The Underlying Economic Crisis

It's no mystery that we're in the midst of an economic crisis.

What lead us into this economic crisis is a topic that is rather frequently addressed... although rarely competently. But digging down a good bit deeper, we see indications that one of the key root-causes to the economic crisis is our entirely insufficient understanding of economics. And I'm not talking about the economic literacy of the layman (that's also frightfully bad, particularly so because we have a democratic form of government). Even the ones at the highest levels of our ivory towers can claim only a feeble understanding of how our incredibly complex global economy actually functions. The Dahlem report released in early 2009 by a group of (admittedly not well known) economists from both the US and Europe takes the whole economics academia to task for this costly failure.

As a society, we look to our economics academia to provide us the foundational economic theories and models that we need in order to make critical economics decisions. Just looking at the daily news, especially given the upcoming elections, and we see that most of the critical issues we face as a society is deeply rooted in economics. From taxation to health care reform to funding for wars to pension reform to economic stimulus to foreign trade and currency policy, each of these issues both drive and are driven by our economy.

Given all the talk about what we should do concerning these issues, you'd think that we already possess the macroeconomic understanding to make the right decisions. Instead, we find a big gaping hole where our understanding should be. To fill this hole of "missing understanding", politicians, pundits, and even lay-people, throw around economic arguments that they clearly do not understand and cannot back up with solid macro-economic thinking. In short, our economic academia has left us bare-naked in a snowstorm.

The Dahlem report gets within a couple yards of the goal line, but still fails to identify the root-cause of our catastrophic deficiency in economics understanding. True, we have trusted our academia to tackle this tough problem and what they have delivered is painfully inadequate. However, it is not enough to just pin the blame on the ivory tower. To get at the deepest underlying problem, we need to ask the question of why our economists have failed to deliver.

Is the problem too hard? Or have they been distracted with other pursuits?

Given the severe costs to the society from mishandling our economic issues, I would think that developing a more solid understanding of macroeconomics would be at the forefront of our scientific pursuit. The real, and actionable, question for us is what we need to do, as a society, to direct (and incentivize) our foremost economic thinkers to drop whatever sideline research they are currently pursuing and address this deficiency of economics understanding. This really should be today's "race to the moon/Mars". Without it, we will be so cash-strapped as a society that tomorrow's actual "race to the moon/Mars" will only be a cruel joke.