Interesting post here by Paul Krugman. He discusses some of the rather illuminating lessons from the crisis and how some people have simply refused to alter their perceptions of the world despite these lessons. For instance:
- QE doesn’t cause hyperinflation or high inflation.
- Fiscal policy doesn’t necessarily drive up interest rates.
- Austerity can really hurt economies in a de-leveraging.
I don’t think the good professor goes far enough though. There are other illuminating lessons from the crisis as well:
- Being an autonomous currency issuer matters.
- An increase in bank reserve won’t necessarily lead to more lending.
- Inflation and hyperinflation aren’t necessarily monetary phenomenons.
These were big time lessons. And yes, some people still haven’t understood them entirely or taken the time to really learn from these lessons. In fact, some people are probably incentivized NOT to learn these lessons….
But I think there’s an even larger problem that leads to this sort of narrow minded thinking – and that’s the relatively unscientific foundation of macroeconomics to begin with. For instance, in the hard sciences you learn a general framework for your field of study. Physicists all learn about a basic set of understandings that form a common set of normative foundations for more experimental work. But this isn’t really achieved in economics. Depending on your “school” of economics you could have differing understandings of the foundations of what drives the economy.
That’s all kind of weird if you think about it, but there might be some good reasons for that. After all, economics is at least partially the study of human action and human psychology is very much a soft science. I also think economics has a tendency to become highly politicized and tends to be overcome by human biases. But that doesn’t mean we should ignore what looks like some empirical truths. In fact, if psychology and human biases are what potentially hurts economic progress then maybe all we need to do is try to be more aware of our weakness so we can establish a more objective foundation for understanding?