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Economics: Krugman on the Failure

Posted in Economics with tags , , , , , , on September 12, 2009 by Josh Wittner

This article by Paul Krugman has really invigorated my fancy for economics. I’ve been in the process of reading what are two of the most foundational books in economics: Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776 and referred in short as The Wealth of Nations which essentially gave birth to the field of economics and John Maynard Keynes’ The General Theory of Employment, Intersest and Money which has particular relevance to the most recent economic recession and the logic behind the use of federal stimulus in an attempt to curtail the impact of the recession. After reading Krugman’s article I fully intend to finish ready those books where I left off as its inspired a lust for more understanding.

The article’s main point is that economists have for the last 30 odd years have been stuck in a concept of ‘efficient markets’. That is, that the market perfectly prices the value of an asset. This idea is based on the assumption that investors are always and only making rational decisions, and that the market can in fact control itself perfectly. While there are different factions of fundamental academic theory both seem to make use of this assumption to some degree. Some even going so far to believe that either recessions and depressions don’t exist or they are in fact part of the free market expression, claiming that unemployment rises can be attributed to the people’s desire not to work. The current recession seems to stand in the face of this ‘efficient market’ theory and so Krugman suggests and predicts that ‘flawed market’ economics must be given more credence from here on out.

I don’t pretend to understand all of it or even a relevant fraction of it, but reading about this academic controversy and how new evidence has confounded both mainstream theories makes me think of other mainstream scientific theories, which is what the economic theories should be, and have apparently failed to be, where new evidence has forced change and new thinking. The future of economics should be quite interesting and if I wanna be a part of it, I’m gonna have to start the education now.