The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.Krugman says the same thing and calls it “equilibrium decadence”. Here, Ugo summarises maverecon Buiter. He quotes "The manifest failure of the EMH in many key asset markets was obvious to virtually all those whose cognitive abilities had not been warped by a modern Anglo-American Ph.D. education". As Justin puts it, today’s macroeconomists write for other macroeconomists.
Can't believe that Blanchard, the IMF's chief economist, was saying the state of macro was good, juts before the crisis (in august 2008)... The link to his NBER working paper doesn't work anymore!!! I wonder why!
Despite this academic disaster, Justin is enthusiastic about economics in general, writing that his optimism comes from looking beyond macro. "As a whole, the economics profession has become more empirically grounded. New large datasets offer the prospect of truly understanding individual behavior in a way that paying lip service to “micro-founded models” doesn’t. Many are engaged in the tricky business of writing more psychologically grounded models that are closely tied to real human behavior. Computational advances allow us now to take differences in people, and how they respond, far more seriously..." And concludes that "formally elegant but empirically irrelevant macroeconomists had a much harder time getting hired this year." I guess the profession will evolve through natural selection then...
In other news, here's a well documented summary of currently rising trade protection by one of us.