Claire Jones: How and Why Economics Forgot Keynes’ Warnings on Panics https://ftalphaville.ft.com/2019/11/05/1572966859000/How-and-why-economics-forgot-Keynes--warnings-on-panics/: 'The skill of the good economist, like the good writer, lies not just in what they include in their work, but what they choose to leave out. The real world is hideously complex. So too are people. If economists are going to tell us anything about either, then they must resort to abstraction. The trouble is what happens when what you choose to leave out one of the things that ends up mattering the most? In a new paper (hat-tip to the University of Washington’s Fabio Ghironi for drawing our attention to it), Nobel Prize winning economist George Akerlof does a brilliant job of explaining how and why, in the decades before the financial crash, macroeconomists failed to include any meaningful role of the financial system in their economic models. The paper takes us back to his graduate studies at the Massachusetts Institute of Technology in 1962, “when a particular version of Keynesian economics was ascendant”. This “particular version” did not, Akerlof notes, pay much heed to John Maynard Keynes’ “beauty contest” theory of market behaviour, which helps explain why asset prices become unmoored from economic fundamentals.... What we like about Akerlof’s paper is not only the degree of examination he applies to himself and his profession, but also the (not all that common) acceptance of the broader social and political forces that influence its findings...


#noted #2019-11-22

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