More reflections on the state of economics

This is going to run for a while. Channel 4 had an item on its news programme on whether economics has failed, including appearances by Bob Lucas (Chicago, defensive) and Robert Skidelsky (critical). There is a video of Gary Becker defending Chicago economics and the market on the FT website, interviewed by Martin Wolf. Becker's view is that the issue was the various mortgage derivative products were fine on their own for spreading risks, but no one understood the systemic risks associated with them. Markets are still the best thing we have, though not perfect. better than government in any case. Finally, there is a long piece in the NY Times from Paul Krugman. Chicago economists were quite prescient for getting in their defence first, as Krugman is not particularly charitable. The Krugman piece is pretty much a regurgitation of his previously blogged opinions (see earlier postings on this site for many of these). Nevertheless it gives an interesting view on the development of macroeconomics and financial economics over the last hundred years or so. It also includes a version of the Capitol Hill babysitting circle story, just about the best illustration of how Keynesian economics works (see his excellent book, Peddling Prosperity, for more detail). Nevertheless there are a couple of issues that seem to be confused: the question of whether the economics profession should have predicted this crisis is logically distinct from whether your approach allows for such crises to occur. Prediciting crises, almost by definition, is very tough and it would be surprising if this could be done consistently.