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Arnold Kling:
My main beef with economists is that standard macroeconomics does such a poor job of describing what is going on. The textbooks models are pretty much useless. Where in the textbooks is "liquidity preference" a demand for Treasury securities? Where in the textbooks does it say that injecting capital into banks is a policy tool? Graduate macro is even worse. Have the courses that use representative-agent models solving Euler equations been abolished? Have the professors teaching those courses been fired?..the economics profession for the past thirty years instead focused on producing stochastic calculus porn to satisfy young men's urge for mathematical masturbation. Economists ought to admit that we do not know much about what is going on today. Neither do the Fed Chairman and the Treasury Secretary. Of course, the market demand is for "strong" leaders and for "strong" economists, who can fool the public into believing that they have great knowledge. The ones who do this best are those who have fooled themselves.One sidenote of the past few months is that folks turned to economists when what they needed were finance experts. But there are relatively few finance experts who aren't affiliated with financial institutions, and so much of their commentary is tainted. Economics, however, hasn't quite caught up to the size and centrality of the financial industry in the modern economy, and so though economist knew relatively more about what was going on than the median American did, they actually knew much less than people assumed. But it's hard to blame the profession. The growth of finance has been hard to keep up with. From Martin Wolf's Fixing Global Finance:
At the end of 2005, the households and nonprofit organizations of the United States -- the world's largest market economy -- owned assets worth $64.4 trillion, a little over five times the country's Gross Domestic Product, and owed $11.9 trillion, which gave them an aggregate net worth of $52.5 trillion. Of these assets, $25.6 trillion were tangible -- principally residential property. The rest, worth $38.7 trillion, consisted of financial assets...the financial assets of U.S. nonfarm, nonfinancial corporate business amount to another $10.9 trillion and those of nonfarm, non-corporate business, to $2.3 trillion. The total financial assets owned by the U.S private sector thus amount to some $52 trillion in 2005.According to the McKinsey Global Institute, total financial assets of the Eurozone in 2005 were some $30 trillion; of Japan, $19.5 trillion; and of the United Kingdom, a further $8 trillion.These four economies held no less than 80 percent of the world total of $140 trillion. This colossal sum was, in turn, equal to 316 percent of world output, up from just 109 percent in 1980 and 218 percent in 1995.That's big money. And it's growing quickly. Over the past few decades, financial holdings shot to more than three times the gross output of the entire world. And it became vastly more complicated. Asking folks who have a general education in matters of macroeconomy to evince a complete knowledge of opaque financial instruments developed in the past few years is a bit odd. But asking the folks who developed and traded those instruments to give unbiased commentary on them is little better. It's a weird situation, and it's why, I'd argue, you've had a lot more commentary on things like the bailout bill, which are fairly general in nature and can be understood using tools from traditional economics, than the specifics of the financial crisis.
