The financial crisis: Why did no-one see it coming, and why did economists get it so wrong?

Why didn’t the experts see it coming?, asked the Queen of England, and the British Academy wrote a letter to explain. Of the lead up to the global financial crisis they wrote:

“It is difficult to recall a greater example of wishful thinking combined with hubris.”

Meanwhile, economist Paul Krugman asked a similar question – how did economists get it so wrong –  and came up with an answer to do with the difference between salt water and fresh water (apparently one turns you Keynsian and the other turns you neo-classical). Krugman noted the failure  of neoclassical economics to account for the apparent irrationality of the market, and proposed as a remedy the emerging sub-discipline of behavioural economics.

When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly.

Both these approaches – that of the British Academy highlighting wishful thinking and hubris, and that of behavioural economics highlighting cognitive biases – make the great mistake of assuming that there is a single ‘ideal’ rationality,which real humans happen to be incapable of attaining. Continue reading “The financial crisis: Why did no-one see it coming, and why did economists get it so wrong?”

Economics of the Singularity

Crooked Timber has been running a ‘book event‘ on the economic ideas of science fiction writer Charlie Stross.

In case you haven’t come across him, Stross is a prolific (300,000 words a year) writer of extravagant ideas who lives in Scotland. His approach to  pulp sci-fi is reminiscent of  Philip K Dick’s.  Sure it’s commercial, but with Stross as with Dick, it’s also art.

Perhaps the thought of economics puts you off an otherwise good read. Or perhaps the thought of science fiction puts you off some otherwise good economics. But for anyone still left in the room, the discussion, including posts by economists Paul Krugman and John Quiggin, as well as by writer Ken MacLeod, is well worth reading.

Warning: cheap joke ahead.

Of course, some might say all economics is fiction…