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Unformatted text preview: “How Did Economists Get It So Wrong?” By Paul Krugman The article is written in an attempt to explain the reasons for the 2008 financial crisis by criticising the fault lines in the economics profession. The article also explains the different approaches and viewpoints one can take in the study of Macroeconomics. The author explains that many economists were blinded by the possibility of perfect markets that very few of them anticipated the possibility of the market’s catastrophic failure. There was a division between economists; some felt that free-market economies never go astray and others believed that economies may stray now and then but any major deviations could and would be corrected by the Fed. The idea that the economy could go astray despite the Fed’s best efforts did not come to the field’s mind. As memories of the 1930’s depression faded, economists renewed their love for the idea o an economy in which rational individuals interact in perfect markets. However, the central cause for the profession’s failure in the face of the new economic crisis was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess. This caused them to turn a blind eye to problems that could arise; the limitations of human rationality, problems of institutions, imperfections of markets, unpredictable crashes and the dangers created when regulators don’t believe in regulation. It is important for economists to acknowledge the importance of irrational and often unpredictable behaviour. From the birth of economics (circa 1776) until the 1930s the central message from economists was to trust the market, this was the basic presumption of “neoclassical” economics. With the occurrence of the Great Depression, the neoclassical ideology was scrapped. Most turned to John Keynes for an explanation and a solution to this crisis. Keynes did not believe in state-run economies, he wanted to fix capitalism, not to replace it. He called for active government intervention, if necessary, and heavy expenditure on public works....
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This note was uploaded on 10/09/2010 for the course INTD 200 taught by Professor .. during the Fall '09 term at McGill.
- Fall '09