Mistaking Beauty for Truth

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 ...