Oops! Some Not so Beautiful Minds

The University of Chicago has collected more of those Nobel Memorial economics prizes than any other school. It has also become something of an economic joke. Those economists didn't just fail to predict the catastrophe that engulfed the financial world last year, they contributed to it and in many ways were the intellectual sponsors of it.

Paul Krugman has a long article in the New York Times Magazine today examining the massive failure of the economics profession in the run up to the financial detonation, and he looks in detail at the failures of the so-called "freshwater" economists. The rest of the macroeconomics profession doesn't get off either. They too mostly failed to anticipate the tsunami.

When a prominent and much glorified school of thought meets a catastrophic reverse, they have the choice putting their heads down and humbly accepting the rebuke of history, or speaking loudly and wildly to guarantee that history remembers them as idiots. Most of Chicago has chosen the latter. One example.

Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”

There are a lot of aspects of this story that follow a classic pattern: success, arrogance, and the pride that goeth before the fall. Of course the Chicago finance professors didn't take the fall, the country and the world did. The profs have their tenure, millions they pocketed from the Wall Street cowboys they promoted and cheered on, and, some of them, their Nobel Mems.

Krugman makes it clear that the failure extends beyond the Chicago school and its minions. The essence of the failure, though, was forgetting Keynes. But if the "saltwater economists" of Harvard, Princeton, MIT and Berkeley relegated Keynes to the back burner of history, the "freshwater" crew imagined that he had been refuted. Krugman focuses on his profession's fascination with beautiful mathematical models at the expense of facts.