Since we reported on the prescience of The Economist, and how they had been able to foresee the housing crash better than most, it is only fitting that they have their own commentary on what was foreseen, what wasn’t, and how the discipline of economics faired in the build up to this financial crisis.
As they point out:
Just as the Depression spawned Keynesianism, and the 1970s stagflation fuelled a backlash, creative destruction is already under way.
So we see that cycles are evident in the economy as well. Richard Nixon once said “We’re all Keynsians now”, free markets gathered pace during the 1980′s, and now behavioral economics is rising in stature, namely to explain the faults of the efficient market hypothesis. Of course, there is more to it than this. For one, even if free markets work, the fact that people expect them to work can alter their behavior, so markets may work differently depending on peoples’ expectations.
In the end, the Economist sums it up nicely:
But a broader change in mindset is still needed. Economists need to reach out from their specialised silos: macroeconomists must understand finance, and finance professors need to think harder about the context within which markets work. And everybody needs to work harder on understanding asset bubbles and what happens when they burst. For in the end economists are social scientists, trying to understand the real world. And the financial crisis has changed that world.
