Back to Basics for Economics
THE SOURCE: “Economics in Crisis” by J. Bradford DeLong, in The Economists’ Voice, May 2011.
The financial crisis laid waste to many things—the housing market, the banking system, individual 401(k)s. A less noticed but still significant casualty was the confidence of many of the nation’s leading economists, among them J. Bradford DeLong of the University of California, Berkeley. How, he asks, could he and his fellow economists have failed to anticipate the gravity of the most significant American economic downturn since the Great Depression?
DeLong, who was deputy assistant secretary of the U.S. Treasury for economic policy from 1993 to 1995, is still “astonished” by the scale of the panic that “relatively small” losses in subprime mortgages caused. But he’s even more astonished by the failure of university economics departments to learn from their mistakes. While economists strove to perfect theoretical models of how markets function, they neglected the human, historical, and political forces that shape economies. Consequently, they missed many of the factors that turned the crisis into a disaster, from the theory-defying failure of banks to protect themselves against excessive risks to consumers’ potential to react to adversity in irrational ways.
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