By Paul Krugman
Brad DeLong
points us to Howard Davies, who accuses economists of being in denial, and of having had nothing
useful to say in the crisis. The first part is definitely true for much of the
profession; the second charge is just false. The truth is that basic
macroeconomics, the stuff that is still taught in textbooks, has been very, very useful in this crisis. The problem
is that half the profession and most policy makers turned their back on this
kind of economics.
It’s
especially ironic that Davies starts his piece by quoting Jean-Claude Trichet,
of all people, complaining that the available tools were of no use. Trichet,
some readers may recall, was one of the high priests of expansionary austerity,
the assertion that slashing government spending in a depressed economy actually wouldn’t make the depression deeper:
As regards
the economy, the idea that austerity measures could trigger stagnation is
incorrect.”
Incorrect?
“Yes. In
fact, in these circumstances, everything that helps to increase the confidence
of households, firms and investors in the sustainability of public finances is
good for the consolidation of growth and job creation.
So standard
economics told him that austerity would depress economies; he chose not to
believe that, and go with the confidence fairy; and he was wrong, wrong, wrong.
How is that a problem with the inadequacy of economics?
Now, what is
true is that efficient markets and equilibrium business cycle theory have
suffered what should be fatal blows to their credibility — but essentially
nobody in that camp is even willing to admit that there is a problem. What that
says, however, is that while we obviously need new thinking — we always do! —
the biggest problem these days has been the rejection of knowledge we used to
have.
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