I fell a little behind on things last week, but here's an article by Barry Eichengreen which was brought to my attention a few days ago. Eichengreen is a well-respected (political) economist who cut his academic teeth researching the gold standard in the Great Depression, but has since become a prolific writer in areas of financial crises, European monetary issues, financial globalization, and much more. His website has links to his 100+ research papers and other articles.
Anyway, this piece provides an excellent, easy-to-read summary of the some of the underlying problems in the financial industry (including business, regulation and academia) that led to the mess in which we find ourselves. This is a popular topic these days, but Eichengreen does a better job than most. Here's a concluding paragraph:
What got us into this mess, in other words, were not the limits of scholarly imagination. It was not the failure or inability of economists to model conflicts of interest, incentives to take excessive risk and information problems that can give rise to bubbles, panics and crises. It was not that economists failed to recognize the role of social and psychological factors in decision making or that they lacked the tools needed to draw out the implications... Rather, the problem was a partial and blinkered reading of that literature. The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object. It is in this light that we must understand how it was that the vast majority of the economics profession remained so blissfully silent and indeed unaware of the risk of financial disaster.
There's a great summary of the areas of economics which did provide useful insights, so read the whole thing. (Thanks for the pointer, Manoli).
