The big news in opinion today--and by big, we mean a 6,700 word piece in the New York Times Magazine--comes from Paul Krugman. The Nobel-winning Princeton economist and New York Times columnist has taken page after page under the headline "How Did Economists Get It So Wrong?" to probe the recession's implications for the economics profession. He asked two questions:

  1. "What happened to the economics profession?"
  2. "And where does it go from here?"

His bottom line: economists fell too far in love with the efficient-market hypothesis, and now it's time to correct, accepting the messiness of reality, and, by extension, the market. "The story of economics over the past half century is ... the story of a retreat from Keynesianism and a return to neoclassicism." That meant, Krugman argued, adopting an unrealistic view of both the market and the meaning and cause of its recessions.

The debate to which Krugman is contributing has been around for a while. As early as last September and October, the media world was already overflowing with debates over the future of capitalism and the laissez-faire/self-regulating market doctrine. By November, the main economics hotspots of the blogosphere were already debating economists' predictive failure, with economists such as Arnold Kling and Brad DeLong reviewing their own records while Tyler Cowen predicted the impact on the profession. The Economist hosted an online debate in March on the return of Keynesianism.

So is what Krugman is saying new? Here's a highly reductive summary of recent pre-Krugman debate:
  • Hubris Is What Happened to the Economics Profession  In April, Peter Coy of BusinessWeek proposed that "economists' worst sin is hubris." Milton Friedman (one of the founding fathers of the efficient-market movement) was too confident, and so was Ben Bernanke. While it is now "tempting to ignore the whole profession ... that won't do." Macroeconomists now need to "make the economy far more robust. Perhaps out of the ashes of failure will emerge a better macroeconomics profession."
  • Hubris Is What Continues to Happen to the Economics Profession  Jeff Madrick, an avowed opponent of efficient-market idolatry, wrote in The Daily Beast in January of his shock in finding "no one humbled by events" at the annual meeting of American Economists. "What most economists can't seem to acknowledge is that they have been overcome by free market ideology over the past thirty years." Krugman's piece should make him happy.
  • Give More Credit to EMH Skeptics  "Even when the EMH [efficient-market hypothesis] still seemed fresh," The Economist pointed out in July, "economists were picking holes in it. Behavioral economics, they argued, "has boomed in the past decade." As it happened, "behavioral finance" is the model to which Krugman pointed today. The Economist, rather like Krugman, saw "the finance industry ... in the midst of a transformative period of evolution, and financial economists have a huge agenda to tackle."
  • No 'Quack Medicine'  Economist John Cochrane may not agree with Krugman. In a March discussion hosted by the Council on Foreign Relations, Cochrane said that his "great hope is that the bounce-back will be quick before the quack medicine can be said to have worked ... there is a danger of thinking all of the crazy stuff they're doing now will have caused the bounce-back." Those do not sound like the words of one ready to re-embrace Keynesianism.