By Jonathan Schlefer, 19-Feb-2013
The economic orthodoxy that swept the world in the 1990s and 2000s attests to the terrifying power of ideas. Economists built "general equilibrium" models that, underneath all the fancy math, just assumed markets are stable and optimal. The models concluded — in a sort of "divine coincidence," as the MIT economist Olivier Blanchard and a colleague quipped — that if central banks merely maintained steady, low inflation, they would achieve economic stability and the best growth possible. Washington and London espoused this orthodoxy. The Treaty on European Union practically inscribed it in law.
In the Wake of the Crisis: Leading Economists Reassess Economic Policy collects essays by economists who are, indeed, leading — and are reassessing that orthodoxy. Never quite a true believer in it, Blanchard, now chief economist of the International Monetary Fund (IMF), acknowledges the terrible damage it caused. The macroeconomist David Romer concedes that the performance of pre-crisis state-of-the art models — some of which he developed — was "dismal." The editors frankly admit they have no clear idea how to replace them.
However, major Asian and Latin American nations offer pragmatic financial and economic guidance. Policymakers there deferred to orthodoxy in their words but not in their deeds — and avoided crisis. None of those nations' principal banks got in trouble, and growth there suffered far less than in the advanced nations. In fact, it wasn't a global financial crisis; it was a North Atlantic financial crisis. <Click Here for More>
