Why Did Economists Fail to Predict the Crisis?
- The Find: Believe it or not, economists "failed to account for the critical roles that banks and other financial institutions play in the economy" and rejected common sense truths that did not fit their mathematical models, argue several business professors.
- The Source: An fascinating article from Knowledge@Wharton.
Over the past 30 years or so, economics has been dominated by an 'academic orthodoxy' which says economic cycles are driven by players in the 'real economy' -- producers and consumers of goods and services -- while banks and other financial institutions have been assigned little importance.So to summarize: "They simply didn't believe the banks were important." Doh! What other realities did economists ignore to prop up their mathematical models? Common sense truths like the unlikeliness of a perpetual rise in home prices and the irrationality of real people's decisions about money, says Wharton management professor Sidney G. Winter.
These may sound like head-slapping, obvious mistakes now, but, as they say, hindsight is always 20/20, and it wasn't like your average Joe (or Jane) saw this coming either. For a much more detailed take on just how academic economists failed to make the call, check out the informative and in-depth article.
The Question: How can economists make sure they stay more grounded in the real world in the future?