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Guest Opinion: Economists for an imaginary world

BY HAROLD MEYERSON | OCTOBER 01, 2009 7:20 AM

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“The worldly philosophers” was economist Robert Heilbroner’s term for such great economic thinkers as Adam Smith, Karl Marx, John Maynard Keynes, and Joseph Schumpeter. Today’s free-market economists, by contrast, aren’t merely not philosophers. They’re not even worldly.

Has any group of professionals ever been so spectacularly wrong? Theirs is an elegant system, a thing of beauty in itself, as Paul Krugman of the New York Times has argued. It just fails to jell with reality. And unlike the pre-Copernicans, whose dogma posed a threat to those who challenged it but not, at least directly, to anyone else, their latter-day equivalents in the economic profession pose a clear and present danger to the well-being of damned near everyone.

The problem with contemporary economics, at least with the purer strain of free-market economics associated with the University of Chicago, is not simply that it failed to predict the near-collapse of the world financial system last year. The problem is that it believed such a collapse could not happen, that all risk could be quantified by mathematical models, and that these quantifications could help us correctly price just about everything.

The one economist who has emerged from the current troubles with his reputation not only intact but enhanced is, of course, Keynes. Every major nation, no matter its economic or political system, has followed Keynes’ prescription for combating a major downturn: increasing public spending to fill the gap created by the decline of private spending. That is why the world economy seems to be inching back from collapse and why the nations that have spent the most, China in particular, seem to be recovering fastest.

But Keynes’ vision has yet to re-establish itself among economists, who, like the Catholic Church in Galileo’s time, aren’t about to change their cosmology just because the facts demonstrate that they happen to be wrong. The quants at the banking houses say that they simply failed to sufficiently factor some risks into their mathematical models. Once they do, their system will be corrected, and banks can resume their campaign to securitize everything (as some banks are already doing by establishing a secondary market in life-insurance policies).

If mainstream economics doesn’t change, however, it may eventually face the worst of all possible fates: market failure.

Harold Meyerson is a columnist for the Washington Post. A version of this commentary originally appeared on Wednesday.


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