Extracted from Olafur's forthcoming Bad Economics from Iceland (Searching Finance 2012)
Inside Job was recently shown on the Icelandic equivalent of BBC 1.
In the wake of it, bloggers and the public either made fun of the economists and bankers behind the whole collapse or continued cursing them to the “debts” of Hell. Frettabladid, a newspaper, published a comic of Tryggvi Thor Herbertsson watching Inside Job but Herbertsson was the co-author of the “Financial Stability In Iceland” report that notoriously changed its name to “Financial Instability In Iceland” on Mishkin’s CV (the red ink text reads “impudent, impertinent, unreasonable, unfair”.
The guy behind Herbertsson (basically) asks him what he’s watching).
Others, such as Styrmir Gunnarsson
, former editor of Morgunbladid (one of the daily newspapers back home, now edited by David Oddsson, former PM during 1991-2005 and the governor of the Central Bank of Iceland 2005 - 2008), correctly pointed out that one could hardly see who had been deeper in the pockets of bankers, politicians or scholars. Furthermore, no serious discussion had been amongst scholars about whether the economics departments of the universities of Iceland had played any role in the economic collapse of Iceland.
Gunnarsson also writes: "Economists and economics professors, especially at American universities, have repeatedly given all kinds of advice and analysis to financial firms in last years and been rewarded handsomely. One can therefore hardly expect many of them to have given warnings what was going on, although they should have had more chances of understanding it rather than other people."
Although Gunnarsson is spot on when he mentions the lack of discussion amongst academic economists about the role of economics teaching behind the collapse, he is not hitting a home run on this point. Exactly because so many economists, such as Mishkin and Herbertsson, were using neoclassical economics that ignore the role of private debt in the economy, one cannot expect them to understand the problems that were mounting up before the Global Financial Crisis hit.
I mean seriously, can one expect economists that use economics where marginal productivity of capital equals interest rates, marginal productivity of labour equals wages, where one can add single demand curves up to get a downward sloping market demand curve, where people are walking calculators that can calculate in a splinter of a second their utility of all possible choices even from now to eternity, where the economy is repeatedly modelled using a single eternal representative agent, where firms maximise profits by supplying their good into the market until marginal revenues equal marginal costs, where debts and nominal figures are repeatedly or naturally ignored, and so on, to understand that the real economy that we live in is on the brink of collapse? No, no we cannot because all of this is incorrect! Never again may we do the same mistake!
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