Paul Krugman: How Economists Got It VERY Wrong
By Shlomo Maital
Paul Samuelson was arguably the great economist of the 20th C., and certainly one of the greatest of all time. He was a professor at MIT, where I taught for 20 summers, and invariably could be found on weekends working away in his office, even after officially retiring. His book Foundations of Economic Analysis (1947) (his Ph.D. thesis) reconstructed economic theory, using clever mathematics. But Samuelson was not deceived by his keen mathematical skill. “Elegance is for tailors”, he once said, in describing elegant, but empty, economic theories.
Alas the Economics profession did not heed him. UK Economist Geoffrey Hodgson reminds us of Paul Krugman’s 2009 New York Times article, analysing where economists went wrong in missing the 2007-8 financial collapse, and in some ways actually causing it with their gung-ho free market enthusiasm.
At that time, Krugman (a Nobel Prize winner, it should be recalled) wrote:
“As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations.” …..the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess. ”
I feel a personal sense of loss and defeat as I read those words. I chose by mistake to study economics. I never did have the mathematical ability to excel in research. But I did have an insight, that behaviour was more important than math, in understanding how people choose and decide. But that idea was like aging wine, ‘before its time’. Behavioral economics has now replaced math as mainstream, helped by the tailwind of economics’ massive failure in 2007/8.
Will this help economists avoid culpability in the next financial crisis?