There has been some discussion on why (and not whether) economists missed seeing the crisis coming. I came across this report but I thought most points were already covered in popular discourse/debate on the failure of models, reliance on one single metric of risk (VaR), etc.
But, for the sake of completeness, here is the link to this report from the Kiel Institute for the World Economy.
Thanks to Prof. Dani Rodrik, I came across an article by Prof. Barry Eichengreen in ‘National Interest’. Written boldly, it makes several simple and forthright points. Here is a sample:
Sociologists may be more familiar than economists with the psychic costs of nonconformity. But because there is a strong external demand for economists’ services, they may experience even-stronger economic incentives than their colleagues in other disciplines to conform to the industry-held view. They can thus incur even-greater costs—economic and also psychic—from falling out of step.
And what is true of investors and regulators, introspection suggests, can also be true of academics. When it is costly to acquire and assimilate information about how reality diverges from the assumptions underlying popular economic models, it will be tempting to ignore those divergences. When convention within the discipline is to assume efficient markets, there will be psychic costs if one attempts to buck the trend. Scholars, in other words, are no more immune than regulators to the problem of cognitive capture.
The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object. It is in this light that we must understand how it was that the vast majority of the economics profession remained so blissfully silent and indeed unaware of the risk of financial disaster. [Read the full stuff here]
He points to the rising importance and popularity of empirical research (inductive economics, as he calls it) as a reason to end the article on a note of hope about economists’ ability to warn of and help to avoid the next crisis. Well, I am not so sure. But, it is good to hope for good things.