As David Blanchflower argued in his first economics column for the NS, the crash of autumn 2008 wasn’t just a failure of banking practice — it was an intellectual failure, too. The collapse of Lehman Brothers just over a year ago wasn’t just an indictment of hubris and greed on Wall Street; it was also “a body blow to those economists around the world who had designed worthless mathematical models, based on unrealistic assumptions that they then used to convince themselves that a recession of this kind could never happen again”.
Blanchflower’s magisterial dismissal of “useless economic models” echoed something the Nobel Prize-winning economist and New York Times columnist Paul Krugman had a written a couple of weeks earlier. Under the title “How Did Economists Get It So Wrong“, Krugman chastised economists for “mistaking beauty for truth” — for allowing themselves, that is, to be seduced by abstract mathematical models and an “idealised vision of an economy in which rational individuals interact in perfect markets”. The only problem is that perfect markets have never existed and never will exist — pace what Krugman nicely calls “Panglossian finance” — and the sooner economists “learn to live with messiness”, the better.
Content from our partners
