Monday, October 6, 2008

Blame The Current Crisis On Greg Mankiw?

It's obvious that most of the players caught up in the current Wall Street meltdown don't have a clue about business cycle theory and an understanding about how it would impact their business.

But it doesn't stop with business leaders. We have frequently commented on the fact that Alan Greenspan did not appear to have any type of theory of the business cycle. A peculiar situation for a one time Federal Reserve chairman. (Read his autobiography, not a word about business cycle theory) The same goes for Warren Buffett. He doesn't ever seem to mention business cycle theory. Who's to blame for this vacuum in understanding of the business cycle? How about the authors of introductory economic textbooks, such as Greg Mankiw, the current leader among authors of best selling economic texts .

Davd Warsh comments:

How peculiar is it that the leading introductory economics texts scarcely mention the cycles of manias, panics and crashes that have been a familiar feature of global capitalism since its emergence in the seventeenth century?

No propensity to bubble or bail is among the ten big ideas that govern economics in N. Gregory Mankiw’s text, for example. Ben Bernanke, in the book he wrote with Robert Frank before he became chairman of the Fed, discusses the 1990s banking crisis in Japan, the episode in the US and the Argentine collapse in 2001, along with the Great Depression, on which he is an expert; he even mentions in passing the “reckless lending” that led to the US savings and loan crisis in the 1980s: but the tendency to repeated financial crises is not remarked, and neither “bubble” nor “credit crunch” appear in the glossary...

Even Karl Case and Ray Fair don’t make much of a case for the perennial nature of crises (at least in my edition), though Case, of Wellesley College, and his colleague Robert Shiller, of Yale University, have played a prescient and central role in the analysis of the real estate crash.
When it comes to the business cycle, you really have to study it on your own. A good place to start is Roger Garrison's The Austrian Theory of the Business Cycle, which also does a good job of explaining why mainstream economists don't understand the business cycle.

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