Everyone's talking about this Paul Krugman essay on where economics, as a discipline, went wrong. Partly, "going wrong" means the failure to appreciate the risks in our financial system, and the corresponding failure to predict the crash we're currently trying to deal with. But from an insider's perspective, something else has happened: an uneasy consensus between two different approaches to economics has been shattered. One, which Krugman labels the "saltwater" approach, is associated (in the U.S.) with some variety of post-Keynesian analysis, generally identified with some willingness to have the government intervene in the economy over and above the Fed's control of the money supply. The other, the "freshwater" approach favored by the Chicago School and other inland economists, is more purely free-market and non-interventionist. (Truth in advertising: I am not an economist.) These camps could more or less get along when everything was going fine, but have dramatically different reactions to a crisis. To the extent that you find freshwater economists claiming that unemployment is currently high, not because there aren't many jobs, but because there are too many incentives for people not to work. One of the reasons it's a great essay is that it's a wonderful example of popularizing science. You can debate all you like about whether economics counts as a science, but there's little doubt that Krugman does an amazing job at explaining esoteric ideas in non-technical language, and is so smooth about it that you hardly realize difficult ideas are even being discussed. I wish I could write like that. One part of the essay worth commenting on, or at least musing about, is the punchline. Krugman thinks that a major factor leading to the failures of economics to understand the mess we're currently in was the temptation to think that beautiful models must be right.
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
Without knowing much of anything about the relevant issues, I nevertheless suspect that this moral might be a bit too pat. Sure, people can fall in love with beautiful theories, to the extent that they overestimate their relationship to reality. But it seems likely to me that the correct way of understanding all this, once it's properly understood, will look pretty beautiful as well. General relativity is widely held up as an example of a beautiful theory -- and it is, when understood in its own language. But if you put the prediction of GR in the Solar System into the language of pre-existing Newtonian physics (which you could certainly do), it would look ugly and ad hoc. Likewise, Newton's theory itself is quite elegant, when phrased in the language of potentials on a fixed spacetime background; but if you express the theory in terms of differential geometry (which you could certainly do), it looks like a mess. Sometimes the beauty/ugly distinction between theoretical conceptions is more a matter of how well we understand them, and less about their intrinsic qualities. So my counter-hypothesis would be that it wasn't beauty that was the problem, it was complacency. If you have a model that is beautiful and works well enough, you're tempted to take pride in it rather than pushing it to extremes and looking for problems. I suspect that there is a very beautiful theory of economics out there waiting to be developed, one that understands perfectly well that individuals aren't rational and markets aren't perfect. One that has even more impressive-looking equations than the current favored models! Beauty isn't always a cop-out.