How Economists Got It Wrong

In keeping with our theme of beating the mainstream press by months and sometimes years — I always try to beat the Noble Laurelates by at least 6 months — I wanted to point to both the massive Krugman piece in the Sunday Times Magazine, as well as referencing similar themes we’ve hit upon over the past few years.

The Krugman article is here:

How Did Economists Get It So Wrong?
PAUL KRUGMAN
NYT, September 2, 2009
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html

Our recent effort, from earlier this year, is here:

Why Economists Missed the Crises (January 2009)
http://www.ritholtz.com/blog/2009/01/why-economists-suck/

That piece included my top 10 indictments as to why the economics profession missed the crises until it was way too late:

1. An inherent upward bias is built into ALL Wall Street research — including economic research;

2. Ideological rigidity prevented creative thinking;

3. Non-critical acceptance of official data from BEA, BLS, Commerce led to only a passing familiarity with reality;

4. Institutional rejection of negative analyses remains endemic;

5. Traditional (non-behavioral) economic analysis seems to have difficulty with human irrationality;

6. Political Bias; (Right wing during GOP Presidencies; Left Wing during DEM Presidencies);

7. Corporate bias — Stock option compensation — skewed views too optimistic;

8. “Timing” is very different from Analysis;

9. Factoring in excessive leverage and liquidity is exceedingly difficult from a traditional economic perspective (Derivatives especially);

10. Herding instinct is powerful;

While Krugman drills deep into a few issues, notably, de-emphasis of behavioral economics and an anti-Kensyeian bias, his piece missed many of the causations.

This wasn’t the first time I pointed out the failures of economists as a whole. Back in 2005, I wrote the following for TheStreet.com:

The Mystery of the Awful Economists
Real Money, 3/2/2005 3:42 PM EST
http://www.cdn.thestreet.com/p/rmoney/barryritholtz/10211333.html

(If you cannot access the Real Money piece, click here).

That piece looked at why economists, as a whole, were so wildly overestimating job creation.

Nothing like beating the MSM to the punch . . .

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Previously:
RIP Chicago School of Economics: 1976-2008 (December 23rd, 2008)
http://www.ritholtz.com/blog/2008/12/chicago-repudiation/

The Illusory World of Economic Forecasting (September 19th, 2006)
http://www.ritholtz.com/blog/2006/09/the-illusory-world-of-economic-forecasting

Read It Here First: “What Good Are Economists?” (April 25th, 2009)
http://www.ritholtz.com/blog/2009/04/read-it-here-first-what-good-are-economists/

Mystery of the Awful Economists, part 2 (April 2005)
http://www.ritholtz.com/blog/2005/04/mystery-of-the-awful-economists-part-2/

Mystery of the Awful Economists (Part III) (April 2005)
http://www.ritholtz.com/blog/2005/04/mystery-of-the-awful-economists-part-iii/