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This follows on from an NY Times article with the same name. The article is worth a read and points out many ugly truths that most people won't try to consider: the guys in charge of the Obama administration's economic policies don't know what they're doing. They never had a clue and still don't have a clue.
The article is written by Paul Krugman, a Times Op-Ed columnist and winner of the 2008 Nobel Memorial Prize in Economic Science. His latest book is “The Return of Depression Economics and the Crisis of 2008.” Apart from recommending this article as a worthwhile read but I disagree with his dismissal of macroeconomics as a valid form of economic theory. To the best of my knowledge the only people that predicted this economic collapse years in advance, eg Peter Schiff, are marcoeconomists. That's why I'm keen to listen to those guys, they got it right, and not the guys currently wielding the power, they got it completely wrong. Apart from the author's dislike of Macroeconomics I was slightly confused by his division of the marcoeconomists into two camps. The article reads like a personal attack on the University of Chicago, everything that people in the economics department is wrong. I can't personally comment on that department but it seems that there is a misunderstanding of what the department actually thinks and what the NYT writer thinks they do. I'm now wondering if there is an inconsistency. The article's author makes the following definitions about Macroeconomists: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and "freshwater” economists (mainly at inland schools), who consider that vision nonsense.
I'll hold my hands up and admit I don't have full knowledge of these differences but the I didn't think the non-Keynesian "freshwater" economists believed in "the premise that people are rational and markets work". A central idea of efficient market theory. Personally I think efficient market theory and rational people/markets is misguided. If anything people and markets are irrational which makes them hard to predict with mathematics. There are signs of efficiency in the market but also signs of it being efficiently 'wrong'.
To the best of my knowledge macroeconomists are against the way that the US economy had been run for decades. The people that actually predicted the current economic crisis say that they are macroeconomists and non-Keynesians: so that makes them freshwater economists? Well they don't believe in efficient market theories either. So the likes of Jim Rogers and Peter Schiff can't be either "freshwater" or "saltwater" macroeconomists.
Fortunately the article points out that Ben Bernanke, the current Chairman of the Federal Reserve, and Alan Greenspan did not predict collapse in fact they said the exact opposite: In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.” That's a big reason why I place zero trust in those two. From the article the author reports that Larry Summers, the top economic advisor to Obama, laughed at economic professors that taught efficient market theory but he too made a colossal blunder: he dismissed warnings of an impending financial crisis as "misguided". However, it seems that in the end macroeconomics is championed in the conclusion: First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics. The first suggestion makes perfect sense to me, no dispute. The second part is something I'm less knowledgeable about so will sidestep that issue for now. I think I see that the article's author uses macroeconomics in a different way to how I understand it. Perhaps his definition is the more commonly accepted one. I would have said that the macroeconomists that I've watched have been closer to reality than any of the other economists.
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