Krugman Slams Influential Economists

Krugman Slams Influential Economists –

The problem isn’t economics per se, it is about assessing certain critical niches.

So the mistake in failing to predict a real estate crash in the US and resulting consequences is exactly the same mistake as predicting a crash in the Canadian markets in the past few years that didn’t happen.

In both cases the outcome was decided by highly specific details.

There is no model that anybody can make which will eliminate the assessment of risk factors and be based on say some rule of thumb ratios, where the assumptions for those models may be question begging.

So in Canada, where home price averages are increasing in large part due to foreign purchases of the most expensive properties, the wages of Canadian workers are irrelevent to the ability of foreign buyers to continue to buy high end homes, and the increasing prices of high end homes are irrelevant to the ability of Canadian workers to buy low and mid range homes.

The factors in the US crash were different, with sub-prime mortgages creating foreclosures with a cascading effects.

In both cases these are highly specific facts.  Such issues cannot be resolved in purely academic models or even debates, in the absence of empirical investigation.  Somebody has to go out there and dig and keep going until he hits bedrock.

In many areas such investigation would be pointless, because there is not much benefit.

But if the market in question is foundational, has the potential to bring everything down, we need due diligence before models. 

If you were to erect a large building, you would survey the land first, take core samples.  You wouldn’t just rely on general principles or averages, you’d want to know if that specific site was suitable for that specific building.  The approach might be different depending on layers of clay or sand or gravel.  You would not erect a skyscraper without surveying because another one just like it was fine  somewhere else.  It might fall over.

So that is what economics needs, not another broad model.  The broad models of economics are fine.  No broad model can address such issues.

What is needed is a surveyor attitude.  Fact driven matters cannot be decided a priori.  That’s so important I’m going to say it twice.  Fact driven matters cannot be decided a priori.

The focus should be on deciding when you dig and how you dig for more information.   


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