Martin Wolf says " one of the big lessons of this experience is that economics is too compartmentalized":
A time for humility, Speech by Martin Wolf, FT: Last year I enjoyed telling a number of entirely unfair jokes about economists. This year, I looked at the same source and found only one joke about the profession’s involvement in depressions. Here it is:
Such a severe depression and banking crisis could not have been achieved by normal civil servants and politicians, it required economists’ involvement.
This, in short, is a time for humility. Why did we mostly get “it” so sensationally wrong? ... It is a pretty good question. It is a pretty embarrassing one, too. It is one everybody I meet now asks. ...
Perhaps this was more than could reasonably be expected. But I do think we need to ask ourselves whether we could have done a better job of understanding the processes at work.
The difficulty was that we all tend to look at just one bit of the clichéd elephant in the room. Monetary economists looked at monetary policy. Financial economists looked at risk management. International macroeconomists looked at global imbalances. Central bankers focused on inflation. Regulators looked at Basel capital ratios and even then only inside the banking system. Politicians enjoyed the good times and did not ask too many questions. And what of commentators? Well, they tended to indulge in the fantasy that the above knew what they were talking about. I am embarrassed to admit this.
I am not seeking to deny that a few people saw important pieces of the emerging puzzle and some saw more than a few pieces. ... But I would insist that one of the big lessons of this experience is that economics is too compartmentalised and so, too, are official institutions. To get a full sense of the risks being run, we needed to combine the worst scenarios of each sets of experts. Only then would we have had some sense of how the global imbalances, inflation targeting, the impact of China, asset price bubbles, financial innovation, deregulation and risk management systems might interact.
Alternatively, we could have spent more time studying the work of Hyman Minsky. We could also have considered the possibility that, just as Keynes’s ideas were tested to destruction in the 1950s, 1960s and 1970s, Milton Friedman’s ideas might suffer a similar fate in the 1980s, 1990s and 2000s. All gods fail, if one believes too much. Keynes said, of course, that “practical men … are usually the slaves of some defunct economist”. So, of course, are economists, even if the defunct economists are sometimes still alive.
These might seem idle thoughts: these errors are now bygones. But what if we are now making new and even bigger errors in rushing back to Keynes? The thought worries me. What if now that households in the US and UK are no longer able, or willing, to borrow any more, we are set on breaking the back of taxpayers, instead? Is the end of this crisis the destruction of the credit of some of the world’s most creditworthy governments? It is a thought I would like to suppress. But it haunts me. It should haunt you, too. ...
One might not expect much from economists, but one would surely expect them to warn us of a crisis on this scale. Some humility is in order. That is going to hurt. A humble economist? Surely not.