Warning: this post is really not fully researched. I may come back and try to fill in with more and better references later.
This post from Wendy Carlin contains the kind of broad brush statement about economics that makes smoke roll out of my ears:
So why are economists in the doghouse? Everyone now knows that we missed the boat in 2008. Trends in house prices and indebtedness were in the data but we did not pay attention to them. Nor did we later provide convincing explanations of what went wrong. Some economists advocated policies that contributed to the onset of crisis and exacerbated the resulting unemployment and economic insecurity. These failures may be traced to complacency among economists that a largely unregulated market economy would take care of itself.
Really? Is that last sentence true? I would contend that #1, economists have not in the last decade supported the idea that a largely unregulated market economy would take care of itself, and #2, that the US and world economy cannot be described as “largely unregulated,” and #3, that the US and EU economies have hardly been free to “take care of itself.”
The housing bubble was probably partially caused by government policies and GSE behavior. (counterpoint here) And the deregulation that occurred over the 20 years prior (which it did,) was to the benefit almost solely of the big banks and institutions. Which is not free market, or for many participants, “largely unregulated.” Barry Ritholtz has a great piece on the whole thing which touches on a lot of the issues.
The FT opinion piece later discusses how economics is supposed to be a mathematical way of describing human behavior. With the small amount of statistics I have learned, I find that laughable. If AIG was blown up by the Black-Scholes options model, that was certainly not due to complacency regarding the big picture or regulations. It was because no one knew what they were using, and that, in fact, the statistical underpinnings of the model were demonstrably false. It was a model that had known issues, that was being used anyway. All models have issues, many known. And lots of models are used anyway. But it is possible for this kind of huge error to occur, and then someone learns from it.
This is where the “take care of itself” part comes in. Instead of allowing these insolvent institutions to go bankrupt, and individuals who had failed to do their jobs properly, and in many cases had committed illegal acts, to face unemployment and/or criminal justice, instead, the biggest and most insolvent were bailed out with taxpayer funds. And they have continued to be rewarded in ways big and small.
Next came the regulations. After the crisis, economists and politicians got on this “unregulated” bandwagon. So the big banks wrote up regulations that punish the small banks (which did not cause the crisis, although they did suffer from it). That’s what we have now. New regulations, that mostly are not being enforced on the big banks, but where they are, impose a much smaller institutional cost on them than on smaller banks (who were mostly responsible citizens during the crisis, and when not, were peacefully and methodically eliminated/reorganized by FDIC).
As far as complacency of economists, clearly the ones with power were in fact in favor of deregulation when it occurred. Thinking Rubin/Greenspan/Summers/Clinton, Mankiw/Bush. Maybe that’s what is being referenced here. But I wouldn’t call it complacency. More like collusion or conspiracy, lol. And were all of them in on this? I find that difficult to believe. But not finding any evidence otherwise at this point (not looking very hard).
To me, the bottom line is this: Why isn’t everyone complaining about the crony capitalism? The total lack of a free market economy? When I read something like that one sentence, it ruins the whole rest of the article for me. Maybe there is something of value in there, but when you start from that premise, how can it be valid? Check your assumptions.
Note: I don’t think the CORE econ project is a bad idea. Julet Schor has a very insightful piece on their site.