-examination that has yet to have much impact.
Those who were wrong still pronounce and influence policy. They continue unabashedly to teach and perpetuate their errors.
The profession, such as it is, is splintered into ideological warring camps making no progress towards a newer or more complete understanding of actual economies where things like asset price bubbles can, and evidently do, exist.
In short economics is a mess and is completely deserving of the skepticism Eisinger attributes to the hedge fund managers.
After all many of them made fortunes by ignoring economic theory, recognizing the bubble, and shorting sub-prime assets. People who have made fortunes by thinking about the real economy and then risking their assets based upon that thinking [or by predicting the financial crisis], have a right to look down on a bunch of academics who opine about theories whose proof only ever resides in carefully constructed and highly constrained alternative worlds known as models.
To win the respect of hedge fund managers, and anyone else out there in the real world for that matter, academic economists need to demonstrate a commitment to learning from their errors and toss aside erroneous theories. They need to stop regurgitating the same old stuff – some of which dates back to bygone eras and thus predates the development of our modern economy.A modern economy that regular readers know is based on the FDR Framework which combines the philosophy of disclosure with the principle of caveat emptor (buyer beware).
This is not to say, naturally, that old ideas are necessarily wrong. But a social science like economics has to recognize that societies change and that the ‘social’ part of a social science provides the relevant context for the ‘science’ part.
Ideas may, therefore, not be timeless. If economists want us to believe they are, then they need to prove that point, and not simply assume it.
Economists still are stuck within an anachronistic vision of what they do. They may have stellar reputations as responsible professionals within academia,Reinhart and Rogoff showed that a stellar reputation as an academic economist is worthless from the standpoint of anyone turning to them for policy recommendations.
Unlike most other academic disciplines, economics has no minimum standard for its peer review articles. So being published should not be taken as a sign that the authors know what they are talking about.
but, by and large, their relationship with society at large seems amateurish and somewhat naive. Indeed they oftentimes deny its existence, preferring instead to remain engaged in scholarly debate within their respective academic bastions....Fed Chairman Bernanke best exemplified the economic profession's relationship with society when he became visibly upset with consumers for not spending more when the Fed adopted zero interest rate policies (after all, that's what the Fed's model that failed to predict the financial crisis said should happen) and with investors for not rebalancing their investment portfolios to riskier securities.
Krugman wants us to believe that economics is still deserving of respect. But what about the current mess within the profession is so deserving?
More to the point, and I have argued this before, given the great fractures and ideological splinters within economics, and given the often totally contradictory nature of different economist’s views, on what basis, exactly, does an outsider rest his or her trust? Who do they turn to for reliable advice?
And how do they identify an economist’s credentials at all? ...Please note that economics is one of the few fields of academic study where many of its leading thinkers were not trained economists (see: Adam Smith and the invisible hand; Walter Bagehot and the modern central bank).
Put it this way: in light of the evident failure of economic orthodoxy in recent years, were you in need of advice regarding the real economy would you turn to an academic economist?
Or would you trust your own experience? Clearly many hedge fund managers and business people choose their own experience.
And that says a lot about the state of economics, doesn’t it?Had policy makers turned to individuals like myself for advice regarding the real economy, they would have been told to adopt the Swedish Model and require the banks to recognize upfront their losses on all the excess debt in the financial system.
The Swedish Model is the only known solution for a bank solvency led financial crisis. It has numerous advantages including it protects the real economy and the social contract.
Furthermore, the Swedish Model is supported by the design of a modern banking system.
However, the Swedish Model is not an economic model. It is simply the solution for what ails us.