In my view, the financial crisis does not provide any evidence of a failure of modern economics. Rather the crisis vindicates the theory. Why do I say this? Because the research I have done shows that the crisis was caused by a deviation of policy from the type of policy recommended by modern economics. It was an interventionist deviation from the type of systematic policy that was responsible for the remarkably good economic performance in the two decades before the crisis. Economists call this earlier period the Long Boom or the Great Moderation because of the remarkably long expansions and short shallow recessions. In other words, we have convincing evidence that interventionist government policies have done harm. The crisis did not occur because economic theory went wrong. It occurred because policy went wrong, because policy makers stopped paying attention to the economics.By the way, Taylor has just started blogging. (HT Russ Roberts)
Wednesday, September 23, 2009
The Crisis: A Failure or a Vindication of Economics?