At INET, one the main topics we are interested in is the recent financial crisis, and especially, how the contemporary paradigm of economic thought missed the signs that led up to it. Recently, we posed a new big question to our community, on the subject of the financial crisis: “Why did so many economists fail to predict the global financial crisis, and so many policymakers mishandle it - while some saw it all coming?”
On our Q&A Forum, the INET community has been responding to this question, giving a some good insight, and echoing some of the main themes that INET is focusing on: that economic models can be detached from reality, and that the discipline is opposed to unpopular views, among others.
Andy.Marmz believes that currently, economists do not take into consideration that economic theories are not perfect, and that perceptions of markets can actually reflexively influence the markets themselves: “Economists need to realize that they themselves are apart of the situation in which they are trying to understand,” he writes, “Unfortunately, this realization would be career suicide for generations of economists.”
Other INET community members note that in the build up to the financial crisis (and even now,) expressing unpopular views in the relatively insular world of economic thought often mean career suicide: “Whoever would diverge significantly from the mainstream opinion would most likely have to look for another job,” nmilova writes, “and who would want to at the time when crisis is approaching?”
Likewise, Scott Thill concisely writes that “no one wanted to upset the apple cart.”
In a lucid and lengthy post, kochikvp says that on a societal level, crises occur because consensus is almost impossible to achieve: “Collective cognitive biases get in the way of our seeing things straight,” kochikvp writes, “‘Conventional wisdom’, often flawed, clouds eyesight. This inveterate muddleheadedness proved horrendously costly when it obscured our view of something that affects us all deeply – the world economy.”
EnricoScalas notes the need for better economic forecasting, which is a subject that INET is interested in, and will be focusing on at our upcoming conference in Budapest.
What else, INET readers? Is there something fundamentally unique about the 21st century economy that the old paradigm simply can’t see? Or, is the situation more akin to how INET advisors Ken Rogoff and Carmen Reinhart describe in their recent book, that economists just overlooked the recurring signs?
For more INET responses, please go to the topic on our Question and Answer Forum. There, you can answer the question yourself, and read and rate other responses. You can also go to our big Question page, where you can see video and find more resources so that you can develop your own opinion.
Comments
One of the greatest issues nowadays is financial crisis.The economy is facing a very serious problem and its indeed a catastrophe that we experienced right now.We can not deny the fact that it's happening globally.We can not just solve these in just a glimpse of an eye.It should have a careful study and research on how these things will be in place.If you will observe the scenario in the society,you'll see that it's struggling for help.I believe that if we join hands together,we'll be able to achieve success. Even falling credit card debt hurts economy, but it also helps lending industry.We should know the root of the problem before doing a solution.
The «financial crisis» is only an inevitable consequence of the slow rate of economic growth of the last 30 to 40 years. It should be evident to a schoolboy that economies that grow at 2% a year can not forever accomodate financial gains of the 10% a year order. It should be evicent to schoolgirls that the wage moderation preached by central banks as the cod-liver oil of economic governance can not possibly sustain housing prices soaring at 10% per year. Not for long anyway. Certainly not forever.
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