Politics Today: Economists: Not As Smart as You Think (Or Are They?)
Economics appears to have replaced the law as the profession of ridicule. In April, for example, Business Week ran a cover story asking, "What Good Are Economists Anyway?" given that they failed to predict the worst recession since the Great Depression. More recently, Paul Krugman, writing for the New York Times, asks "How Did Economists get it So Wrong?"
Krugman's "it" presumably refers to predicting the financial crisis. With his Nobel Prize in economics, Krugman's criticism of his profession is not likely to be ignored, and it shouldn't be. In his lengthy article for the Times, Krugman argues that "the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for the truth." Krugman identifies two tenants as the central cause of this failure: an idealized view that markets are perfect and that individuals are rational. …
… For markets to function, we have to act as if highly improbable outcomes rarely occur. If we have to react today to every possible outcome, no matter how remote, then it will be very hard to get anything done. As Lucas said, it makes no sense to drive your car into a ditch now to avoid a head on crash because the car coming around the curve might be in your lane.
Yet, the economic collapse shows that we cannot ignore the fact that extreme events do occur. When a very rare 'black swan,' to use Nassim Taleb's term, appears, how should we react? …
… This financial crisis and economic recession are imposing nearly unbearable pain on the global economy, and that pain should not be treated cavalierly. Yet, as irrational as it may seem, it may be better to have had the opportunity to reach extreme heights, and experience the benefits of reaching the top, even if it means that sometimes we fail and fall to immeasurable depths.
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