I am actually commenting on a snippet with a useless link here.
Professor Krugman’s article, like much of his journalism, was hastily drafted and factually incorrect. [skip] One of the most humorous aspects of the article was its view that the efficient markets hypothesis was at the heart of the inability to see the bubble coming. If Krugman had bothered to read any of the finance journals for the past two decades he would have noticed a remarkable transformation of the profession away from adherence to the efficient markets hypothesis.
Meeeow. Also irrelevant. Krugman was talking about what academic economists tell policy makers, not what is published in academic journals. It is quite different. Also there is a difference between research in a field and the message from that field to economists in other fields. Roughly, macroeconomists assumed that the efficient markets hypothesis was a useful approximation even though people who look at asset prices knew it was rejected by their data.
The terrible power of elegant theories in economics is that they maintain their power even once it is agreed that they are rejected by the relevant data. The response is that “all models are false” — (I am quoting Victor Rios Rull but I could be quoting thousands of economists) and that they can still be useful. Roughly the logic is that just because a model is not exactly true doesn’t mean it isn’t useful. This model is not exactly true, therefore it is useful.
Reading Calomiris’s criticism of Krugman, I am reminded of something this guy named Brad DeLong said about Krugman some time ago.
Brad said that Krugman has spent his academic career finding cases in which a country can gain from protectionism and his career as a public intellectual arguing that protection hurts the protecting country.
Yes that was a long long time ago (about 20 years). Brad war right about Krugman the public intellectual (the first statementw as hyberbole as Krugman the academic had a broader range even lo those many years ago).
Brad’s point was that, when economists give advice, they switch to economics 101 — to old mathematical results based on old models with assumptions made for tractability. In contrast new research in economic theory has to be uhm new, and it’s best to get new results not the same old results with relaxed assumptions.
Thus old economic theory dominates economists contributions to the public debate even when economists know that it isn’t even valid as theory — that there are other models just as elegant and beautiful which give the opposite answer to the policy question.
I think this refutes Calomiris’s critique of Krugman. Yes current research published in The Journal of Finance and the Journal of Financial Economics has moved beyond CAPM. Wow big surprise, you can’t publish the same paper for over
a decade two decades.
However, when talking to policy makers, academic economists explain the old simple model, that is assume efficient markets, and don’t bother them with current research, that is, the fact that the efficient markets hypothesis has less empirical support than the phlogiston hypothesis.
This also reminds me of something that Robert Waldmann once Said about Greg Mankiw.
The rules of theoretical debate among economists often require great deference to simplifying assumptions which no one has ever believed to be approximately correct. Roughly, the rule seems to be “according first neoclassical model” must be accepted as meaning “true to first order” which much be interpreted as “a useful approximation.” I really don’t know why.
This means that, at least until behavioral economists develop a theory as complete and elegant and simple as the efficient markets hypothesis, economists give policy makers advice which is sound only if it is true.