Economic myth and meaning
Earlier this year I had posted on Triplecrisis a critique of the mainstream views of the crisis, pointing out that they were still lagging behind the heterodox discussions and had much to gain from incorporating the insights of progressive economists. One of the surprising things about the readings I did for that post was that Robert Shiller actually was not very prescient about the housing bubble. In the famous paper with Karl Case he argued, as I noted, that: “judging from the historical record, a nationwide drop in real housing prices is unlikely, and the drops in different cities are not likely to be synchronous: some will probably not occur for a number of years. Such a lack of synchrony would blunt the impact on the aggregate economy of the bursting of housing bubbles” [emphasis added].
Now, I'm reading Tom Palley's latest book, The Economic Crisis: Notes from the Underground, and discover that the phenomenon is all too common. He notes (p. ix) that Raghuran Rajan, the ex-chief economist at the IMF, whose paper at Jackson Hole in 2005 was lionized as predicting the limitations of financial innovation in the famous film Inside Job, actually says in his conclusion that he: "believe[s] the changes have, in general, expanded opportunities significantly and have, even on net, made the world tremendously better off. But opportunities can be used for good and for bad" [emphasis added]. Note that if financial innovation has made the world better off, as he concludes, it cannot be that he thinks it has increased risk. However, in the film Rajan said this: "the title of the paper was, essentially: Is Financial Development Making the World Riskier? And the conclusion was, uh, it is." Yep, he should get the Mishkin Prize (awarded after he changed the title of his paper from Stability to Instability).
There are several other interesting cases of oracles that did not predict anything, and of mainstream economists that when they did predict the crisis, they did it for the wrong reasons and got the story and the consequences incorrectly (all bring up more stories from Tom's book in other posts). The essential point that Tom makes, however, is a sociological one, that helps understand the predominance of the mainstream paradigm. The profession suggests that, while predicting the crisis was impossible, a few illuminati within the mainstream did foresee everything, and as a result there is no systemic problem with economics as a science. No need for revolutionary change in the profession.
Levi-Strauss once said that myths are totalitarian stories that eliminate all possibilities of doubt, since they explain everything. In this case, the myth of the lone, foresighted, neoclassical economist preserves the culture of complacency in the profession with the utter irrelevance of mainstream economics.