Paul Krugman: The Real Trouble with Economics:
I’m a bit behind the curve in commenting on the Rosenberg-Curtain piece…. They’ve gotten it almost all wrong…. They apparently imagine that QE was an intuitive reaction by Bernanke, one that academic macroeconomics would never have suggested. Nothing could be further from the truth…. Krugman 1998 (pdf), Eggertsson and Woodford (2003), and, yes, Bernanke-Reinhart-Sack 2004 (pdf). Indeed, the Fed’s QE policies initially followed the latter paper closely…. Far from acting as a free-spirited improviser, Bernanke has been largely implementing recipes developed in the academic literature years before. So Rosenberg and Curtain completely misunderstand what’s been going on
They also misunderstand the nature of economists’ predictive failures…. [While] few economists predicted the onset… once crisis struck… basic macroeconomic models did a very good job…. The intuitionists--remember, Alan Greenspan was supposed to be famously able to sense the economy’s pulse--insisted that budget deficits would send interest rates soaring, that the expansion of the Fed’s balance sheet would be inflationary, that fiscal austerity would strengthen economies through “confidence”. Meanwhile, wonks who relied on suitably interpreted IS-LM confidently declared that all this intuition… would prove wrong--and they were right… these past 5 years have been a triumph for and vindication of economic modeling…. It would be a real tragedy if the takeaway from recent events becomes that you should listen to impressive-looking guys with good tailors who stroke their chins and sound wise, and ignore the nerds; the nerds have been mostly right….
Yet obviously something is deeply wrong with economics…. Textbook macro models got things mostly and impressively right, [but] many famous economists refused to use those models… made it clear… they didn’t understand points that had been worked out generations ago… [failed to] change their minds when their predictions, say of sharply higher inflation, turned out wrong. Nor is this a new thing. My take on the history of macro is that the notion of equilibrium business cycles had, by the standards of any normal science, definitively failed by any normal scientific standard by 1990 at the latest. The original idea that money had real effects because people were surprised by monetary shocks fell apart… the real business cycle view that nominal shocks didn’t actually matter after all was refuted by decisive evidence… yet there was no backing off…. Economics as practiced doesn’t look like a science. But that’s not because the subject is inherently unsuited… our understanding is in its early stages… although what really impresses you if you study macro, in particular, is the continuity, so that Bagehot and Wicksell and Irving Fisher and, of course, Keynes remain quite relevant today. No, the problem lies… in the sociology of the economics profession… that somehow, at least in macro… rewards research that fits preconceptions and uses hard math instead.
Why has the sociology of economics gone so wrong? I’m not completely sure--and I’ll reserve my random thoughts for another occasion.