Monday, October 13, 2008

Leading introductory economics texts scarcely mention the cycles of manias, panics and crashes

David Warsh at Economic Principals:
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 dot.com 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.

There’s a lucid discussion of banking panics in Paul Krugman’s principles text with Robin Wells; he asks whether the Fed should have sought to puncture the stock bubble of the late ’90s: but the “sovereign debt bomb” of the ’70s and the S&L crisis of the ’80s have disappeared in the dim mists of time. 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.
My favorite principals author's (Mankiw) book is just out in its 5th edition; I rather doubt there's much if any change from the previous edition on the subject. But if he had to do it over again there'd be some. You'd certainly expect him to say so if it did; he's not.

Krugman today received the Nobel Prize in Economics, for his work in the new trade theory, location theory and economic geography. Tyler Cowen at Marginal Revolution says Krugman has work relevant to the current financial crisis:
He could have been cited for his work on currency crises as well. ... He has been influential in pushing the United States toward a bank recapitalization plan. ... Some of Krugman's thinking on the liquidity trap -- a key issue today for the crisis -- can be found here.

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