Barry Eichengreen is a professor of Economics and Political Science at the University of California, Berkeley
Despite the similarities with the Great Depression, the policy makers’ failure to tackle the Great Recession was striking. What failures do you reckon as crucial in fundamental conceptual way?
Conceptually, the Great Moderation led to the mistaken belief that the business cycle had been tamed and additional risks could be safely taken. Efficient-markets theory provided a convenient pretext for failure to address new risks created by financial innovation and to adequately regulate the shadow banking system and securitization markets. And then there was the tendency for macroeconomists to forget as many lessons of the Great Depression as they remembered.
How is it possible that the ideas of Austrian School without supporting evidence in practice still dominate the macroeconomic policy in Europe?
The answer, I think, is that the Austrian School got it half right: Hayek, Mises and others highlighted how credit booms and busts were intrinsic to the market system. The histories of the 1920s and 2000s both bear them out. But they, or at least some of their followers, then went on to endorse liquidationism as the appropriate response to these problems, which is a logical nonsequitur.
What, if at all possible, will the experience of the Great Recession change regarding economic thinking in the future?
The fact is that economic thinking changes only very slowly. Senior professors of economics, with tenure, are set in their ways. They’ve been at it too long to change how they think even in the face of evidence incompatible with their theories. Better to disregard the evidence in that case, the thinking goes.
The field changes as students graduate and new scholars influenced by the Great Recession, by historical evidence and by Big Data begin to repopulate the field, making economics a more fundamentally empirical and historical discipline. I see at least some signs that this is beginning to happen.
Thank you very much.
Barry Eichengreen is Professor of Economics at the University of California, Berkeley; Pitt Professor of American History and Institutions at the University of Cambridge; and a former senior policy adviser at the International Monetary Fund.
His current book: Hall of Mirrors: The Great Depression, The Great Recession and the Uses-and Misuses- of History, Oxford University Press, 2015.