Krugman’s Crash Course in Economics: How Did Economists Get It So Wrong?

If you’ve been reading Katalusis since its inception in August 2007, you’re well aware that economics is not one of my areas of expertise. My usual response to the topic has been to marvel at a system that functions best when the middle class is heading daily to the mall to spend its hard-earned cash on stuff it doesn’t need instead of saving a few dollars for a rainy day.

In recent years, many of us have been suckered in by credit card swindlers to spend more than we have at usurious interest rates. At the same time, a significant number of low income seniors have racked up credit card debt to pay for emergencies like car repairs, dental bills, new eye glasses, and doubled or tripled electric bills from running the air conditioner during summer heat waves.

Then came word in the fall of 2008 that the economy was tanking fast. One of the scariest scenes for me since the announcement of the global financial meltdown was Alan Greenspan’s public admission that the model he had believed in over the years had proved to be wrong. What model would that be, I wondered.

Nearly a year later, I surprised myself by printing Paul Krugman’s 11-page dissertation in the NY Times Magazine titled How Did Economists Get It So Wrong? More surprising, I gathered it up and took it out to my kitchen table and with yellow highlighter in hand sat there and read the whole thing. No kidding. Written in lay people’s terms, the article was readable even for a novice like me, and I now have a much better handle on economic theory and practice; heck, I even know the difference between “fresh water” and “salt water” economists. Hint: lots of fresh water economists are from Chicago.

Krugman writes:

It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.

Last year, everything came apart.

Read more of Krugman’s compelling narrative here: