Thursday, July 23, 2009

Economists and Binoculars

The Economist recently pointed the finger of blame for the financial crisis on economists. Many people, including Judge Richard Posner in A Failure of Capitalism, have blamed economists for the crisis, or at least for failing to predict it. Although some economists, such as Dean Baker, correctly foresaw the problem (according to the cited article, "Dr. Baker put his money where his mouth is by selling his downtown DC condominium in May of 2004"), few sounded the alarm, and even fewer economists listened to their associates who made dire predictions. According to The Economist:
There are three main critiques: that macro and financial economists helped cause the crisis, that they failed to spot it, and that they have no idea how to fix it.

I have two things to add. First, not all economists are macroeconomists, yet all economists are similarly maligned. Richard Posner has recognized this, but few others have. I almost feel embarassed to introduce myself as an economist, even though the work I do is not related to the crisis. Second, a failure of economists to predict better the crisis does not mean that economic theory failed. Looking back, economic theory could have perfectly predicted what happened, it just seems that macroeconomists were asleep at the helm. In my view, it's not that the binoculars failed, rather economists failed to look through the binoculars properly.

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