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Exciting news from the world of macro-economics!
It’s all about the global financial crisis and the long, deep recession that followed it.
After thinking about these events really really hard, a handful of leading-edge economists have hit upon a truly remarkable idea. Now, make sure you’re sitting down, because I’m about to tell you what it is.
Okay, here goes: the theoretical assumption that recessions are the result of rational responses to unpredictable events might just be wrong! Furthermore, having opened oneself to this mindblowing possibility, one might even conclude that pumping cheap credit into dodgy asset classes like sub-prime mortgages is an irrational activity with entirely predictable consequences!
In other news from the frontiers of human understanding, leading theologians have uncovered the religious affiliations of the Pope; and zoologists aren’t far from finding out what bears do in their natural habitat.
Writing about recent developments in macroeconomic theory for Bloomberg, Noah Smith acknowledges the lag between academic progress and basic common sense:
“To lots of people, it seems obvious that the 2008 crisis was long in the making — the product of years of financial and regulatory folly. In general, the notion that economic booms cause busts, instead of being random unrelated events — an idea advanced by the maverick economist Hyman Minsky — seems to have much more currency beyond the ivory tower than within it.”
Smith goes on to look at the work of economists who have incorporated common sense assumptions into their theoretical models:
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