Wed Feb 27th, 2013 at 07:38:05 AM EST
Apparently Martin Wolf was in Dublin giving a talk on "The State of Economics" yesterday, as reported by Nat:
"We did not know what we thought we knew" about the economy. That was one of the strong themes of Martin Wolf's presentation. He talked about his own, belated, interest in the work of Hyman Minsky. Minsky posed a deceptively simple (and for years ignored) question to macroeconomists. Minsky argued that for any model of the economy to be realistic, it had to allow for a Great Depression as one possible outcome.
Mr Wolf has come to the conclusion that the macroeconomic paradigm "failed" and the orthodoxy was simply "wrong", in relation to the importance it gave to inflation targeting and the mistaken belief that "cleaning" after a crisis would be cheaper than "leaning" against one, in terms of Government policies to prevent a crisis from occuring.
Wolf's turn to the dark side is complete, apparently.
What this implies, he said, is that a good deal more leaning against risky behaviour is required by governments, including regulation of banking, less risky financing of property, and much larger counter-cyclical capital investment.
In hinting at what a new economic paradigm might look like, Mr Wolf used the analogy of a bridge building project. Although the fundamental laws of physics apply to the construction of bridges, we do not ask theoretical physicists to undertake their design. Rather, we employ the profession of engineers, who have an array of practical skills, including rules of thumb, that better qualify them to oversee the construction of a durable bridge in the real world. By analogy, we need more "economic engineers" in future rather than theoreticians to advise governments and business about how the economy works in reality, rather than according to the idealised, orthodox models (the same models, I might add, that failed to allow for the possibility of the major economic crash that we just experienced).
Those putative engineers won't be listened to, because their narrative would be complicated to use in soundbites. The orthodox narrative is popular because it appeals to all sorts of pre-existing biases and simple "common sense".