The Crisis of 2008: Structural Lessons for and from Economics

We do not yet know whether the global financial and economic crisis of 2008 will go down in history as a momentous or even uniquely catastrophic event. Unwritten history is full of events that contemporaries thought were epochal and are today long forgotten. And on the other side of the scale, there were many in the early stages of the Great Depression that belittled its import. Though it is too soon to tell how the second half of 2008 will feature in history books, there should be no doubt that it signifies a critical opportunity for the discipline of economics. It is an opportunity for us- and here I mean the majority of the economics profession, unfortunately myself included- to be disabused of certain notions that we should not have so accepted in the first place. It is also an opportunity for us to step back and consider what the most important lessons we have learned from our theoretical and empirical investigations -that remain untarnished by recent events- are and ask whether they can provide us with guidance in current policy debates.

This short essay first provides my views on what intellectual errors we have made and what lessons these errors over us moving forward. My main objective, however, is not to dwell on the intellectual currents of the past, but to stress that economic theory still has a lot to teach us and policy makers as we make our way through the crisis. I would like to argue that several economic principles related to the most important aspect of economic performance, the long-run growth potential of nations, are still valid and hold important lessons in our intellectual and practical deliberations on policy. But, curiously, these principles have played little role in recent academic debates and have been entirely absent in policy debates. As academic economists, it is these principles and the implications of current policies for the growth potential of the global economy that we should be reminding policymakers of.