History matters

Paul Krugman makes a great point in his blog today about the importance in macroeconomics of understanding economic history.  And he does not just mean the business cycle in the US over the last 40-50 years.  Instead there is much to be learned, he argues, from the experiences of Germany after World War I and the issues faced in developing countries such as Mexico, Indonesia and Argentina.  The current financial and economic crisis has some unique factors, especially the role of derivatives and the shadow banking system, but it was largely created by an age-old factor -- too much debt that was too highly leveraged. 

Krugman and I are rarely on the same page concerning what should be done in the current crisis (he thinks the jobs bill proposal is too modest), but his warning should be taken to heart:

Unfortunately, many economists have not learned from the past. And that’s at least part of the reason we are apparently condemned to repeat it.