Monday, February 7, 2011

Rajan's thoughts on why economists failed to predict financial meltdown

Chicago Booth Professor Raghu Rajan with another stimulating blog post that basically asks, "If us economists are so smart, why did we not see this train wreck coming?"  Some have said it reflects lack of knowledge; others think our profession is too wedded to free markets with even a few questioning whether economists have become ethically challenged by being too close to big business. 

Rajan's take -- he sees three main causes: (1) forecasting turning points is not easy, (2) economists are over-specialized, and (3) all too many economists spend too much time on theoretical abstractions rather than the real world economy.  In other words we had a train wreck because the path ahead was very foggy and twisty, the personnel on board could only see their own roles and not the big picture, and the engineer thought autopilot could handle everything. 

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