05 October 2009

Economic History Intentionally Ignored

Modern macroeconomists ignored a long history of economic panics, in part, because they thought modern finance theory had learned these lessons and rendered history irrelevant. My own view is that the economic historians have a much better grip on the nature of panics and bring much more convincing evidence to the debate than macroeconomists relying on mathematical models with flawed assumptions do.

Footnote: Thomas Kuhn's, Structure of Scientific Revolutions (which is best known for the notion of a paradigm shift), with a similar methodology to economic historians (he wrote as a historian of science) is also in vogue.

In both cases, one of the key underlying premises is that history is one of the better suited disciplines to noticing and understanding "Black Swan's," i.e. dramatic and infrequent phenomena that change everything.


Michael Malak said...

It's like how the economic modelers on Wall Street when pricing mortgages used a 10-year look-back period instead of a 100-year look-back.


Andrew Oh-Willeke said...

A hundred years ago, in 1909, the modern residential mortgage basically didn't exist. There were signs to be seen, but they were required a certain amount of willingness to hear the rhyme of history to hear.