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How Economists Got It Wrong

Posted By Barry Ritholtz On September 6, 2009 @ 7:00 am In Financial Press,Really, really bad calls | Comments Disabled

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 [1] 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? [1]
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 [2] (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 [3]
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 [4]).

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

Nothing like beating the MSM to the punch . . .

>

Previously:
RIP Chicago School of Economics: 1976-2008 [5] (December 23rd, 2008)

http://www.ritholtz.com/blog/2008/12/chicago-repudiation/

The Illusory World of Economic Forecasting [6] (September 19th, 2006)

http://www.ritholtz.com/blog/2006/09/the-illusory-world-of-economic-forecasting

Read It Here First: “What Good Are Economists?” [7] (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 [8] (April 2005)

http://www.ritholtz.com/blog/2005/04/mystery-of-the-awful-economists-part-2/

Mystery of the Awful Economists (Part III) [9] (April 2005)

http://www.ritholtz.com/blog/2005/04/mystery-of-the-awful-economists-part-iii/


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2009/09/how-economists-got-it-wrong/

URLs in this post:

[1] Krugman piece: http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html

[2] Why Economists Missed the Crises: http://www.ritholtz.com/blog/2009/01/why-economists-suck/

[3] The Mystery of the Awful Economists: http://www.cdn.thestreet.com/p/rmoney/barryritholtz/10211333.html

[4] click here: http://www.ritholtz.com/blog/2005/03/the-mystery-of-the-awful-economists/

[5] RIP Chicago School of Economics: 1976-2008: http://www.ritholtz.com/blog/2008/12/chicago-repudiation/

[6] The Illusory World of Economic Forecasting: http://www.ritholtz.com/blog/2006/09/the-illusory-world-of-economic-forecasting/

[7] Read It Here First: “What Good Are Economists?”: http://www.ritholtz.com/blog/2009/04/read-it-here-first-what-good-are-economists/

[8] Mystery of the Awful Economists, part 2: http://www.ritholtz.com/blog/2005/04/mystery-of-the-awful-economists-part-2/

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

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