Lars Syll: Krugman on the relevance of the history of economic thought: “Being myself the author of seven books…

…on the history of economic thought I can’t but applaud Krugman’s plaidoyer…. The financial crisis of 2007-08 and its aftermath definitely shows that something has gone terribly wrong with our macroeconomic models, since they obviously did not foresee the collapse or even make it conceivable…. Modern mainstream macroeconomics obviously did not anticipate the enormity of the problems that unregulated ‘efficient’ financial markets created. Why? Because it builds on the myth of us knowing the ‘data-generating process’…. Mainstream macroeconomists… want to be able to use their hammer. They decide to pretend that the world looks like a nail and that uncertainty can be reduced to risk. So they construct their mathematical models on that assumption–and the ensuing results are financial crises and economic havoc…”

OK…

Suppose we decide that we are no longer going to:

  1. Pretend that agents–or economists–know the data-generating process…
  2. Recognize that people are not terribly committed to Bayesianism–that they do not model probabilities as if they have well-defined priors and all there is is risk…

What do we then do–what kind of economic arguments do we make–once we have made those decisions?