Paul Krugman: When Basic Economic Theory Is Ignored, Disaster Will Follow [View all]

[marmar]

When Basic Economic Theory Is Ignored, Disaster Will Follow

Thursday, 16 May 2013 13:58
By Paul Krugman, Krugman & Co. | Op-Ed


As I have been writing a lot lately, the clean little secret of the global economic crisis is that standard economic theory actually performed pretty well.

It's true that few anticipated the severity of the 2008 crisis — but that wasn't a deep failure of theory, it was a failure of observation. We actually had a pretty good understanding of bank runs; we just failed to notice that traditional banks were a much smaller share of the system than before, and that unregulated, unguaranteed shadow banks had become so important. Once that realization hit, as the economist Gary Gorton has documented, standard bank-run theory made perfectly good sense of the story.

And the aftermath of the crisis — persistent low interest rates despite high deficits, impotence of monetary policy, major negative impacts of fiscal austerity — may not have been what most economists or government agencies predicted, but it's what they should have predicted. As I often point out, Macroeconomics 101 has worked pretty well.

The point is that radical new theories haven't been needed at all, since off-the-shelf economics tools we already had, provided plenty of guidance.

In that case, however, why are we doing so badly? And I mean really badly. ......................(more)

The complete piece is at: http://truth-out.org/opinion/item/16416-when-basic-economic-theory-is-ignored-disaster-will-follow