The Stupidity of Experts

If ordinary people in America and elsewhere are insufficiently intelligent to understand and fix major problems of the modern world, that might be tolerable provided there are enough brighter people available smart enough to solve them. But what if the experts themselves are too dim-witted to understand what needs to be done?

Along with an excellent discussion of why the Great Recession occurred and persisted, Paul Krugman’s recent Why Weren’t Alarm Bells Ringing? (a review of Martin Wolf’s The Shifts and Shocks: What We’ve Learned–and Have Still to Learn–from the Financial Crisis) provides an impressive picture of the extent to which the views of contemporary economists have been disconnected from reality. Here’s an excerpt:

Almost nobody predicted the immense economic crisis that overtook the United States and Europe in 2008. … On the eve of crisis in 2007 the officials, analysts, and pundits who shape economic policy were deeply, wrongly complacent. They didn’t see 2008 coming; but what is more important is the fact that they even didn’t believe in the possibility of such a catastrophe.

…while the depression that overtook the Western world in 2008 clearly came after the collapse of a vast financial bubble, that doesn’t mean that the bubble caused the depression. Late in
The Shifts and the Shocks Wolf mentions the reemergence of the “secular stagnation” hypothesis…. If the secular stagnationists are right, advanced economies now suffer from persistently inadequate demand, so that depression is their normal state, except when spending is supported by bubbles. If that’s true, bubbles aren’t the root of the problem; they’re actually a good thing while they last, because they prop up demand. Unfortunately, they’re not sustainable—so what we need urgently are policies to support demand on a continuing basis, which is an issue very different from questions of financial regulation. …

Yes, rising levels of private debt, increased reliance on shadow banking, growing international imbalances, and so on helped set the stage for disaster. But intellectual shifts—the way economists and policymakers unlearned the hard-won lessons of the Great Depression, the return to pre-Keynesian fallacies and prejudices—arguably played an equally large part in the tragedy of the past six years. …

The Shifts and the Shocks is an excellent survey of how we arrived at the mess we’re in, and Wolf’s substantive proposals… are all worthy and laudable. But the gods themselves contend in vain against stupidity. What are the odds that financial reformers can do better?